F&C: value and growth winners we’re backing

F&C Investment Trust manager Paul Niven sits down with ii’s Sam Benstead to discuss how he manages his global portfolio.

Two years on from his last interview, Niven explains the major portfolio changes, and goes into depth on a growth and value share that he likes.

He also explains why he thinks investors should own his trust over a passive fund.

F&C Investment Trust Ord (LSE:FCIT) is one of ii’s Super 60 investment ideas.

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Paul Niven, manager of F&C Investment Trust. Paul, thank you very much for coming into the studio.

Paul Niven, manager of F&C Investment Trust: Nice to see you.

Sam Benstead: So, most people will have an idea of what F&C Investment Trust does. But for those who haven't heard of you, can you give a brief summary of how you invest and where it might fit into a portfolio?

Paul Niven: So, F&C Investment Trust is a closed-ended fund. We're listed on the London Stock Exchange. Market capitalisation of in excess of £5 billion and a member of the FTSE 100.

Our overriding objective is to deliver long-term growth in capital and income for shareholders.

The way that we seek to deliver on that aim is through investment in growth assets and that's listed equities and private equity.

We seek to deliver essentially a diversified solution for investors who are looking for us to provide a diversified allocation to different geographies, different sectors, different styles.

So, the way that we actually manage the portfolio on the equities side is by allocating across a number of different strategies in the US, Europe, globally, with different stylistic characteristics to smooth out the performance journey for shareholders.

Sam Benstead: So, it could be seen as a one-stop shop for equities in a portfolio?

Paul Niven: Exactly.

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Sam Benstead: We last had you in the studio about two years ago. A lot has changed in markets since then. How has the portfolio changed as well?

Paul Niven: An awful lot has changed in the last two years. When we last met in 2022, we were in the early stages of rises in interest rates, so central banks were responding to more robust growth, higher inflation. And as a response to that, we're raising interest rates essentially from the zero bound, in many instances quite markedly.

We've seen since then quite low volatility in markets. But if one looks point to point, over the last two years, there's actually been a really strong run in equities. In fact, global equities in sterling terms are up by around a third over that period. And sterling itself has risen by around 20% over that period. So, actually, local currency returns have been stronger still than that 30% that I referenced in sterling terms.

Within global equities, it's been a relatively familiar story to that which we've seen in prior years. Again, notwithstanding volatility in the sense that the US has performed strongly in a global context, emerging markets have lagged the Magnificent Seven. Those big, disruptive technology names led the way with a gain in excess of 170% and some familiar names now like NVIDIA Corp (NASDAQ:NVDA) rising over 1,000%.

So, some really strong returns in aggregate from global equities overall. Quite a marked rotation, actually, which we saw from growth stocks towards value and then again, back to growth. But over the piece, strong equity markets, growth stocks leading, the US continue to be relatively dominant in terms of market performance.

Sam Benstead: And over this period then, what changes have you made to the portfolio to take advantage of some of these changes in the environment?

Paul Niven: So, the last time we spoke I was talking about the fact that we'd been reducing exposure to large-cap growth stocks in the US specifically. And the context for that was that if one thinks about that period in 2020 when the pandemic hit, the perception that some of the big disruptive tech names were going to benefit very materially in terms of their dominant market position, change to working from home practices and so on, led to really outsized gains from growth stocks.

So, from the mid to the latter part of 2020, we actually started moving out of some of those relatively highly priced growth names into value stocks...more cheaply priced parts of the market like financials, for example, and some commodity exposure.

So, that when we came into 2022, we were actually longer in value than in growth, and that served us extremely well in 2022 because this period of rising interest rates [and] higher inflation, led to quite a marked rotation of those growth stocks into value.

Subsequently, once again, we've rotated the portfolio And as things stand now, we're relatively equally exposed between large-cap growth and large-cap value on the portfolio. So, relatively well diversified, I would say, between those two areas.

We've also made several other changes; we have in recent years lightened up further exposure to emerging markets, which have been a laggard. China's obviously performed very well in the last few weeks, but on a multi-year period that area's been a significant laggard.

We've made some changes in terms of the underlying portfolio strategies as well. We divested in entirety from T Rowe Price, who had been running our large-cap growth strategy for us in the US, into JP Morgan who now run that part of the portfolio. That's about £1 billion, out of the £6 billion of assets that we have, that JP Morgan now manage for us.

Some other notable changes as well. So, Columbia Threadneedle Investment, we incepted a mandate in terms of a global-focused strategy run by a portfolio manager called Dave Dudding within the organisation, as well.

So, quite a number of changes navigating what's been quite a positive period, but nonetheless quite a lot of volatility within nonetheless.

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Sam Benstead: You own large-cap growth and large-cap value shares. Can you give an example of each and tell us why you like it so much?

Paul Niven: So, our largest individual holding today is Nvidia, one of the largest companies in the world. One of our managers purchased that stock back in 2018 at a relatively small position.

As I said earlier, in the last couple of years, it's up by, I think, 1,050%. So, a tremendous performer, and that is a dominant position in terms of powering the artificial intelligence (AI) revolution, in terms of producing chips that power AI applications. Very, very dominant in terms of their market segment.

Relatively richly priced to be fair, but a very high growth stock, at least in terms of historic terms. We're actually slightly underweight against the market benchmark, but nonetheless, that is our single largest exposure.

An interesting stock, I think, that sits within the value portfolio run by one of our US managers is called Vertiv Holdings Co Class A (NYSE:VRT), and it's gained around 750% in the last two years. Not bad for a value stock in that time period.

They provide cooling systems that are extremely helpful in terms of data centres, again, data centres being part of the AI theme. So, that stock has benefited very materially from the AI theme but has sat within the value part of the portfolio.

Sam Benstead: And where do you stand on this AI theme generally? I mean two companies you like are linked to it, but are there worries that actually there's a bit too much hype at the moment and all this investment may not actually lead to profits in the future?

Paul Niven: It's a really good question and one that's very difficult to answer with any level of certainty.

Our view is that AI is going have a real impact on the economy and if one takes a multi-year view, there are numerous areas where you can see meaningful applications that may well lead to productivity improvements and better growth outcomes from an economic perspective.

The big question on a forward-looking perspective, as you know, is who are going to be the winners in terms of the AI revolution? Nvidia, as I said, has been one of the dominant, if not the dominant, and most noteworthy winner to date. It is likely, however, that there are going to be numerous other winners from that revolution.

So, I think it's real in terms of the impact that it's going to have. The first movers don't always have a permanent advantage and our portfolio managers are continually looking for other ways that we can benefit from the emerging AI theme.

Clearly one needs to be cognisant of valuations from a generic and from a stock-specific perspective. And I think it's very true to say that market concentration levels, particularly in the US market, are very, very high. Valuations look relatively extended, expectations are also relatively elevated. So, the margin of safety in terms of the AI theme, I think, is relatively small.

Sam Benstead: For a lot of investors, the core global equity allocation can be via an active fund like yours or a passive fund. So, why should investors choose an active fund?

Paul Niven: It's a really good question, and as active managers, we need to demonstrate value for money for shareholders in terms of the outcomes that we deliver.

We do look to deliver a one-stop shop, as it were, in terms of a solution for investors looking to growth assets. So, we cover not only listed equities, albeit our benchmark is a listed equity benchmark, but also private equity.

In the last five years, we've had a drag in terms of returns from our exposure to private equity, which is unusual for us in a longer-term context. That's held our returns back somewhat.

So, we have broadly kept pace with the global market over that period. But we have exceeded market returns if one takes a longer-term perspective. And if one looks at different comparators, like open and closed-ended peers, we have exceeded the average returns from both those open and closed-ended peers that we would look to benchmark ourself against.

And in absolute terms and, again, different ways of measuring success or otherwise, over the last decade, our shareholder returns have compounded at around 12.5% per annum.

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Sam Benstead: Paul, thanks very much for coming into the studio.

Paul Niven: Thank you.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment and subscribe. See you next time.