Mark Dampier: Caledonia's long-term approach worth following

The Analyst

As a change of tack this week, I'm going to look at an investment trust. Contrary to what some readers believe I am not against investment trusts. I hold several in my own portfolio.

The problem is many trusts suffer from poor liquidity. This means completing a buy or sell order for large volumes can be difficult.

In my experience investors can be unforgiving. If an order isn't completed in a rapidly rising or falling market they could seek compensation. Consequently, I feel investment trusts are perfect for niche private clients, but are not a mass-market product.

Caledonia Investments, a self-managed investment trust with net assets of approximately £1.1bn, is an interesting, eclectic-type trust investors either love or hate.

It was acquired by the Cayzer family in 1951 as a holding company for their various shipping interests. It still enjoys the backing of the family who collectively own 47 per cent of the share capital. As they are not sellers this is an example of a trust that isn't going to be that liquid.

Under the leadership of Will Wyatt (chief executive since July 2010) a reshaping of the portfolio is underway. Some smaller holdings have been disposed of and the resulting, more-focused, portfolio has been split into six defined pools (quoted, unquoted, Asia, property, funds and income & growth). The establishment of the income and growth pool is part of a wider objective to raise the portfolio yield towards four per cent and build on the trust's record of increasing dividends in each of the past 45 years.

The changes will take time to come to fruition and short-term performance has continued to be lacklustre. The top 10 holdings account for around 50 per cent of net asset value (NAV), so poor performance from any one is not going to be good. Over the past year, three in particular weighed heavily.

Aim-listed Avanti Communications supplies satellite broadband services to telecom companies across Europe. It is still at an early stage in its development and yet to make a profit. Euphoria can quickly turn to gloom with such companies and after rising to around £7, the shares currently trade around £3.50. The company has imminent plans to launch a second satellite, which will act as crucial back-up for the first, and a third next year. This should help it win and retain customers. Interestingly, M&G's Tom Dobell is one of the largest shareholders in Avanti Communicatio through his M&G Recovery fund, which gives me added faith.

Secondly, Melrose Resources fell around 50 per cent. Most of its assets are in Egypt and it was hit by negative sentiment following the Arab Spring last year. Oil and gas is always a riskier proposition, but Caledonia maintains Melrose looks cheap relative to its NAV while the company has never had a bad debt from its Egyptian operations.

Thirdly, British Empire Securities, a UK-listed investment trust, suffered in a "risk-off" environment as its strategy of focusing on companies trading at what they believe is a significant discount to NAV was not in favour with investors.

Caledonia believes all three companies will come back and shine, while there have also been plenty of successes to shout about.

AG Barr, maker of the famous soft drink Iron Bru, and Sterling Industries, an unquoted engineering company specialising in heat exchanges, have been great investments.

These typify Caledonia's ability to buy into long-term growth stories in areas many open-ended funds avoid. In my view, their approach of seeking to buy quality companies with exciting growth prospects and hold them for the long term is sadly lacking among many fund managers today.

I think this is the type of trust you can tuck away in the bottom drawer for the longer term and I'm tempted to suggest much bad news is now in the price as the trust currently trades on a 26 per cent discount to NAV.

Overall I view the changes implemented by Mr Wyatt as positive and for private investors looking for something a little more eclectic, I think this trust is worthy of consideration.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.h.l.co.uk/independent