Global sector company, F&C (FCIT), has reported its interim results to 30 June 2020. The company’s growth and income mandate is carried out through investments in public markets, unquoted investments and private equity. With a market cap of £3.8bn, it is amongst the largest closed-end investment companies and was the first investment trust to launch, back in 1868.
Performance highlights – scope to deliver another dividend increase this year
- FCIT’s share price total return was (10.0%), which it says can largely be attributable to the move from a small premium to a discount of (7.7%) in a period of extreme volatility for markets;
- The NAV total return was (0.9%), which compares with a 0.4% gain from its benchmark, the FTSE all-world index;
- FCIT noted that the investment portfolio modestly outperformed, but the repricing of the fair value of debt detracted 0.9% from returns;
- The private equity portfolio posted positive returns of 7.1%, helped by weakness in sterling over the period. A feature of these unlisted holdings is the timing lag in the receipt of underlying valuation reports. FCIT commented: “The board has scrutinised valuations as at the end of June and any adjustments in pricing, as a result of economic disruption going forward, are not expected to be material to this part of the portfolio;”
- On its dividend outlook FCIT noted: “The revenue reserve alone exceeds one year’s worth of dividends leaving plenty of scope to deliver yet another increased dividend this year. The first interim dividend of 2.9 pence for 2020 will be paid on 3 August.”
Review by manager Paul Niven
“We entered 2020 with the expectation that the US economy would further extend a record long expansion and that equity markets would continue to be aided by solid growth in corporate earnings and a supportive policy backdrop. Indeed, early in the period equity markets reached new record highs buoyed by an environment of benign inflation and modest, but robust, growth.
There were some concerns early in the period that Covid-19 would disrupt the Chinese economy, but markets quickly adjusted expectations to the wider reality that we were facing a global pandemic with profound implications for growth. Indeed, the actions of governments globally, with the prospect of rising domestic infection rates, was to enforce a shutdown of large segments of the economy leading to a simultaneous shock to both supply and demand.
While government action to protect the health of their citizens rapidly created the sharpest and deepest downturn in the global economy for generations, policymakers sought to cushion the blow by enacting huge monetary and fiscal stimulus. Indeed, the scale of packages unveiled and the speed of response surpassed those seen over a decade ago in response to the Global Financial Crisis. The unprecedented scale of stimulus, however, was commensurate with the magnitude of the downturn.
As markets grappled with the severity of the economic collapse and contemplated the prospect of widespread corporate failures as a result of the ensuing recession, share prices fell sharply with declines of 30-40% in many major indices. The pace of the sell-off, which occurred in a little over four weeks, was extraordinary, reflecting both tremendous uncertainty and the challenge facing the global economy. Apart from the impact of Covid-19, separately the collapse of the oil price and increased tensions between the US and China added to the volatility.
Markets, however, are forward looking and, having fallen precipitously and troughing on the day that Prime Minister Johnson announced a lockdown in the UK, equities began a sharp recovery towards the end of March driven by an expectation that growth was likely to return later in the year. Markets rallied by over 40% from the lows with an acceptance of near-term recession while hopeful that infection rates and fatalities would diminish, and that policy action would not only speed the recovery but alleviate some of the lasting damage from the downturn.
‘Growth’ stocks, such as technology companies, which tend to be more highly priced on the expectation of growth in future earnings, delivered outperformance into the market downturn as well as through the recovery seen to date. In contrast, and in general terms, those companies trading on lower multiples but with greater sensitivity to short-term fluctuations in the economy underperformed markedly coming into the crisis and, unusually, also underperformed as economic prospects improved. Ahead of the setback in markets we reduced exposure to higher yielding value stocks, such as Chevron, as well as trimming European exposure which reduced our exposure to, amongst other stocks, Shell. These moves funded new allocations in our Global Strategy component.
Our investment portfolio produced a return of 0.7%, which was ahead of the market benchmark (0.4%) and our North American holdings produced positive gains of 4.5%. Our US growth manager, T Rowe Price,
delivered exceptional returns of 18.5%, materially extending their outperformance relative to ‘value’ stocks, where our holdings fell by 11.6% over the six-month period. Despite the challenges, a number of our North American holdings produced strong returns, benefiting from an acceleration in prevailing trends brought about by the crisis. Amazon and Microsoft, our two largest listed holdings, rose by around 50% and 30%, respectively.
Outside the US, Japan was a relatively strong area for the portfolio in absolute and relative terms with a gain of 4.0%. Early in the year we decided to focus our exposure in this area, selecting the best twenty stocks available, and this strategy paid off with strong performance from stock selection. Here, Keyence was a beneficiary of anticipated rises in automation investment and posted gains of 17%.
Despite a loss (-2.4%), Europe was an area of relative strength for the portfolio over the first half. Here, limited exposure to the banking sector, which performed poorly, and some strong stock selection in companies such as Delivery Hero, the online food delivery platform whose business models were robust to the effects of pandemic, helped our relative returns.
Emerging Markets produced disappointing returns (-8.9%) over the period with banking stocks in India and Indonesia detracting from returns.
Within our Global Strategies (-3.3%), our Global Smaller Companies exposure and Global Income Strategy, which invests into cheaper and higher yielding stocks, both lagged global market returns. In contrast, our allocation to a new Sustainable Opportunities strategy, focusing on high quality and sustainable business models, produced strong returns against a challenging backdrop.
Our private equity portfolio posted positive returns of 7.1%, helped by weakness in sterling over the period, as the currency fell by more than 6% against both the US dollar and the Euro.”
Manager’s outlook
“Having seen one of the sharpest downturns in history we have now witnessed the fastest and steepest recovery in equity markets. These events correspond to the deepest recession of modern times and the largest stimulus packages ever deployed by governments and central banks across the world. Over the near-term there will undoubtedly be testing times in terms of economic, corporate and Covid-related newsflow. Longer term, markets are looking forward to better growth with recent data suggesting a decent upturn in activity that should accelerate into 2021.
The recent crisis has fundamentally benefited many of the large technology related companies in our portfolio as, in common with prior recessions, we have seen a rapid acceleration of many pre-existing corporate and consumer trends. This will likely be one of the lasting impacts of Covid-19.”
FCIT: F&C could deliver another dividend increase