Buy, hold, sell: F&C Capital and Income investment trust

Fund manager Julian Cane has been in charge of this £300 million trust for just over 20 years. As the name suggests, it focuses on both capital and income. “We’ve increased the dividend every year since 1992,” says Cane. The yield is currently 3.3%, and the dividend is paid quarterly, “which is something a lot of investors like”.

One of F&C Capital & Income Investment Trust's (FCI) unusual features, according to Cane, is that almost 80% of assets under management are held through savings plans rather than broker platforms. “ISA investors in particular keep as much money as they can in their wrapper, so they tend to reinvest their dividends.”

This is why over recent years the trust has issued more shares to meet extra demand, and it now trades at a marginal premium to net asset value. Moreover, Cane explains that the board of the trust uses share buybacks to control the discount.

Cane is part of a pan-European equity team, and they focus on three aspects of a business when making their investment decisions.

“The first and most important part is quality,” says Cane. It’s about “what makes this business defendable, the barriers to entry for others”. Cane says he’s trying “to assess the longevity of the business”. The second aspect is valuation: “we look at the discounted cash flow”; and the third is management: “we look at track record, their incentive structure, and we try to meet them,” he adds.

Buy: Beazley (LSE:BEZ)

“This is my favourite stock in the portfolio,” says Cane. This insurance underwriter has two key aspects he finds attractive. It generates high returns, producing an 18% return on equity; and it’s still managing to grow. That’s because the company specialises in niche areas of insurance, where there aren’t many competitors. “Half of its business comes from the US, where it does indemnity for architects, builders and accountants – a niche business which is difficult for others to break into.”

The second area the company focuses on is quite topical, as it is fibre insurance. “If your systems are hacked, it will help in rectifying that and underwrite the business that has been lost; it will contact the people whose data has been hacked,” says Cane.

He adds that while this appears to be very risky, the company diversifies risks widely by providing cover across a number of businesses, “not typically to big banks, but smaller businesses of builders, architects, everyone who might need cover but is not the obvious target of a hack attack.”

He first bought Beazley (BEZ) in 2009 at 68p and has topped it up five times since then; the current share price is 521p.

Hold: Arrow Global Group (LSE:ARW)

This business is a firm hold for Cane. “When I describe it to people, they often recoil in horror, because it’s a debt collector – but it’s not a man with a baseball bat.” He says the company’s business model revolves around the strength of its database.

“When debts go bad, it’s not always because the underlying person doesn’t want to repay; it might be because they have moved house and the company can’t track them down.” But he argues that most people want a good credit rating, and that’s why they tend to agree to a new repayment strategy once this company has managed to track them down.

Cane says that while it is able to produce great returns, he “wouldn’t buy now because shares have performed well recently, and while the valuation is still not expensive, it is not as cheap as it was,” and he is “happy to hold” the stock for now.

He first bought Arrow Global Group (ARW) stock in 2013 at 205p and has topped it up four times since then; its current share price is 456p.

Sell: Halfords Group (LSE:HFD)

Cane sold Halfords Group (HFD) at the end of May. The reasons he sold it goes back to the three-pronged investment process. While the “valuation doesn’t look particularly unattractive, it’s a combination of quality and management that unsettles my view of the business,” he says.

Over less than two years, the business has had two new chief executives, both of whom have put in place plans to strengthen the business and return it to high levels of profitability.

“But the very fact they both walked out of the door before their plans were implemented has undermined the credibility of those plans,” says Cane. He remarks that if one person walks out, it “raises questions but doesn’t make it uninvestible, but when two walk out, that does raise questions”.

He first bought this company in 2014 at a price of 475p and sold it for 359p per share.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.