Important: What follows is not a recommendation to buy or sell shares in Caledonia Investments. I am just a private investor, storing and sharing my notes. Read my disclaimer.
Name: Caledonia Investments
Ticker: CLDN
Business: Investment trust
More: Trustnet / Google Finance
Official site: Caledonia Investments
I have a soft spot for family vehicles like Caledonia Investments. I’m reassured to think that crusty old Barons and Earls are keeping a gimlet eye on the same investment that I’m in.
These trusts also appeal to me because:
- I believe wealthy old money knows how to stay wealthy.
- Big investment trusts are a relatively economical way to buy active management, if that’s your wont.
- They are invariably interestingly diversified.
- I’m a sucker for the romance.
Like anything on the stock market, investment trusts can attract their fair share of flighty managers and corporate conquistadors — or sometimes they simply bungle badly. With a wealthy family trust, I’m more confident that I can wait out misadventures knowing that seriously rich people are batting for the same cause as me – but with rather bigger bats!
For all these reasons and one more, I’ve made a substantial investment over the past few months in Caledonia Investments.
The extra kicker is that as I write, this investment trust stands at a discount of nearly 20% to its Net Asset Value (NAV). I consider this discount very likely to narrow over the medium term.
Wiping out the discount so that the shares traded at the estimated value of their underlying assets as of today, I’d see a 31% uplift to my shareholding’s value, even if Caledonia’s own investments did not to rise in value at all!
In reality, however, I expect Caledonia’s assets to at least keep track with the UK stock market; the trust has beaten the FTSE All-Share index in all but one year out of the past ten.
On a total return basis, Caledonia outperformed the same index by 113.5% over ten years, as of 31 March this year — a superb result! No lost decade for investors in Caledonia.
Past performance doesn’t guarantee anything, but I believe the combination of what I consider an unwarranted large discount, the strong family interest, and a track record of good asset allocation is a recipe for decent returns from here.
A potted history of Caledonia
Caledonia arose from the wealth of the Cayzer family, which made a mint or two from steamships in the 19th Century.
The Cayzers bought the wonderfully named Foreign Railways Investment Trust in 1951 as a holding vehicle for their family wealth, though they showed rather less sentimentality than me when they renamed it Caledonia Investments Ltd.
In 1955, Caledonia then gobbled up the Cayzer family’s interest in the British and Commonwealth Shipping Company, and the resultant entity was floated on the London Stock Exchange in 1960.
Caledonia subsequently divested itself of the British and Commonwealth holding in 1987, and became more like the opportunity-seeking investment vehicle it is today.
It was restructured as a formal investment trust in 2003.
Don’t discount the family factor
Now, there are some investors who would say this convoluted history justifies a discount on the trust, especially when added to the ongoing involvement of the Cayzer family, who have their own colourful back stories.
But as I’ve said above I’m in the opposite camp, in that I like the family factor.
I’d also note that the share has sometimes traded at a slight premium to net assets in the past, so clearly the Cayzer family effect alone can’t explain the discount:
It has to be admitted though that Caledonia’s family owners have been a fiery lot over the years: More 1980s Dynasty than 19th Century dynasty.
The turn of the 20th century was marked by a big bust-up, which this article from The Telegraph from 2004 captures:
One of the City’s most bitter family feuds moved towards peace yesterday when Caledonia Investments announced a special dividend costing at least £64m to buy out dissident members of the Cayzer shipping dynasty.
The scheme has been devised to end three years of feuding in the family, which owns 37.5pc of Caledonia via the Cayzer Trust Company and 12pc through individual family members.
Rebels led by Sir James Cayzer, the 72-year-old patriarch who gives his address as Kinpurnie Castle, in Angus, and has a fleet of Rolls-Royces but no driving licence, have campaigned for Caledonia to be broken up and its assets distributed.
Rows and power struggles have turned on matters ranging from a controversial investment in a boat by the trust for the millennium celebrations to Dotcom-era underperformance.
And while those fractious days would seem to be behind it, various offshoots of the Cayzer family still own 46% of the trust’s shares. What’s more, last year Will Wyatt, the distant grandson of clan founder Charles Cayzer, took over as CEO, returning the trust to direct family control.
For some this sort of thing – and the potential for another flare-up — is untenable.
For me it’s all part of the fun of investing in family houses. But if it doesn’t float your steamboat, then you should certainly look elsewhere; the Cayzer involvement is surely here to stay.
No big buybacks
The family holding presents a more concrete concern, however, even for us spreadsheet-wielding romantics.
An undertaking to the UK’s Takeover Panel means Caledonia is unable to execute any share buybacks that would take the Cayzer concert party’s holding above 49.5%.
That’s important because — as investors at rival mega-trust Alliance are presently discovering — buying back shares can be an effective way of narrowing a large discount to a trust’s net assets.
Personally, I don’t think it does much good for ongoing shareholders. Yes, your shares are rising in value, but your company is spending your assets to get that result. It’s all rather circular.
The hope of course is that the discount will narrow faster than the rate you’re spending money to narrow it, as other investors should buy the shares if the discount widens too much, anticipating it will be closed again by buybacks.
But it doesn’t always work that way.
Worries about what’s under Caledonia’s kilt
It’s all rather moot, anyway, because Caledonia isn’t buying back substantial amounts of shares.
Instead, we’ll need to see a decent investing performance and a change in sentiment to narrow the discount.
The key to the latter, it seems to me, is that a big slug of Caledonia’s money is in private equity funds or directly invested in unlisted companies (including, rather fittingly, 100% ownership of The Sloane Club in London) and the market seems to lack confidence in these unlisted holdings.
A similar argument was made a couple of years ago to justify the discount at RIT Capital Partners, the family vehicle of the Rothchilds.
Indeed, I discussed RIT Capital Partners on Monevator when it was trading on a double-digit discount in 2009. Since then the discount on Jacob Rothchilds’ warchest has turned into a premium, and anyone who bought the shares when I wrote has seen a return of around 46%, versus less than 29% in the FTSE 100 1.
This return is especially impressive when you consider that RCP was holding plenty of cash at times – although equally it was also invested in flightier foreign markets, too, so the comparison with the FTSE is a crude one.
My highland fling with Caledonia
While RIT has an even more stellar ten-year record than Caledonia on most measures, the main reason for that recent outperformance is simply that the discount on its shares disappeared to become a slight premium. This transformed the trajectory of its share price.
I think RIT has a good chance of doing well from here, too – and to retain its value better than a tracker should the market dive — and I still hold some.
What I’d class as the easy justification for investing in those shares has passed, however. If anything, the slight premium bothers me.
But the window has not yet passed for Caledonia. The fund sits at a 20% discount despite the fact that net assets were ahead 6.5% over the past year, versus a 5.4% performance from the All-Share. Consider that it has 6% or more of its money in cash, and the 20% discount looks even more untenable.
Yes, Caledonia has a new manager, who seems to favour resource companies over the financial firms that long dominated Caledonia’s roster (and the CVs of some of his aristocratic forebears).
And yes, he’s also reshaping the trust’s strategy to concentrate on fewer holdings, where Caledonia’s investment can result in a more meaningful influence at board level, as well as looking to boost the trust’s market-lagging 2.2% dividend yield.
Even on this last point, Caledonia already has a 44-year history of raising its dividend – another super achievement.
Yet the market seemingly prefers to fret that this £1 billion company has lost nearly £200 million of its value down the back of an antique sofa than to look at its medium-term history of wealth preservation, market-beating returns, and a growing income.
I think the market is wrong. It’s true that buying trusts on a discount can be a hit-and-miss affair; the market isn’t entirely dumb, and often the discount correctly anticipates dawdling performance or worse.
But I think the old money factor tilts the odds in Caledonia’s favour. In my worst case scenario, the discount doesn’t narrow much and I buy into a secure and rising dividend with one-fifth knocked off the price.
If you too are tempted to invest in Caledonia, then you’ll want to read the latest annual report to see where it is putting its money and how recent changes will affect its portfolio going forward. As ever, do your own research – I am not responsible for your actions.
My own money is where my mouth is. I’ve put roughly 6.5% of my net worth into Caledonia Investments, and writing this post I’m thinking to myself that this sum could rise still higher!
Note: I take no responsibility for the accuracy of this post. Read my disclaimer.
- excluding dividends[↩]
The second update of the Slow and Steady passive portfolio takes place against a backdrop of global doom and gloom. Eurozone ministers fiddle while Athens burns and the talking heads ponder every scenario – from default to default plus meltdown of the financial system (part two).
Where does all this brouhaha leave our battered lazy portfolio? Roughly where it started!
The portfolio was set up at the start of the year with £3,000 and an extra £750 is invested every quarter into a diversified set of index funds, heavily tilted towards equities.
Missed an update? Catch up on all the previous passive portfolio posts.
The results are in
The portfolio has ticked up 0.85% since launch for a whopping cash gain of £31.96. That’s £14.12 earned in the last three months. Sweet dreams are made of this.
Since last time:
- The US fund remains in the black but has lost nearly half of its initial gains 1 as America’s recovery runs out of puff and growth figures are revised down.
- Meanwhile, Europe continues to motor ahead, despite everything – maybe the doom-mongers have been exaggerating?
- The FTSE is bumping along going nowhere fast, which feels about right. Still, we’ve had the VAT rise, the onset of George Osborne’s austerity measures and carnage on the High Street since the last update, so we’re getting off lightly.
- Japan was the big laggard last time, post-Tsunami. It’s still down but slowly recovering.
- The Pacific continues to edge down. This fund is dominated by Australia so could be feeling the slowdown in commodities and the rises in interest rates.
- UK Gilts gain as fear stalks the land. Our bond holding registered the portfolio’s second biggest loss last time, but has swung around to notch the highest gain this quarter. Its performance this quarter is a shining example of bonds as buoyancy aid, shielding the portfolio from equity volatility.
- Emerging markets are now the biggest drag on the portfolio as overheating takes the steam out of Chinese growth.
Whatever the causes, we’re talking about dips and gains that amount to a few pounds. Despite the red-hot newswires, the market remains flat.
Still, it’s a long-term game for passive investors – we’re relying on low costs, diversification and the risk premium to reward us in the future. Perhaps the far-distant future of foil suits the way we’re going.
New purchases
Time to throw in another £750 of our carefully husbanded cash and rebalance the portfolio as follows:
UK equity
HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233
New purchase: £153.02
Buy 43.0690 units @ 355.3p
Target allocation: 20%
Developed World ex UK equities
Split between four funds covering North America, Europe, the developed Pacific and Japan.
Target allocation (across the following four funds): 50%
North American equities
HSBC American Index – TER 0.28%
Fund identifier: GB0000470418
New purchase: £218.76
Buy 113.8771 units @ 192.1p
Target allocation: 27.5%
European equities excluding UK
HSBC European Index – TER 0.37%
Fund identifier: GB0000469071
New purchase: £87.35
Buy 16.6858 units @ 523.5p
Target allocation: 12.5%
Japanese equities
HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374
New purchase: £33.47
Buy 53.2813 units @ 62.81p
Target allocation: 5%
Pacific equities excluding Japan
HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713
New purchase: £38.63
Buy 15.708 units @ 245.9p
Target allocation: 5%
Emerging market equities
Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60
New purchase: £84.25
Buy 162.9317 units @ 51.71p
Target allocation: 10%
UK Gilts
L&G All Stocks Gilt Index Trust: TER 0.25%
Fund identifier: GB0002051406
New purchase: £134.51
Buy 83.9663 units @ 160.2p
Target allocation: 20%
Total cost = £749.99
Cash = 1p
Total cash = 5p
Trading cost = £0
We rebalance to target allocations every quarter using new contributions. It’s a no-brainer as our plain ol’ index funds don’t incur trading costs.
Take it steady,
The Accumulator
- Note, I’m talking cash returns since the last update. I’m not referring to the gain/loss percentage since purchase. Same goes for all the other funds.[↩]
Some good reads for the weekend.
I read two great articles from Allan Roth this week. One is in the lists below, while the second (which is actually a year old) I am calling out as my post of the week.
In Skimp or Splurge – Millionaire’s Car, Roth highlights the awesome wealth-destroying capabilities of an expensive automobile:
On average, each of the two Lexus SUVs cost $15,060 annually, while the Ford clocks in at $10,000 less. This leaves the [Ford-owning] Thriftys with $20,000 annually to invest.
If the investments return seven percent annually, the Thriftys will have built up a $1.9 million portfolio after 30 years. Of course to get that rate, you’ve got to keep expenses and emotions out of the equation and be a rational investor.
I’ve mentioned before the big wins – from a frugality standpoint – of avoiding the three Cs: Cars, cigarettes, and children.
It’s especially true in your 20s. I once worked with a young colleague who ran a top-end car and smoked like a Cold War spy. He was always in debt. Luckily he smelt like a chimney and preferred fine mechanical bodywork to a fertile chassis, so he avoided the children that his lifestyle would have sent to the poorhouse.
But perhaps I shouldn’t preach: This post is slightly late because I’ve been assembling one of these
The first dividend income from the high yield portfolio (HYP) I set-up in May has already begun trickling into my clammy hands!
More precisely, the dividend income has been paid into the Halifax Sharebuilder account where I hold the portfolio. It will stay there until I withdraw it.
So far I’ve received a total of £14.50 in income, paid by four constituents: Royal Dutch Shell, Aberdeen Asset Management, Unilever, and Admiral. Not much of a haul from the £5,000 I invested but it’s early days. A full 16 companies are yet to make any payment, and all pay at least twice a year.
I calculate the HYP’s starting forecast yield to be around 4.3%. Therefore, we might expect at least £215 over a full 12 months to 6th May – though in the first year it’s certain to fall below that because some companies would have been trading ex-dividend when I jumped into these shares, and other payments due won’t actually make it into my account until the second year.
What I’ll do with the dividend income
As previously explained, I do not intend to reinvest the dividend income from this demo HYP back into these shares.
Partly that’s to reinforce a point: I think HYP’s are best thought of as income vehicles, rather than as necessarily a good route to growing a capital sum (although that said there’s nothing wrong with targeting income from day one and avoiding onerous switching costs and hassle later on, even if it’s potentially not a winning strategy in total return terms. There’s more than one way to skin cats).
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in…”
– J.D. Rockefeller.
I’m also not reinvesting these small amounts of dividend income because I want to avoid the tedious paperwork associated with reinvesting dividends outside of an ISA should I ever need to calculate capital gains tax on the shares.
But mainly I want to ‘cleanly’ see what my initial £5,000 investment is paying out in a few year’s time, and to judge if it has achieved my target of delivering more cash in real terms (that is, inflation-adjusted) than today.
This will be trivially easy to see if I simply keep the capital investment intact, and then add up and withdraw all the income every year. I’ll report the annual dividend income sum here on Monevator, and we can ponder what a fully scaled-up equity income portfolio might mean for a pensioner currently trying to get by on a squeezed and cheapened fixed income.
Dividend income is key to long-term returns
Now, if you’re a long-term investor in the stock market, you should certainly be reinvesting your dividend income.
This is super-simple with Halifax Sharebuilder, and it only charges you 1% of the sum being reinvested. (So 10p on automatic reinvestment of £10). 2% of the sum being reinvested (so 20p on an automatic reinvestment of £20). (The charge went up to 2% since I wrote this – see Martyn’s comments below).
Alternatively you could allow the dividend income to add up until you’ve got enough money to make another share purchase efficiently after dealing charges. I’d probably do this myself, to take the HYP to 30-odd shares, before I began to reinvest in existing holdings.
However you choose to reinvest your money from shares, make sure you do it if you’re under 60. Dividend income is extraordinarily important. While the financial media goes crazy for daily share price moves, it’s the compound impact of reinvesting dividend income over the decades that has generated the bulk of the stock market’s winning longer-term performance.
According to the infamous Barclays Equity Gilt Study 2011 edition of historical returns:
- £100 invested in UK equities in 1899 would have been worth just £180 by the end of 2010, after inflation. That’s barely doubled!
- In contrast, if you’d reinvested your dividends over the same time period, you’d have been left with an after-inflation sum of £24,133!
Spending your capital is a sin, just like the old-timers said. But spending your income too early isn’t going to lead to a heavenly retirement, either.
A fudge to track the HYP’s total return
Given the importance of dividend reinvestment, what I may do is track the year-end capital value of the demo HYP in a spreadsheet (and in an annual review on Monevator!) and then assume I reinvested that year’s dividend income into buying a fresh chunk of that same portfolio.
I’ll knock off 1.75% of the total cash amount (note: not the running yield!) of dividend income being reinvested to account for fees, spreads, and stamp duty.
For example, if I get £200 of dividends over the year, then I’ll assume £3.50 is lost to costs and add the remaining £196.50 to the ongoing portfolio value.
The next year I can simply calculate the yield due on that sum based on the actual return from the real-money portfolio, and compound again. Unless I’m missing something obvious, this should give a rough handle on how the portfolio would be growing if the money wasn’t being withdrawn to spend on whisky and women (or more likely Kindle books and Marks & Spencer canapes).
Obviously it won’t produce exactly the same result as reinvesting dividend income throughout the year would, but it will serve as a decent approximation and anomalies should balance out over time.
The notorious bankers at Royal Bank of Scotland plugged a big hole recently in the asset allocation choices for passive investors by launching a UK small cap index tracker. 1 However my street party was short-lived, as the fluffily-named RBS HGSC Tracker (ticker: RS64) comes with bigger buts than England’s front-row.
Small cap companies have historically trounced the FTSE All-Share 2 over the last 50-odd years. Research suggests investors are paid a ‘small cap premium’ for taking a punt on riskier pygmy equities.
Unfortunately the small cap punt is riskier still when it comes in the shape of RBS’s UK small cap index tracker – it’s neither a cuddly index fund nor a comfy old Exchange Traded Fund (ETF).
RBS call it a Redeemable Certificate, and that raises all kinds of questions.
Let’s try to answer a few.
What’s a certificate?
Even though you’re buying the return on a clutch of small cap equities, a certificate doesn’t invest directly in the shares it tracks. It’s effectively debt issued by the bank. In exchange for your money, RBS promises to pay the value of the index tracked, plus dividends.
The debt is unsecured, meaning that if RBS 3 goes bust then you’ll probably get buttons. Your investment isn’t backed by a nice cushion of collateral.
That 100% exposure to the credit-worthiness of the certificate issuer is the main drawback of this kind of tracker.
Certificates are an obscure offshoot of covered warrants, are all the rage in Europe, and are the near-identical twins of Exchange Traded Notes (ETNs) that are popular in the US. But I digress.
Other key features of the certificate are:
- The RBS HGSC tracker trades on the London Stock Exchange (LSE).
- You buy and sell it through a broker, just like an ETF.
- The main advantage of a certificate is it does away with tracking error.
- It returns the value of the index minus the annual management fee.
- Dividends aren’t paid out as income but are rolled up into the certificate.
What’s the index?
The RBS UK small cap tracker follows the RBS HGSC (Tradable) TR Index, a cut-down version of the venerable Hoare Govett Smaller Companies index.
- It comprises up to 200 of the smallest 10% of companies listed on the LSE.
- It’s filtered to only include firms that traded an average of £10,000 worth of shares every day over 3 months.
- A company’s weight in the index is capped at 5% to ensure diversity of holdings.
- Weightings are reset once per year.
- TR stands for total return; it means that dividends are assumed to be reinvested in the index.
The FTSE SmallCap index represents the bottom 2% of the UK’s weeniest listed companies. So the full HGSC index (which contains over 400 companies excluding Investment Trusts) would normally bite off a fair chunk of the bottom half of the FTSE 250 as well. Knocking out 50% of the most illiquid tiddlers will heighten that FTSE 250 exposure even more.
But it’s nigh on impossible for retail investors to take a view on that because RBS doesn’t publish details of the index holdings on its website – a miserable failing in comparison to ETF issuers like iShares and db X-trackers.
That alone makes my investing antennae twitch with distress. Understanding the index you’re tracking is a key part of passive investing.
You can at least get an idea of the sector weightings of the full HGSC index courtesy of fund manager Aberforth.
What are the costs?
The annual management charge is 0.6%. Certificates don’t speak in terms of Total Expense Ratio (TER) because they don’t comply to UCITS fund regulations. Again, we’re straying off the garden path and into a darker neck of the woods.
Still, 0.6% AMC is reasonable and compares with:
- 0.85% Aberforth Smaller Companies Trust (Investment Trust)
- 0.58% CS ETF (IE) on MSCI UK Small Cap (ETF)
- 0.27% FTSE 250 Index Retail Acc (Index fund)
On top of that, you’ll pay a spread to buy and sell. The bid-offer spread is 1%, under normal circumstances, according to RBS.
That is steep and is equivalent to paying a load fee for every transaction.
You’ll pay the usual broker’s commission, too.
The HGSC Tracker is supposedly available through all the major brokers. You may need to give them a phone call though because it’s confounding many of the broker search engines I tried, even some of the ‘preferred partners’ RBS lists on its own website.
Try looking in the broker’s covered warrants section if all else fails.
Funny stuff
The certificate has an expiry date. Like most other types of debt it eventually matures and that pay back date is April 19th, 2021.
Come the day, RBS will pay out whatever the index is worth after 10 years, plus dividends. If the index is on its knees then there’s no waiting out the storm, unless you can reinvest in an identical tracker at the time (presumably paying out more on commission and the spread).
You’ll also notice on the HGSC Tracker’s website a number marked ‘effective gearing’. Happily this doesn’t mean you’re exposed to some hideous amount of leverage. It refers to the proportion of the index value that one certificate share represents. If you multiplied the price of one share by the effective gearing ratio then you would get the value of the index.
RBS say you can hold their small cap tracker in an ISA or a SIPP as long as you buy more than five years before its expiry date, but Hargreaves Lansdown, for one, say it’s SIPP only.
While the factsheet cautions you to read the prospectus, RBS have mysteriously failed to put it on their own website – what reason can there possibly be for that in this era of digital communication? Apparently, we’re welcome to pop into their offices to pick up a copy, or it’s available online via the LSE. Good luck finding it. Please tell me if you do.
RBS owns the index the certificate is tracking. That’s a potential conflict of interest brought home when you read this choice piece of small print:
The Index rules may be amended modified or adjusted from time to time by RBS as applicable. Any such amendment may be made without the consent of or notice to investors in instruments linked to the Index and may have an adverse effect on the level of the Index.
Now I’m used to reading things in prospectuses that seem anything from a bit rum to the work of gangsters, but then my usual range of investment vehicles have run for decades without calamity so I might be prepared to give them the benefit of the doubt.
The same can’t be said for certificates. It also turns out that RBS can redeem the certificates early if:
…the closing price of the Index cannot be determined on a particular day due to a suspension or limitation of trading or other disruption to trading or early closure of the London Stock Exchange or any other exchange.
Certifiable?
Taking all this together I can’t say I’m a fan of the RBS HGSC Tracker. Aside from the credit risk (and in truth it seems unlikely that RBS would really be allowed to pop) and the painful bid-offer spread, it’s the lack of transparency that puts me off.
Certificates can be used to provide low-cost access to otherwise hard-to-reach markets, but the only reason you’d choose this particular UK small cap index tracker is because of the sheer lack of alternatives.
Take it steady,
The Accumulator
- CUKS, the Credit Suisse UK Small Cap ETF is a closet FTSE 250 tracker in my view.[↩]
- The Hoare Govett Smaller Companies index has outperformed the All-Share by 3.4% per year since 1955 according to a report by Professors Dimson and Marsh, who devised the HGSC index.[↩]
- That’s RBS the semi-nationalised UK banking behemoth, severely wounded during the credit crunch and saved by the Government.[↩]
