I have mentioned before in these columns the Foreign and Colonial Investment Trust. It is a very large fund of 2.2 billion, listed on the London Stock Exchange and dual listed on the New Zealand Stock Exchange. It is just one of many similar international funds that are dual listed on both the London and New Zealand exchanges.
Foreign and Colonial is worth mentioning again, as it just keeps on keeping on. It did decline slightly by 4.6% over the past year ending December 31, but that did not dampen the three-year 4.6% or five-year 12.4% average returns to December 31.
The fund claims to be the first managed fund, having been founded in 1868 for the benefit of small investors. Initially, it invested mostly in railway development in South America.
These days, it holds some 490 listed companies in 29 countries. The majority of the assets are in UK and US companies, with holdings in private equity funds and smaller holdings in Asia, Europe and Japan.
It is a very easy way to become a shareholder in very large companies such as Vodafone, GlaxoSmithkline, BP, HSBC, Royal Dutch Shell, Apple, Samsung, Google, Toyota etc.
It is a closed end trust in that you buy and sell units on the open market, not directly with the trust. It sells at a discount of about 10% to its net asset backing.
The management of the trust is very protective of the discount of the fund, trying to keep it as close to 10% as possible.
They point out that investors should take a long-term view in owning the trust so as to ride out the difficult conditions and volatility.
The trust has survived two world wars and many market crashes.
Investors often often say the running of New Zealand-managed funds is expensive for the investor. The managers' expense ration (MER) on many New Zealand funds is typically about 2.5%. That is, the fund is charged 2.5% for the managers' running costs. In the case of the Foreign and Colonial Trust, the MER is 0.5%. (Without being cynical, that is 11 million on 2.2 billion.)
The unit price at the time of writing is 310 pence ($NZ6) with a net asset backing of 354 pence, being a discount of 11%. The dual listing on the New Zealand exchange is just a straight currency conversion of the London SX rate. In my opinion, it is easier to buy it in New Zealand dollars, because then dividends are paid in New Zealand dollars, as Computershare acts as the New Zealand agent.
The fund is regarded as a foreign investment fund (FIF) for tax purposes. Tax is not deducted from dividends paid in either sterling or New Zealand dollars. Dividends therefore have to be declared for tax purposes and tax is calculated under the FIF rules. These are better understood and while an investor does have to file a tax return, this is not onerous.
In years of reduced returns, you may not pay any tax on an FIF fund. The current dividend is 7 pence per unit (2.25%).
The Foreign and Colonial Investment Trust should be regarded as a core growth fund in the international sector of an investor's portfolio. At what percentage of the total portfolio this should be depends on the investor's risk factor and possible tax position. Consult your financial adviser for advice before investing.
• Peter Smith is an authorised financial adviser and certified financial planner and is the principal of Kepler Group Otago Ltd, Dunedin. Email: pete@keplergroup.co.nz . A free disclosure statement is available on request.
