42 Years of Small-Cap Dividends
LONDON -- Investing in smaller companies requires a certain level of dedication. Careful research and monitoring of your selections is needed to make sure they stay on track.
Given this, what would you say to investing in a 230 million pound small cap that's been in business since 1889 and has increased its dividend every year for the last 42 years?
The company concerned is, of course, an investment trust -- one of the most Foolish ways of investing in shares.
F&C Global Smaller Companies (ISE: FCS.L) was founded in 1889 and is now part of the F&C Asset Management (ISE: FCAM.L) stable of investment trusts and funds. Impressively, despite its focus on smaller companies, it is one of just eight investment trusts that have increased their dividends every year for at least 40 years.
Over the last 10 years, F&C Global Smaller Companies has comfortably outperformed its benchmark of 8.18%, delivering an annualized trailing return of 12.32%. It has also strongly outperformed the FTSE 100 (INDEX: ^FTSE) , which has provided a total return of just 4.1% per year over the last 10 years.
The trust's performance has got even better since current manager Peter Ewins took over in 2011, although it's arguably too soon to say how much of the improvement is due to his management.
On the other hand, one fund manager who definitely can take full responsibility for his funds' growth is Neil Woodford, who many describe as the U.K.'s answer to Warren Buffett. Woodford's High Income fund has grown by 347% over the last 15 years, compared with 42% for the FTSE All-Share Index, while the investment trust he manages -- Edinburgh Investment Trust (ISE: EDIN.L) -- gained 9.42% last year, against a fall of 3.46% in its benchmark.
Woodford invests in a mixture of big-cap and smaller companies, and he now manages more money for private investors than any other fund manager. You can find eight of his biggest current holdings in this free report, which I highly recommend.
F&C Global Smaller Companies claims to be the only investment trust specializing in smaller companies on a global basis. The trust's 250 million pounds' worth of assets are allocated across the world:
- U.K.: 29%
- Europe: 10.8%
- U.S.: 39.8%
- Japan: 7.8%
- Rest of the world: 12.6%
I particularly like the global aspect of the trust's investments, which provides attractive exposure to smaller growth companies all over the world and means that its investments are very unlikely to duplicate any of your individual shareholdings.
Another good year
The trust's global growth strategy seems to work well. It has just published its latest annual report, showing that it outperformed the relevant local index in every single one of its regions:
Portfolio Performance, Year Ending April 30, 2012
Local Smaller-Companies Index
|Rest of the world||(1.2%)||(13.6%) (Pacific, excluding Japan)|
(12.5%) (Latin America)
Source: F&C Global Smaller Companies 2012 annual report.
This year saw the trust increase its dividend for the 42nd consecutive year. The total dividend for the last year is 5.63 pence, a 10.4% increase on the previous year. This equates to a yield of about 1% -- not outstanding, but this is primarily a growth investment.
With regard to cost, F&C Global Smaller Companies is cheaper than most unit trusts. Ongoing charges for the most recent year (this measure has replaced total expense ratio) were 1.08%, a figure that puts most open-ended funds to shame.
Getting a discount
Shares in investment trusts can sometimes trade at hefty discounts to their underlying net asset value, or NAV. This tends to reflect the degree of confidence the market has in the trust's future performance and the liquidity of its investments. Trusts that invest in highly illiquid assets, such as forests and privately held companies, can suffer particularly badly in this respect, as their assets are hard to sell quickly without being discounted.
F&C Global Smaller Companies has kept its discount under control using share buybacks, and its share price is within a whisker of the NAV. Investors who prefer to buy at a significant discount may have to wait -- but I think FCS represents decent value at full price and have added this to my own short list of investment trusts to watch.
Finally, don't forget to check out that free report I recommended. It contains eight of dividend legend Neil Woodford's biggest holdings, and it can be in your inbox in seconds.
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At the time this article was published Roland does not own any of the shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.