Essential Investment Trusts

[UncleEbenezer]

I've just invested a rather large sum in my SIPP, after transferring the rump of my ex-Equitable pension into it.

I went half-and-half between IEM and Vanguard world tracker (though I also sold IEM in another account, so the net investment was a lot less than implied by half-and-half). The rationale of IEM is that "green" investments should get a boost from the shock that energy price rises delivers. Along with drought, and the background rumbles of stories like (in Blighty) sewage releases.

[absolutezero]

I follow the money (as you are doing with RIT) and it has certainly paid off. I see the big family interest as a positive as I do with RIT. What we need to remember with this sort of IT is that it is the family that is calling the shots. The outside shareholder has no clout but that has worked to the outside shareholder's benefit I think, certainly in the case of Caledonia. It also has the advantage to me that it is not like the average IT in that it holds a small amount of publicly quoted shares but many of its holdings are privately held so that it acts more like a private equity fund, but without loading up the holdings with debt. That sort of investment company will be getting more offers than it could ever handle which enables it to pick and choose. The family and its investment style has, as far as I know, got a high reputation with those that matter in the City and beyond.

Dod

Definite food for thought here. So thank you. Follow the (family) money.
Going to look into this outfit in more detail I think.

[absolutezero]

I have considered Caledonia before.
This is the one with a massive discount on NAV. Possibly caused by the family having a large interest in the shares.
I notice the free float is only around 60% of the share capital.
Is the large family interest a problem? Could be seen as a long term positive as it's their family's riches I suppose.

The running cost at 1.71% is rather steep!

IMHO the family interest isn't a problem except that it prevents Caledonia from running a large buyback program. This is because the Cayzers would be forced to make a takeover bid for Caledonia if their collective share of it became much larger as the takeover panel treats them as a "concert party".

The KIID ongoing costs should be taken with a big pinch of the proverbial salt. A few years ago I looked at the method used for the KIID and it's very misleading.

KIID's include an estimate, which is added to the management fee, that takes into account previous transaction costs. So if you're a business like Caledonia which has private equity transactions then all of the costs involved with a purchase of sale are not treated as a one-off cost but instead get swept up in the KIID as a recurring cost. Very misleading since the purchase or sale of a business is a one-off transaction.

If an investment trust has a major portfolio restructuring, as sometimes happens when new managers are appointed, then all of the costs incurred as a result are treated as recurring in future years rather than as a one-off.

The KIID also includes the interest on all borrowings, but no allowance is made for the additional returns that might be produced by investing the borrowed money. If an investment trust borrows money and pays £X in interest on it, whilst earning £X on the money, I'd argue that the cost of the borrowing is nothing. The KIID instead adds £X to the total charges.

A few years ago Law Debenture was quoted by some sources as having annual cost of over 7%, whereas the annual management fee was 0.3%. It turned out that the calculation treated all of the running costs of its fairly substantial unquoted fiduciary services business as an ongoing cost for the purposes of the KIID. If you produce a KIID for an operating company you're going to get some high costs. I just did a quick calculation for Diageo (costs and interest paid were approximately £18.9 billion in the last financial year) and the Diageo "KIID" ongoing charges are about 22% of market value or 247% of NAV.

Earlier this week I bought some shares in the Macau Property Opportunities Fund (MPO), which has been hammered in the last few years and was trading at a discount of almost 70% of its NAV. MPO is in the process of being wound up so the managers are trying to its remaining properties. The KIID quotes a fee of 6.07%, a big part of which is the costs of selling properties in the previous year.

Fascinating stuff.
It's as though those in charge of the financial world don't want the average man in the street to understand anything...

So the question really.
Would you buy Caledonia today? (Or rather next week when the market is open.)

I notice there are a few Caledonias.
Caledonia Investments plc (CLDN) and the very similarly named Caledonian Trust plc (CNN)
I assume CLDN is the one we are talking about here.

[Dod101]

I follow the money (as you are doing with RIT) and it has certainly paid off. I see the big family interest as a positive as I do with RIT. What we need to remember with this sort of IT is that it is the family that is calling the shots. The outside shareholder has no clout but that has worked to the outside shareholder's benefit I think, certainly in the case of Caledonia. It also has the advantage to me that it is not like the average IT in that it holds a small amount of publicly quoted shares but many of its holdings are privately held so that it acts more like a private equity fund, but without loading up the holdings with debt. That sort of investment company will be getting more offers than it could ever handle which enables it to pick and choose. The family and its investment style has, as far as I know, got a high reputation with those that matter in the City and beyond.

Dod

Definite food for thought here. So thank you. Follow the (family) money.
Going to look into this outfit in more detail I think.

I have held it for just over 30 years. I bought it on 10 June 1992 for £3.48 per share. There have been no share splits or anything since then. Today’s price is around £37 so it is at least a ten bagger although that is over a long period. In addition of course there has been an increase in the dividend every year plus specials from time to time. Never been any surprises and it simply ticks along. Anyway, just a thought.

Dod

[Dod101]

I have considered Caledonia before.
This is the one with a massive discount on NAV. Possibly caused by the family having a large interest in the shares.
I notice the free float is only around 60% of the share capital.
Is the large family interest a problem? Could be seen as a long term positive as it's their family's riches I suppose.

The running cost at 1.71% is rather steep!

IMHO the family interest isn't a problem except that it prevents Caledonia from running a large buyback program. This is because the Cayzers would be forced to make a takeover bid for Caledonia if their collective share of it became much larger as the takeover panel treats them as a "concert party".

The KIID ongoing costs should be taken with a big pinch of the proverbial salt. A few years ago I looked at the method used for the KIID and it's very misleading.

KIID's include an estimate, which is added to the management fee, that takes into account previous transaction costs. So if you're a business like Caledonia which has private equity transactions then all of the costs involved with a purchase of sale are not treated as a one-off cost but instead get swept up in the KIID as a recurring cost. Very misleading since the purchase or sale of a business is a one-off transaction.

If an investment trust has a major portfolio restructuring, as sometimes happens when new managers are appointed, then all of the costs incurred as a result are treated as recurring in future years rather than as a one-off.

The KIID also includes the interest on all borrowings, but no allowance is made for the additional returns that might be produced by investing the borrowed money. If an investment trust borrows money and pays £X in interest on it, whilst earning £X on the money, I'd argue that the cost of the borrowing is nothing. The KIID instead adds £X to the total charges.

A few years ago Law Debenture was quoted by some sources as having annual cost of over 7%, whereas the annual management fee was 0.3%. It turned out that the calculation treated all of the running costs of its fairly substantial unquoted fiduciary services business as an ongoing cost for the purposes of the KIID. If you produce a KIID for an operating company you're going to get some high costs. I just did a quick calculation for Diageo (costs and interest paid were approximately £18.9 billion in the last financial year) and the Diageo "KIID" ongoing charges are about 22% of market value or 247% of NAV.

Earlier this week I bought some shares in the Macau Property Opportunities Fund (MPO), which has been hammered in the last few years and was trading at a discount of almost 70% of its NAV. MPO is in the process of being wound up so the managers are trying to its remaining properties. The KIID quotes a fee of 6.07%, a big part of which is the costs of selling properties in the previous year.

Fascinating stuff.
It's as though those in charge of the financial world don't want the average man in the street to understand anything...

So the question really.
Would you buy Caledonia today? (Or rather next week when the market is open.)

I notice there are a few Caledonias.
Caledonia Investments plc (CLDN) and the very similarly named Caledonian Trust plc (CNN)
I assume CLDN is the one we are talking about here.

SalvorHardin and I are writing about Caledonia Investments (CLDN) I cannot speak for Salvor but I would certainly buy it today. BTW, I am a very average man in the street but I value good culture and Caledonia has it is spades.

Dod

[SalvorHardin]

Fascinating stuff.
It's as though those in charge of the financial world don't want the average man in the street to understand anything...

So the question really.
Would you buy Caledonia today? (Or rather next week when the market is open.)

I notice there are a few Caledonias.
Caledonia Investments plc (CLDN) and the very similarly named Caledonian Trust plc (CNN)
I assume CLDN is the one we are talking about here.

The KIID rules are a classic "designed by committee" where box ticking is much more important than producing accurate information.

Yes we're talking about Caledonia Investments, ticker CLDN, share price 3,565p at tonight's close

Would I buy today? Yes, but I don't have the cash to spare at the moment. I topped up my holding a couple of weeks ago with a buy of one-third of my then current number of shares.

[Alaric]

The KIID rules are a classic "designed by committee" where box ticking is much more important than producing accurate information.

KIID rules were an EU thing, although the lack of moves to abolish them suggests the hand of the FCA in devising them.

Are IT's as known in the UK rather unique to this country and possibly Ireland? That may ccount for the attempt to shoehorn them into some standardised European format. Some of the jargon used and the presentation format could be traced back to the alphabet soup of LAUTRO etc from the 1980s.

[scotia]

Definite food for thought here. So thank you. Follow the (family) money.
Going to look into this outfit in more detail I think.

My first check on any new investment is to look at its performance compared to a tracker. I know you don't want to purchase an ETF - but you can get tracker OEICs - in your case you would go for the Income rather than the Accumulation units to simplify tax matters.
E.G. for an all world tracker - HSBC FTSE All World Index Class C Income - 5 year total return 61%
And for a UK FTSE all share tracker - HSBC FTSE All Share Index Class C Income - 5 year total return 20%
Looking at the total returns over 5 years of your existing ITs, they are
RIT Capital 28%
City of London 20%
F&C 59%
And looking at Caledonia (CLDN) it is 42%

I hold a number of ITs, as well as trackers (mainly ETFs) - but I sometimes suspect that trackers would adequately meet my needs

[SalvorHardin]

The KIID rules are a classic "designed by committee" where box ticking is much more important than producing accurate information.

KIID rules were an EU thing, although the lack of moves to abolish them suggests the hand of the FCA in devising them.

Are IT's as known in the UK rather unique to this country and possibly Ireland? That may ccount for the attempt to shoehorn them into some standardised European format. Some of the jargon used and the presentation format could be traced back to the alphabet soup of LAUTRO etc from the 1980s.

I suspect that it's inertia that stops the FCA and Treasury from scrapping KIIDs. IMHO they see any change to EU regulations as encroaching on their turf (and they don't want any changes), which is why (amongst other things) the Solvency II directive has been left untouched despite the huge costs it imposes for very little benefit.

AFAIA it's only Britain and Japan who have investment trusts with the big tax benefit of not being charged capital gains tax upon internally realised gains (shareholders are only liable for CGT when they sell their shares).

In many countries, instead of investment trusts they have closed end funds which don't have the same tax benefits. America's closed-end funds (CEF) may look like investment trusts at a distance but investors get a nasty wakeup call when they find out that they have to pay CGT upon their share of the capital gains when the CEF sells something at a profit. It's American CGT as well, so British investors have to submit an American tax return!

Not sure about Ireland, I know that they charge 33% CGT and dividends have a 25% withholding tax deducted if you're an Irish citizen or resident. I read an article a few years ago where they seemed to have some sort of tax levied on internally realised gains, but that could have changed.

[Spet0789]

The KIID rules are a classic "designed by committee" where box ticking is much more important than producing accurate information.

KIID rules were an EU thing, although the lack of moves to abolish them suggests the hand of the FCA in devising them.

Are IT's as known in the UK rather unique to this country and possibly Ireland? That may ccount for the attempt to shoehorn them into some standardised European format. Some of the jargon used and the presentation format could be traced back to the alphabet soup of LAUTRO etc from the 1980s.

Very much this. The FCA held the pen on KIDs.

[absolutezero]

I follow the money (as you are doing with RIT) and it has certainly paid off. I see the big family interest as a positive as I do with RIT. What we need to remember with this sort of IT is that it is the family that is calling the shots. The outside shareholder has no clout but that has worked to the outside shareholder's benefit I think, certainly in the case of Caledonia. It also has the advantage to me that it is not like the average IT in that it holds a small amount of publicly quoted shares but many of its holdings are privately held so that it acts more like a private equity fund, but without loading up the holdings with debt. That sort of investment company will be getting more offers than it could ever handle which enables it to pick and choose. The family and its investment style has, as far as I know, got a high reputation with those that matter in the City and beyond.

Dod

Definite food for thought here. So thank you. Follow the (family) money.
Going to look into this outfit in more detail I think.

I have held it for just over 30 years. I bought it on 10 June 1992 for £3.48 per share. There have been no share splits or anything since then. Today’s price is around £37 so it is at least a ten bagger although that is over a long period. In addition of course there has been an increase in the dividend every year plus specials from time to time. Never been any surprises and it simply ticks along. Anyway, just a thought.

Dod

Good performance when compared with (official!) inflation.
Thanks.

[absolutezero]

The KIID rules are a classic "designed by committee" where box ticking is much more important than producing accurate information.

No doubt an EU directive...

Yes we're talking about Caledonia Investments, ticker CLDN, share price 3,565p at tonight's close

Would I buy today? Yes, but I don't have the cash to spare at the moment. I topped up my holding a couple of weeks ago with a buy of one-third of my then current number of shares.

Thanks.

[absolutezero]

Definite food for thought here. So thank you. Follow the (family) money.
Going to look into this outfit in more detail I think.

My first check on any new investment is to look at its performance compared to a tracker. I know you don't want to purchase an ETF - but you can get tracker OEICs - in your case you would go for the Income rather than the Accumulation units to simplify tax matters.
E.G. for an all world tracker - HSBC FTSE All World Index Class C Income - 5 year total return 61%
And for a UK FTSE all share tracker - HSBC FTSE All Share Index Class C Income - 5 year total return 20%
Looking at the total returns over 5 years of your existing ITs, they are
RIT Capital 28%
City of London 20%
F&C 59%
And looking at Caledonia (CLDN) it is 42%

I hold a number of ITs, as well as trackers (mainly ETFs) - but I sometimes suspect that trackers would adequately meet my needs

Trackers are my usual vehicle these days but fancy something different for diversification.
Got tons of trackers as it is! Plus the tax return...

[absolutezero]

Thanks all.
I bought some Caledonia Investments (CLDN) and topped up on RIT Capital Partners (RCP) this morning.

[yyuryyub]

I have looked at CLDN as a potential investment several times over the years - and also similar ITs that are majority owned by very wealthy families. I've always been put off by observing numerous holdings that are actually themselves funds-of-funds. Maybe this does allow access to a larger universe of investment options (especially global Private Equity) and meets the wealth preservation requirements of generations of The Family. Personally, I baulk at the multiple layers of fund managers and lack of transparancy about what real investments are buried several layers down. Perhaps I should just accept the wisdom of the long established managers and their decent record, but I'm a long term Fool. I wonder if The Family feel happy about their investment vehicle or are they stuck with a management setup that they cannot easily change.

The multiple layers of funds here is one reason why calculation of total management charges can be done in different ways and give wildly different answers.

[Dod101]

I have looked at CLDN as a potential investment several times over the years - and also similar ITs that are majority owned by very wealthy families. I've always been put off by observing numerous holdings that are actually themselves funds-of-funds. Maybe this does allow access to a larger universe of investment options (especially global Private Equity) and meets the wealth preservation requirements of generations of The Family. Personally, I baulk at the multiple layers of fund managers and lack of transparancy about what real investments are buried several layers down. Perhaps I should just accept the wisdom of the long established managers and their decent record, but I'm a long term Fool. I wonder if The Family feel happy about their investment vehicle or are they stuck with a management setup that they cannot easily change.

The multiple layers of funds here is one reason why calculation of total management charges can be done in different ways and give wildly different answers.

You must make up your own mind of course. RIT tends to have some funds of funds but Caledonia much less so. In the end though, if you are getting excellent returns it does not matter what the management charges are. Obviously if they were lower you would get an even bigger return but in itself I do not see them as a reason for not investing. It might be that they are just the cost of getting good returns.

Dod

[richfool]

I have looked at CLDN as a potential investment several times over the years - and also similar ITs that are majority owned by very wealthy families. I've always been put off by observing numerous holdings that are actually themselves funds-of-funds. Maybe this does allow access to a larger universe of investment options (especially global Private Equity) and meets the wealth preservation requirements of generations of The Family. Personally, I baulk at the multiple layers of fund managers and lack of transparancy about what real investments are buried several layers down. Perhaps I should just accept the wisdom of the long established managers and their decent record, but I'm a long term Fool. I wonder if The Family feel happy about their investment vehicle or are they stuck with a management setup that they cannot easily change.

The multiple layers of funds here is one reason why calculation of total management charges can be done in different ways and give wildly different answers.

Yes, I too am conscious of the funds holding funds aspect, and also, with the likes of CLDN, the element of private equity held by such trusts, which again reduces transparency and can increase downside volatility. I was bitten by CLDN quite some years back, - probably just the result of my poor timing, buying just before the 2008 falls, when it seemed to take forever to recover. So, despite looking several times, I have left it well alone since. Plus the fact I prefer a bit more of a dividend than 2% and under.

[scotia]

Another feature of CLDN which puts it on my definitely do-not-buy list is their Factsheet. This highlights its superior performance to the FTSE All Share Index - but its constituents are:-
North America 33%
Channel Islands 16%
UK 15%
Asia 15%
Europe 7%
Cash etc 14%
Clearly a world tracker would be a more relevant Index - but, of course, CLDN compares poorly with such an index (as I quoted previously).
And I do not like the 16% in the Channels Islands. Was that one of Woodford's ploys to apparently reduce unquoted holdings - and did Guernsey suspend some of these listings? OK - CLDN is running at a very large discount (29%) - but I'm not surprised.

[SalvorHardin]

Another feature of CLDN which puts it on my definitely do-not-buy list is their Factsheet. This highlights its superior performance to the FTSE All Share Index - but its constituents are:-
North America 33%
Channel Islands 16%
UK 15%
Asia 15%
Europe 7%
Cash etc 14%
Clearly a world tracker would be a more relevant Index - but, of course, CLDN compares poorly with such an index (as I quoted previously).
And I do not like the 16% in the Channels Islands. Was that one of Woodford's ploys to apparently reduce unquoted holdings - and did Guernsey suspend some of these listings? OK - CLDN is running at a very large discount (29%) - but I'm not surprised.

The Channel Islands is high because quite a lot of the private equity investments are held through companies in the Channel Islands (e.g. Seven Investment Management is registered in Jersey - see the bottom of its website's front page)

https://www.caledonia.com/our-strategy/private-capital/

https://www.7im.co.uk/

Caledonia holding investments in the Channel Islands isn't remotely like what Woodford did. Woodford made the highly risky decision to hold a lot of unquoted investments in an open-ended fund, rather than a closed-end fund. So when his investors cashed in their investments, they did so by selling their units back to the fund which then had to pay them out of its own funds. Once the flow of sales rose above a certain level, his fund was forced to pay these investors by selling some of its more liquid assets and/or accept fire sale prices for the unquoted investments. That's why they had to stop redemptions; it was turning into the unit trust equivalent of a bank run.

In contrast Caledonia is a closed-end fund. So if investors sell their shares this is done via the Stock Exchange and Caledonia doesn't get involved. So no forced sales because of investor selling pressure.

World tracker funds don't own lots of private equity; they aren't a good benchmark. Caledonia's large UK and cash holdings are well outside the margins of what you'd expect to see in a world tracker fund.

A big discount isn't all that unusual for funds with lots of private equity. Also Caledonia cannot engage in large share buybacks because of the concert party ruling regarding the Cayzer family (if their collective shareholding rises above 50% then they have to bid for the entire company).

[scotia]

Caledonia holding investments in the Channel Islands isn't remotely like what Woodford did.

This is not entirely correct. Why are the Channel Islands chosen? - presumably because they are not subject to the stricter regulations in the UK.
And as for Woodford's OEIC - it did substantially better than his IT. So much for the "protection" of his closed end fund - it was the big disaster.

World tracker funds don't own lots of private equity; they aren't a good benchmark. Caledonia's large UK and cash holdings are well outside the margins of what you'd expect to see in a world tracker fund.

But the FTSE All Share, as chosen by CLDN is doubly irrelevant - it contains no private equity, and no foreign investments.

A big discount isn't all that unusual for funds with lots of private equity. Also Caledonia cannot engage in large share buybacks because of the concert party ruling regarding the Cayzer family (if their collective shareholding rises above 50% then they have to bid for the entire company).

Agreed - another reason why I have steered clear.