F&C Investment Trust H1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

Key Takeaways

  • Positive Sentiment: F&C reported a strong first half, with NAV total return of 13.2% versus the FTSE All-World Index at 12%, driven by solid performance across its diversified equity portfolio.
  • Negative Sentiment: Shareholder total return was only 6.4% because the trust’s discount widened materially, from 5.9% to 11.7%, offsetting the better underlying NAV performance.
  • Positive Sentiment: The board announced an interim dividend of 3.6p per share and reiterated its commitment to deliver another annual increase, marking a 54th consecutive yearly rise.
  • Positive Sentiment: Revenue generation remained healthy, with net revenue return per share up 10.9% year on year and a substantial revenue reserve of 19.6p per share supporting future dividend growth.
  • Neutral Sentiment: Management said the portfolio stayed underweight the “Magnificent Seven” but still outperformed, while private equity lagged listed markets yet showed improving realizations and valuation progress. The trust also continues to buy back shares aggressively to narrow the discount and support NAV.
AI Generated. May Contain Errors.
Earnings Conference Call
F&C Investment Trust H1 2024
00:00 / 00:00

Transcript Sections

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Operator

Please simply type in your questions at any time and press send. The company may not be in a position to answer every question it received during the meeting itself; however, the company can review all questions submitted today and will publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. If you give that your attention, I'm sure the company will be most grateful. And now I'd like to hand over to Head of Investment Trust, Christina Cantrell.

Head of Investor Relations at F&C Investment Trust

Hi, thanks, and good morning, everybody. We're delighted to be here. It's the oldest investment trust adopting modern ways to communicate with shareholders. So we hope that everybody will engage in asking questions because this is really your time with the lead portfolio manager, Paul Niven, who's about to present. So he has quite a lot of materials to go through the first half of 2024's results, including portfolio changes, performance, gearing, dividends, etc. And I'll just highlight that it's very apt that he'll also comment on his 10-year tenure of running F&C. So yeah, it's great to have you here. And I'll hand over to Paul now for asking questions later.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Okay, great. Thanks, Christine. Good morning, everyone. Thanks very much for calling in to this webinar. I'm going to do two things. One, I'm going to cover the interim results, our results for the year to the end of June that we just released this morning, make some comments about what we've delivered for shareholders over that period. I'll give some thoughts on current market perspective, how we see the rest of the year and indeed the longer term progressing in terms of opportunities for us and indeed for you from an investment standpoint. As Christine said, this is your opportunity to ask questions. We will leave time at the end to get through as many of them as we can. Again, as she said, we've got a lot of content to get through.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

I'm going to run through a number of these slides with respect firstly to the context of F&C as an investment trust, then onto our results, and then the market outlook. We are the oldest, as Christine said, oldest investment trust in the world. We're a member of the FTSE 100 Index, our market cap exceeds GBP5 billion. In recent decades, we've been focused on growth assets. That's equities and private equity. The overriding objective and aim of the trust is to provide growth in capital and income for you as shareholders through exposure to listed and unlisted global growth assets. That's listed equity and private equity. We use an approach of blending across different active strategies within private and public markets, each of which is relatively focused.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But the principle is one of diversification, looking to smooth the performance outcome for you and navigate volatile markets by providing a relatively smoother performance journey for you as shareholders. We have made a commitment to a net zero carbon portfolio by 2050 or earlier. The outcome we look to deliver is consistency in terms of performance delivery and value for money. Our OCF ongoing charge is 0.49%, which we think is very competitive, certainly relative to our peers. Briefly, there's a lot of detail on this slide, but just in summary, this gives a perspective about the exposure that we have in terms of underlying strategies.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Regional equity strategies in the top half of this table, then some global strategies, all of which are separate accounts where we hold the stocks directly, where we use experts from within Columbia Threadneedle Investments, or indeed from across the market to source and select best opportunities in a particular region or with a particular style. For example, right at the top there, we've got J.P. Morgan Asset Management. They run a large part of the portfolio. They're focused on growth stocks in the U.S. They've got around 60 holdings, and around 25 of those stocks are unique, i.e., not held anywhere else in the portfolio. Similarly, we've got an external manager in Barrow Hanley running a value strategy for us in North America. We look to blend these components together in a manner that essentially adds to return or reduces risk, i.e., following that principle of diversification.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

And then we've got private equity exposure as well. Pantheon, as I'll discuss, running a program for us investing in leading venture and growth managers, hard to access brand name managers in that space, and then focused predominantly on mid-market opportunities from Columbia Threadneedle Investments in terms of funds and co-investments. I'll give some comments on performance of these components going forward. But that'll be quite detailed, a snapshot of the overall strategy allocation. I'll talk about the geographic allocation as we go through. So our interim results were released this morning. So that is the six months to the end of June. We delivered a return of 6.4% for shareholders. Our NAV, net asset value total return, was 13.2%, and that exceeded the benchmark return. That's the FTSE All-World Index of 12%.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So the underlying performance of the portfolio, as I'll show you, and of the net asset value return exceeded, excuse me, that of the benchmark. So good return in absolute terms, outperformance against the benchmark, but clearly shareholder return was lagging. And that was a function of a widening the discount. And I'm going to spend some more time, excuse me, talking about this shortly, but the discount moved from just under 6% at the start of the year, that's discount share price, discount net asset value, moved from just under 6 to just under 12. And we bought back 10.2 million shares during that period. Net asset value, sorry, net revenue return per share increased by 10.9% year on year compared to the first half of 2023. So again, really good progress in terms of our revenue account, our income, and that obviously helps to fund our dividend.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

We delivered outperformance in our listed equity holdings. Again, I'll give some more detail on this, despite us holding an underweight position in those largest stocks, which really drove the market in the first half of the year. So what had become known as the Magnificent Seven, which includes such names as Apple, Microsoft, Nvidia, and so on. So it's a very concentrated market, narrow market, U.S. leading the way, and within the U.S., a small number of stocks leading the way. We're actually underweight those very largest stocks, as I'll explain in a moment. But we still delivered, excuse me, outperformance. And private equity returns lag strong listed market returns. So private returns or returns in the private market space lag returns from listed equity. So that was somewhat detrimental to our return. But overall, good return in NAV terms, 13.2 against 12, as I said.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Our first interim dividend was announced. That was 3.6 pence per share. The board had committed to another rise in 2024. That will be the 54th consecutive annual rise in dividends that we will deliver for shareholders. Those are the highlights. I'm going to go into a bit more detail. This slide left to right essentially builds up that NAV total return. The portfolio, that's our portfolio of investments, delivered a return of 12.2% in aggregate, slightly ahead of benchmark. Gearing, the fact that we had borrowed to invest in a rising market, that was additive to returns. That added 0.8. The fact that we bought back shares at a discount, as I said, 10.2 million shares at a discount net asset value, that added to net asset value return.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

The fact that market interest rates rose over the period reduced the value of outstanding debt; that added modestly to our NAV as well. Then detracting were management fees and interest and other expenses. So you add up those components on the left-hand side of this chart, and you get to the NAV total return that I said of 13.2%. What was disappointing, clearly, was that change in discount, the move from 5.9% to 11.7%, and that detracted from shareholder returns. So shareholder total return was 6.4%. So the NAV ahead of benchmark, the shareholder return behind. A lot of text in this chart. I apologize for that, but I'm going to draw a few highlights in, and I'm going to follow this up with some tables in a moment. Very narrow market, artificial intelligence, AI, a key theme that investors were responding to.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

That was the case in the latter part of 2023. Also the case in the first half of 2024. Technology stocks leading the way, ongoing enthusiasm about that AI theme driving not just those very largest stocks, but actually a number of related areas as well. In addition, from a broader macro perspective, I would say that there was a general fall in inflation, which was good in the sense that clearly that gives greater confidence in terms of rate cuts by central banks. However, there was quite a marked repricing or reassessment in the market about both the timing and magnitude of rate cuts. So in other words, we came into 2024 with markets very optimistic about the speed and the scale of rate cuts in the U.K., in Europe, and in the U.S.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

While rate cuts are still expected, the timing has been pushed out, and the magnitude of rate cuts has also been pushed out. It was good news, lower inflation, expectations of rate cuts, and growth remained reasonably robust, actually. It looks very much like we have achieved a soft landing in the U.S., i.e., slowdown without recession. That's a good backdrop for financial assets. Equity markets performed accordingly, as I said, so a strong period for listed equities. Private equity in aggregate delivered a return of 6%. That was quite meaningfully behind listed markets. But I actually take quite a lot of encouragement from that performance for reasons that I'll elaborate on in a moment. Back in 2023, our performance was broadly flat in private equity, and therefore, again, lagging listed markets, and that was a detractor from relative returns.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But 6% in absolute terms is a reasonable return. And we are seeing signs of progress in valuation in our private equity holdings, and also signs of progress in terms of realizing some of those investments, i.e., selling some of those investments to other parties and realising cash returns. So again, I'll talk about that more. So private equity lagging, but I think actually good progress over the period. Our listed equity holdings outperformed the benchmark. If one strips out just the listed equity holdings, they delivered a return of about 13.1% against that benchmark return of 12%. A few other points that I would draw out. Really good performance within certain segments of the market, particularly North America for us.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Growth stocks, i.e., those that are exposed to faster earnings growth and the prospect of significant improvement in terms of the earnings outlook, performed very strongly, again, driven by technology. The Russell 1000 Growth Index returned just under 22% in sterling terms. That's the comparative growth index. Our manager in that space, J.P. Morgan, delivered a return of 25.7%. So really strong returns from US large-cap growth, better than the market. But what was also encouraging was, for example, in terms of our value exposure, those cheaper, perhaps slower-growing stocks delivered good levels of return. Barrow Hanley delivered a return of 10.9%. The internally managed strategy that we have returned 9.8%. They both exceeded the value index, the Russell 1000 Value Index, which returned 7.6%. So growth beat value within the market, certainly within the US market, I should say.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But our strategies within the U.S. exceeded both relevant comparator indices, i.e., our growth manager beat the growth index, and our value managers beat the value index. So that was encouraging. Europe also performing well in certain components, not everywhere, but within our global strategies also delivering very strongly. Global Focus, which is a quality growth mandate, again, focused on high-quality businesses with what we regard as wide moats or a protected position in terms of their competitive standing with fast growth prospects, that strategy delivered 18.6%. So well ahead of the global benchmark return of 12%. In a bit more detail, and again, there's a lot of text on this slide, in a bit more detail to this point about the Magnificent Seven stocks, we started the period with an underweight stance.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So if you strip out all the equity holdings and think about how much in the benchmarks is in those Magnificent Seven stocks, that's about 16.5% or was about 16.5% at the start of the year. We had about 12%, 12.2% in those seven names at the start of the year. So we were light in exposure terms with the exception of Alphabet, where we were a small long. And we ended June with a slightly bigger underweight position against the market and an underweight position in every region. But despite that underweight position and despite the strength of returns from that area or that cohort of stocks, we made good levels of return. As I said, Vertiv, which is held by Barrow Hanley, did extremely well. They essentially provide cooling solutions among other aspects to data centers.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So they benefited from the AI theme, although they're not a producer of semiconductors, for example. Broadcom produced a return of 46%. TSMC, which is involved in the chip production business, 56%, and so on, as well as positions in pharmaceutical company Eli Lilly and an underweight stance in Tesla. So despite the fact we were underweight those very largest stocks in the market, which had a phenomenal return with Nvidia, again, being a standout in that space, they gained by 152% almost in sterling terms. We still managed to deliver excess returns. As I'll talk about in a moment, we've got a relatively balanced position between value and growth in the portfolio for reasons that I will explain. So this gives a perspective about the underlying performance in the first half. This gives all the granularity. Some of that is in the preceding slide within the text.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But essentially, this shows the allocation that we had in aggregate to North America within the equity space, how much we had in Europe, Japan, and so on. What the look-through exposure is, because obviously when we allocate to global strategies, some of that global allocation is in turn invested in the US. So there was 41% invested in North American strategies, but our economic or look-through exposure was actually about 63% at the portfolio level at the end of the first half. Portfolio performance, as I said, 2% excess return within North America, very strong returns from that component, the value and growth exposure, both performing well. Europe, again, another standout area for performance, 10.4% against 6.5%. Japan was just slightly behind. Good performance in local currency terms. The yen was very weak.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

That's reversed actually to some extent, or at least partially in the last 24 hours of the Bank of Japan raising interest rates there. Emerging markets was an area of disappointment in terms of performance, lagged in absolute and in relative terms while global strategies was broadly in line. Private equity, as I said, 6%, good in absolute terms, but behind listed market equivalents. And that cost us in relative performance terms. Just briefly in terms of allocations and to give you a sense about some of the changes that we made in the portfolio. Again, a lot of information on this slide, and I hope you can read this at your leisure. But this shows the year-end and half-year-end position from December 2020 through to June 2024.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So you've got year-end positions and then the most recent end of June position in terms of how much we've got in U.S. growth stocks, how much we've got in U.S. value stocks, how much we've got in Europe, and so on. And what I would say is in recent years, we have made some quite substantial changes or movements between U.S. growth and U.S. value in particular. So when one thinks about 2020, we were very long of U.S. growth stocks. We moderated that stance, actually ended up being long of value. That served us very well when growth actually had quite a material setback. But we're much more balanced in terms of exposure between growth and value stocks in the U.S. at the present time. Emerging markets has been an area with a relatively light exposure, obviously an area of relative disappointment.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Private equity towards the right-hand side of the chart there is currently sitting around the 10% level in terms of overall allocation exposure on the trust. On private equity, just adding to the points I made previously, we've got different components within private equity. Many of you listening today will be familiar with the long history that we have of investment in the private equity space. In recent years, we have sourced and selected a portion of the portfolio through Columbia Threadneedle Investments. There's a team in Edinburgh run by Hamish Mair, many of you be familiar with him, who helped me in terms of sourcing and selecting opportunities in terms of fund investments, primaries and secondaries, as well as individual co-investments. That component gained by 3.6% in the first half of the year.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

The legacy holdings, those are very old holdings that we still have in fund of funds, fund of private equity funds that Pantheon and HarbourVest managed for us. Those commitments were made between 2003 and 2008. So I said they're legacy, they're old, they're small as a portion of the portfolio, but they did see some progress as well. We've got a couple of small listed what I consider private market exposure in Syncona, which had a disappointing period, and Schiehallion. Schiehallion did a very good period, having previously performed relatively poorly, actually in 2023. Pantheon, as I mentioned earlier, also manages exposure to leading venture and growth managers. It's really hard to access preeminent players in the venture and growth space, primarily in the U.S. We've got two programs, one that we started in 2019, one that we started in 2022.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

The combined NAV, or asset value exposure of those portfolios, was GBP 131 million at the end of the first half. We made a roughly 10% return. Reasonable progress. To my point about good progress in the private equity portfolio overall, within that CTI, Columbia Threadneedle Investments component, we saw some good realizations. Examples here, Jollyes, which is a pet supply retailer. You might see them if you go to an out-of-town shopping center. They've got a bunch of stores that sell pet supplies. We had a position in that company. We made 3.7x return on that investment since we committed in 2018. That returned just under GBP 29 million. We also sold a position in a company called Coretrax, which is involved in cleanup of oil and gas wells for GBP 23 million.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So again, we're seeing progress in terms of capital coming back and being able to realise some of these investments, which again, I think is good in terms of the outlook for that segment of the portfolio. Just briefly in terms of revenue and dividends, good progress in terms of our underlying revenue, just under 11% in the first half of the year. We continue to hold a substantial revenue reserve, GBP 19.6 per share. Compare that to our full-year 2023 dividend of GBP 14.7. And that tells you we're in a really, really good position. We've certainly had in 2023 a covered dividend, but that revenue reserve is substantial. And the board have made a commitment to deliver another rising dividends for shareholders in 2024. I want to spend just a minute on our discounts.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So clearly, it was disappointing to see a widening in our discount from 5.9%-11.7%, as I said in the first half. This chart reflects a longer-term perspective in terms of discount levels. As many of you will be aware, we reached a premium issued shares in 2018. We issued shares in 2019. COVID hit. The discount widened. We actually were trading, though, at a premium again about 18 months ago. So it's really disappointing to see that recent widening in discounts. We've not been alone, but it's clearly wider than I and the board would like to see. We stepped up level of buybacks, 10.2 million shares in the first half. That converged to 8.6 million in the whole of 2023. So more than the first half we did in the whole of last year. And we have bought back 4.2 million shares in July.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Our discount in the last few days is trading around the 7%-8% level. So it's still wider than we would like, but the board are really committed to using buybacks to reduce volatility, to get us closer to Net Asset Value in terms of share price. And because it's accretive to NAV, it enhances NAV when we buy shares at a discount. And it's the right thing to do for U.S. shareholders. In addition, I should say this is not the only tool that we have. We're obviously out there promoting, marketing the benefits of investing in the trust, not only to existing shareholders, but also to prospective shareholders to create more demand. So we'll look to see further progress in the discount from what was a disappointing half-year point.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Here, briefly, this shows the overall exposure of the portfolio at the end of June, including liquidity and including private equity on the left-hand side there. So the majority of the portfolio is in North America. And why that number differs from what you saw slightly earlier on was because earlier on it didn't include liquidity. This chart does. On the right-hand side there, you can see the exposure within listed equities. Now, I'm very conscious of time, so I want to make a couple of points on performance in the first half. As Christine said, this is actually on responsibility for the trust the 1st of July 2014, so just over 10 years ago. And this gives a shorter and longer-term perspective. And I think you can assess performance in a number of different ways. Clearly, long-term objective is growth in capital and income.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

We're delivering very well on that objective. You can see last 5, 10 years, we're delivering 9.4% per annum return to shareholders. Five years, 12.3% per annum over the last 10 years. Our Net Asset Value returns are also strong. But you can think about absolute, you can think about relative clearly. And we've got a competitive landscape. We compete against closed-ended funds. So what's encouraging, I think, is our returns against the closed-ended comparators are first or second quartile over all the time periods shown here, 1, 3, 5, 10 years. Obviously, shareholder returns somewhat diminished in the short term by that widening discount, which I hope will be temporary. And open-ended comparators were well ahead of open-ended comparators. So a much wider universe of global equity funds. We're doing very well against them, and we're delivering excess returns against the market benchmark.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

And what's been a, I would say this went, a tough market, a narrow market. I think we've done relatively well over the short, medium, and longer-term perspective in performance terms. So I guess moving on to the outlook, and again, conscious of time, I'll make a few points and refer to a few slides before I pass over for questions. We do expect rate cuts. Obviously, the ECB, European Central Bank, has already cut rates. By contrast, the Bank of Japan actually raised interest rates, albeit from the zero bound yesterday. But the Bank of England is a bit of a coin toss. The Fed probably likely to push through a rate cut in September. But rate cuts are going to be forthcoming this year from major developed central banks. The outlook from a fundamental perspective looks relatively constructive, I think. Declining inflation, reasonable growth.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

That is a reasonably good background. Risks, politics in the U.S., primarily. The odds in terms of Republican-Democrat presidency have changed quite materially in the last few weeks as a result of Biden's withdrawal from the race. It looks again very much now a coin toss, whereas previously Trump looked like he had a 2/3 probability. If you take betting markets as an indicator, he looked like a 2/3 probability of winning. And clearly, he has got some pretty strong views and policies with respect to tariffs, which may have implications in terms of emerging markets and growth and inflation, actually, more broadly. Geopolitics, again, the last few days should remind us all that there are clear risks within the Middle East, primarily with respect to conflict there and what that might mean, not only for commodity prices, knock-on impact on growth and inflation, but also risk appetite.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So there are clear risks. There are always risks, though. I would say the fundamental backdrop looks reasonably sound. That said, it's been a narrow market. That presents two-way risks. What I would say is that, on the one hand, value looks cheap. The U.S. market looks pretty expensive. Outside the U.S., it looks relatively cheap. But growth stocks, those growth stocks that have led the market, would typically be expected to benefit from rate cuts. They have been delivering superior earnings growth. And that AI theme, excuse me, is likely to persist, I think. We do, however, remain underweight those very largest stocks in the market. For private equity, I think we've seen some good progress year-to-date, albeit in listed markets. And I expect that progress will continue.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

I'm going to rattle through just a few slides to draw a little bit more color to some of those points. This here just shows some of the things that we're thinking about. Are we getting rate cuts? Yes. How deep are they going to be? I'll give you a sense about where the market pricing is. Are we seeing recovery in the UK and Europe? Well, Europe's a bit targeted, to be honest. The UK is actually performing better than expected. Equity market concentration is an issue, clearly. Narrow market, narrowly concentrated in terms of market capitalization. Now, we do think there's going to be opportunities outside the U.S. The case for diversification, I think, very much is intact, certainly, given potential risks that arise from concentration and valuation.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So reflecting on where we've come and where we are in the last few years, this shows rebased to 100 for 1st of January 2021, developed markets, emerging markets and China. So the story has basically been developed has beaten emerging. China has lagged emerging, and the U.S. has exceeded returns within the developed space. The U.S. has been the dominant and preeminent market, emerging markets lagging, and China within that cohort being particularly disappointing. It's been a narrow market. We can think about the narrowness in different ways in terms of percentage of market cap or how much of returns are contributed from a narrow segment. But this shows the U.S. outperforming as in the previous slide. This is from the beginning of 2023. This shows you market capitalization.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So what you typically look at when you look at the S&P, which is the bellwether US Index, that's up almost 50% since the beginning of 2023. Really strong returns. And then an equal-weighted measure of the S&P or US market returns. So stripping out this point about concentration. So it's the biggest stocks. In other words, in more plain English, it's the biggest stocks that have led the way. And that is reflected in equal-weighted indices in the US, underperforming market-cap-weighted indices. And within that, it's been those biggest stocks. Now, the FAANGs, the Magnificent Seven, however you want to think about it, the Amazons, the Alphabets, the Nvidia's, and so on that have really led the way. They've outperformed not only the S&P, but clearly the equally-weighted index as well, and led the way in global markets. Where's that led us to in terms of valuations?

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Well, to repeat the point, valuations in the U.S. look relatively high. You can look at this in different ways. P/E ratios, price-earnings ratios, price-to-book ratios, enterprise value-to-EBITDA ratios. Wherever you cut it, the U.S. looks like it's trading a premium rating. And a chunk of that is a function of the market composition. So the U.S. has got a lot higher exposure to those faster-growing areas within technology and elsewhere that have got higher return on equity, higher profitability levels, overall faster growth, a much bigger segment of the U.S. market. That's one reason why the U.S. is trading at this premium rating. The rest of the world looks around fair. In some instances, slightly cheap relative to history. But the U.S. looks relatively expensive by virtue of the exposure to those faster-growing companies.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Now, in macro terms, this again gives a perspective on the 2024 growth outlook in the left-hand chart there and how that's changed through time. In the right-hand chart, what the expected growth outcome is for 2024 and 2025. So there's a few points. One, the U.S. essentially won the growth race in 2024 in the developed markets. And you can see that it came from behind. So that's reflected in the left-hand chart there, that blue line going up. So people are becoming more optimistic about the U.S. growth outlook and less worried about recession. But looking at the right-hand chart, you can see that the expectation is that the U.S. is going to moderate. There's going to be some slowdown. And we're seeing that coming through now. You're seeing that with some moderation in the U.S. consumer, some loosening in the labor market.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

That's not bad news, actually, because that reduces some of those inflationary pressures, arguably. You're seeing an improvement in the prospects, however, for the European growth outlook and also for the UK and emerging markets, which in real terms is expected to deliver a superior growth outcome for GDP to develop some improvement in growth in 2025. So divergence in growth prospects, US slowing down, other areas seeing slight uptick in growth, actually. But the US, in absolute terms, winning, as it were, in developed market space in 2024. This shows you that, again, over the last year or so, the US, which is the lighter blue line there, had generally been beating expectations. When these lines are above zero, it tells you that the economic picture is better than people expect. But more recently, interestingly, the UK has been doing better.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

The U.K. is certainly exceeding expectations in terms of the economic releases. And that's the grey bar there. So better than expected U.K. growth coming through. Inflation coming down everywhere to varying degrees, getting closer to target. And that's going to enable rate cuts. And on that point, again, a lot of information in this slide. But in summary, this shows you, left-hand side, where the market expects rates to be through time from the current rate of around 5.5%, so what the implied policy rate is. So the market, if you go all the way through to the end of 2025, the market is saying there's probably going to be around 2% worth of rate cuts over that period. And rate cuts are going to be forthcoming this year.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

You can see that in the right-hand chart, whereby you can see that the market is currently pricing in, as of a few days ago, actually, around about 75 basis points, 0.75% worth of rate cuts in the U.S. Also some rate cuts in the U.K. Europe has already started in this process, but also rate cuts in the Eurozone. What does that mean? Well, after rates stop rising, it tends to be good for equity markets. This shows you soft landings, i.e., as I said earlier, an economic outcome, a slowdown without recession in the U.S. That is the dark blue line there. What happens historically when you get that slowdown without recession after a period that rates peak? What happens when you get a hard landing, i.e., recession, and where we are with the current cycle? That's the red line.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So we've kind of followed tight to some extent. The market, the red line there is broadly returned what you would have expected, actually, in a soft landing scenario. But the market does expect good earnings growth in 2025. You can see in the U.S., this is probably analysts, most of my panelists tend to be too optimistic, but market expects an acceleration, which I don't think is credible, frankly, from 10% or thereabouts this year in U.S. earnings growth to 15% next year. That's probably too optimistic. I think you'll probably see something in the high single digits at this point. Could be wrong. Things unlikely are going to get a significant acceleration, though. But it looks like a pretty robust outcome expected in terms of the earnings picture in 2024 and looking forward to 2025. And again, that's good for equity markets.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But importantly, within the market, the dominance and superiority of the Magnificent Seven is beginning to wane. The blue bar here shows you the earnings growth that has been delivered from that segment of the market against the rest of the market, which is the orange bar. It's been way ahead. In fact, the rest of the market has actually been delivering negative earnings growth in aggregate in recent quarters in the U.S. Either way, looking forward, the expectation is that that gap is going to narrow. Mag Seven is still going to give you a better growth outcome in EPS terms or earnings growth terms, but not as much as it has historically. Some catch-up from the rest. This gives you a sense about just the importance of that segment of the market. This is not price return, but earnings contribution.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So US technology has done phenomenally well just in terms of earnings delivery. That's one reason, clearly, why that segment of the market has performed so strongly in the US, has far exceeded earnings growth outside of the US. Again, one reason to my earlier point about why the US has done so well. So I am going to wrap up there. The last chart you can see here just shows you within the market, different sectors and regions, and how you can think about valuation in terms of what you're paying in price-to-book terms against return on equity. Either way, you cut it. On the right-hand side there, you can see US is above the line of best fit, which is a pretty crude metric given the limited number of observations. But US is a bit rich, and tech is a bit rich as well.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Our U.S. large-cap growth managers are under way at IT in the U.S. So conscious of time, I am at this point going to pass back, I think, to the moderator. Very happy to take any questions.

Operator

That's great, Paul. Thank you very much indeed for updating investors. I will be very brief. Ladies and gentlemen, please do continue to submit your questions. You're choosing the Q&A tab situated on the right-hand corner screen. But just to remind you that a recording of this presentation, along with a copy of the slides, will be available on the platform very shortly. Christine, over to you. A number of questions from investors. If I can just ask you to read out those questions, and I'll pick up from you at the end.

Head of Investor Relations at F&C Investment Trust

Yeah, perfect. Thanks. So there's been quite a mixture of questions. So I'll start with more of the trust-specific ones.

Head of Investor Relations at F&C Investment Trust

So one that was pre-submitted. You have over 64 million shares in Treasury. What are the future plans for this number of shares? Is it going to be cancelled or reissued, etc.?

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Okay. Yeah, we've got a lot of questions, so we're trying to get through as many as possible. And if I don't give either an answer or a full summary of answer or you want more detail, then clearly get in touch with us, and we can respond directly and give you the detail that you require. But the question relates to Treasury shares. So we do own a large chunk of Treasury shares. How have we got to this point, and why do we own such a large position? Well, firstly, in recent years, I think I'm right in saying since 2015, when we stopped cancelling shares, we bought them back, and we put them in Treasury.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

The idea was that we would look to reissue those shares when we reached a premium. And as I said, we reissued in 2018. We reissued in 2019, and we were at a premium, actually, about 18 months ago. Now, we've got a lot of shares in Treasury. The board do look at the number of shares in Treasury, do look at our policy. So this is a point of discussion with the board that we touch. We discuss with them regularly. Those shares that are held in Treasury are not due dividends, and there is no cost to holding them. So there's no detrimental impact to holding in Treasury. But looking forward, I think it's a perfectly reasonable question. Why do you hold so many? I think we definitely should hold some because I hope that we will reach a premium rating again.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

It is more cost-effective for you as shareholders for us to issue shares from Treasury rather than create new shares. I'd say this is a point that the board will and are giving attention to. Buying in shares is accretive to NAV. We are clearly maintaining or looking at the proportion that we have in Treasury. If there is a change in policy, then clearly that will be communicated to shareholders. Hope that answers the question. If you need more, then, as I said, please reach out.

Head of Investor Relations at F&C Investment Trust

Thanks. We'll skip on to dividends. David is asking, with the rise in net revenue return per share, what's the board's confidence level in continuing to increase the total dividend for the year? What are the main challenges that might impact their ability to maintain the annual rise in dividends?

Head of Investor Relations at F&C Investment Trust

Okay.

Head of Investor Relations at F&C Investment Trust

So I don't want to appear in any way complacent, but we've got a very large revenue reserve, as I said, just below GBP 100 million, which out of the number in front of me, but I think it was GBP 19.6 per share. So we earned more than we paid out last year. We made more revenue than we paid out in dividends last year. So we put aside some of that income into the revenue reserve as we have done in recent years. So we're really well positioned in the event that we have a downturn in our revenue account from here. And we haven't, and I don't see any indication of that in the near term. Now, what are the risks? I think that the risks are numerous. Firstly, a very material move in sterling would be detrimental given the proportion of our earnings, which essentially originate from overseas.

Head of Investor Relations at F&C Investment Trust

So all else being equal, we're starting to go up materially. That would be detrimental to our revenue account. I can see some modest sterling strength from here, actually. The macro picture is better. As long as the fiscal position is maintained, then actually, based upon what I was discussing earlier on, it may be that there's a modest rise in sterling. But I think the tail event of a big rise is probably unlikely. So I regard that as an approximate risk. Second risk, clearly, if there is a marked economic downturn, then that typically would lead to an earnings recession. Then an earnings recession, we'll see a fall in our revenue. That happened in COVID. It happens when the GFC. It happens when you see declines in corporate earnings.

Head of Investor Relations at F&C Investment Trust

So if I'm too sanguine on the economic and earnings outlook, that's going to be bad news for our revenue. In either of those circumstances, we've got well over one year's worth of income held back in reserve that we could use to top up any shortfall. And therefore, I am very confident that we can continue to deliver, sorry, rises in dividends for shareholders, not only in nominal terms, but in real terms over the medium to longer term. And the board have committed to deliver another rise in dividends this year. So again, hope that answers the question.

Head of Investor Relations at F&C Investment Trust

Super. And since you were leading to your views on sterling there, there's a question from Andrew about what impact do you foresee from potential policy changes under a Labour government in the U.K. and other political shifts in Europe?

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Yeah, very interesting. Very interesting.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

So I think the first thing I would say is, actually, the bigger impact for our portfolio is probably more on movements in currency than it will be on specific U.K. equity holdings. We actually have got a very small portion of our portfolio in listed U.K. equities. So I think within the listed equity component, it's around about 4% or thereabouts. And on the one hand, I think that one needs to think about windfall taxes, whether that's in the financial sector, for example, the bank sector, what it means, what it might mean in terms of oil companies and so on. So those potential negatives against an environment that is actually looking more positive, I think, given where we are today relative to where we were previously for the U.K. economy.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Either way, I don't think it's going to have a material impact in terms of our portfolio outcome. Europe is, I mean, this is not a helpful answer, so I apologize. It's just tremendously uncertain, right? There's gridlock in France. There's possibility, I think, of more elections, perhaps next year, a swing arguably to the right, more by way of populist policies. Again, I don't think that creates an immediate risk.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But certainly, if there's more fiscal profligacy in Europe, and I think we are seeing, I think, France and Italy breaching some of the current fiscal rules, then it might be that sources of revenue relate to higher taxes or windfall taxes or higher corporate taxes, which probably is in contrast to, slightly beyond the immediate question, to what we may see in the U.S., clearly, if President Trump 2.0 emerges, where probably lower taxes, but more by way of tariffs could be good news for domestic U.S., maybe a bit more inflationary, probably a bit of a steeper yield curve in the U.S., but more challenges for emerging markets.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

The odds in terms of the outcome of Trump 2.0 have diminished quite markedly, actually, in the last couple of weeks, given the likelihood of, well, the fact that she will be the Democratic nominee, that Kamala Harris is pretty much neck and neck in terms of what markets are expecting in terms of the next presidency. But what I would say on that point is that the recent change, i.e., Biden's withdrawal, means that a Republican clean sweep is far, far less likely. And therefore, policies may be somewhat watered down by Trump 2.0.

Head of Investor Relations at F&C Investment Trust

Great. And in the interest of time, I'll try to combine two that are about sector exposures. So one person's asking about how have specific sectors within the portfolio performed, for example, technology and healthcare.

Head of Investor Relations at F&C Investment Trust

And then some other people are also asking about how do you plan to balance between high-grade sectors and more cyclically exposed areas of the market?

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Yeah. So it's interesting. So in answer to the question, I can maybe look at the specifics and give some numbers directly to what we've experienced in terms of performance of different parts of the portfolio from a sectoral standpoint. Well, what's kind of interesting, I think, is that the AI theme has permeated through not only the technology space. And from a market standpoint, we're actually a bit underweight technology stocks. But that is the biggest part of the market. And I think you need to respect that, the most recently priced part of the market. But it has also positively impacted other segments of the market, like utilities, for example.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

To repeat the point I made earlier on, companies that provide solutions that support the rolling out of AI infrastructure, so cooling solutions, for example, in data centers, energy production, and so on. So it's quite a nuanced picture within what is the broad brush landscape of different sectoral components. And then within pharmas, obviously, there has been tremendous performance from the likes of Eli Lilly and Novo Nordisk, driven in part by high growth expectations that indeed deliver results from weight loss drugs. We've been a beneficiary of that. And we think there's a long runway again there. I mean, we're getting lots of results of studies, positive, and obviously with some of the side effects that these drugs can give.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

But I'll look at the questions and perhaps provide a specific answer with respect to what we've seen in terms of some of the performance patterns, if that works.

Head of Investor Relations at F&C Investment Trust

Yeah. So we'll wrap up there. And there are a couple of very specific questions on positioning that we can hopefully get to by publishing the answers after the call. And so I'll just ask people then to add some closing remarks. Are there any things that you want the shareholders just to take away after today's call in particular?

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

Yeah. Firstly, thank you very much for dialing in. And there are many, many shareholders on the call. It is always very nice to meet and interact with shareholders face to face and virtually. And it's great to have the opportunity to speak to many of you today. I know there are many questions that we have not answered.

Paul Niven
Paul Niven
Head of Multi-Asset Solutions at F&C Investment Trust

We will endeavor to provide answers to each of those questions. I believe that we have delivered strong underlying growth in terms of asset returns in the first half. Clearly, some disappointment in terms of that discount. We are focused on delivering value for you as shareholders. And I think those longer-term results, which I explained earlier on, demonstrate that. So thanks again for calling in. And I hope that I'll have the opportunity to speak to many of you again soon. Thank you.

Operator

That's great. Paul, Christine, thank you once again for updating investors. If I could please ask investors not to close the session, as we'll now automatically redirect you for the opportunity to provide your feedback in order that the team can really better understand your views and expectations.

Operator

This might take a few moments to complete, but I'm sure it'll be greatly valued by Paul and the team. On behalf of the management team of F&C Investment Trust PLC, I'd like to thank you for attending today's presentation and wish you a good rest of your day.

Executives
    • Paul Niven
      Paul Niven
      Head of Multi-Asset Solutions
    • Head of Investor Relations
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