It’s been an underwhelming period for F&C Investment Trust (LSE: FCIT) shares following their entry into the FTSE 100 last September. They have unperformed the blue-chip index’s returns by a percentage point or so.
But the trust doesn’t measure its performance against the Footsie. Its benchmark is the FTSE All-World index. Yet according to its latest update released on Thursday, it failed to beat that index in the first half of the year too.
What’s going on here?
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Benchmark underperformance
Launched in 1868, F&C is the world’s oldest investment trust. Yet its objective hasn’t changed in over 150 years. It still aims to deliver both steady, long-term capital growth and healthy dividend income.
Today, it does this through investing in established companies such as AstraZeneca, Apple and Microsoft, as well as emerging markets and private equity funds. In all, the portfolio contains over 300 holdings, meaning it is incredibly well diversified.
In its H1 update, the trust reported that the 4.7% rise in its total net value lagged the 7.5% return of the FTSE All-World index. Worse still, the total share price return over that period was -2.6%, with the net asset value discount increasing from 3.0% to 9.8% over the period.
Following this announcement, the shares fell 0.5% to 875p.
I should point out that the longer-term performance has been much better. Over the past 20 years, the trust has more than doubled the total returns of the FTSE All-Share index.
Why did this happen?
The company blamed “stubbornly high inflation” and a “hawkish” Bank of England for this period of underperformance.
Also, the 11.8% allocation to private investments didn’t help, as investor sentiment around unlisted assets remains very negative. Likewise, emerging markets disappointed, with a faltering Chinese recovery pushing returns here into negative territory.
Paul Niven, the fund manager, commented: “Looking forward, while we remain uncertain of the unfolding economic environment, we do expect that performance within equities will broaden and that relative value will be an important consideration for prospective returns.”
Will I buy the shares?
Though the yield is modest at 1.57%, the trust has an exceptional record of 52 years of dividend growth. Its full-year 2022 dividend of 13.5p per share represented an increase of 5.5% on the previous year.
To be honest, though, that yield doesn’t seem particularly attractive to me, as I can currently get much higher elsewhere. So, I’m left assessing the share price growth potential of the portfolio.
The trust holds all the stocks that have driven the US market rally this year, including Nvidia, Microsoft, and Alphabet. But their outperformance has been diluted by the more than 300 individual stocks it holds.
Plus, it reduced its exposure to large-cap US stocks earlier this year, which has proven costly.
Management admitted as much when saying: “Overall relative performance of our listed strategies was negatively impacted by an underweight position in many of the names which drove the first-half rally.”
To my mind, the sprawling portfolio of listed stocks is spread far too thinly. If I’m after such vast worldwide diversification, I’d rather just invest in a global tracker fund.
I’m personally more interested in investments trusts that run high-conviction strategies that differ significantly from benchmarks. As a result, I won’t be investing in the shares.
