Is this ‘the best kept secret’ in the investment trust sector?

When an analyst describes their subject as ‘one of the best kept secrets in the investment trust sector’ it pays to take note, says Nick Sudbury.

A large investment trust with an excellent long-term performance record and a mandate that would appeal to most private investors would normally trade at a premium to its peer group, but that is certainly not the case with Caledonia Investments (LON:CLDN), whose shares are available at a 16% discount to net asset value (NAV).

This looks like a bargain and suggests that it has gone under the radar, probably as a result of the large family holding − the Cayzer family owns 48.5% of the share capital – which could imply a lack of marketing and publicity.

Caledonia is a self-managed investment trust with net assets of £2bn and has many of the characteristics of a family office including a very long-term approach to investment and a focus on absolute returns.

The fund aims to grow both its net assets and dividends over the long-term, while managing risk by avoiding the permanent loss of capital. In many ways it is quite similar to its better known peer, RIT Capital Partners (LON:RCP), which is trading on a hefty 10% premium to NAV.

Impressive set of results

As my colleague Evil Knievil recently pointed out, Caledonia has just released an impressive set of results. In the financial year to the end of March the fund delivered a NAV total return of 10.9% that was substantially ahead of the 6.4% gain by the FTSE All-Share. It also increased its dividend by 4%, which was the 52^nd consecutive year of growth, with the shares now yielding 1.9%. 

In the short to medium term the objective is to beat the Retail Prices Index (RPI) by 3% to 6% per annum. This represents a real return that is commensurate with the average market outperformance. Over longer timeframes it benchmarks itself against the FTSE All-Share and in the last 10 years it has just managed to beat the index, with the performance in the last five years being especially strong.


Will Wyatt, the Chief Executive since July 2010, has reorganised the portfolio into four distinct pools of capital that allows the investment team to concentrate on their own unique areas of specialism. The pools are: Unquoted Assets (35% of the net assets at the end of May); Funds (26% of the assets); Quoted Securities (21%); and Income (10%); with the other 8% temporarily in cash.

Its largest area of investment, the unquoted pool, is the most concentrated with just 11 holdings at the end of March. Caledonia owns majority and minority positions in established, cash generative UK businesses, with an initial investment size of between £25m and £125m. These delivered a total return of 11.4% in the last financial year.

Strong recent performance

The funds pool has performed strongly in the last few years and delivered another impressive gain with a return of 15% in the recent accounts. This latest result was mainly due to the strong performance of Asian and US based private equity funds.

At the end of March the quoted pool consisted of 19 core holdings with the emphasis on consumer-oriented companies that are able to demonstrate growth. The high quality names included the likes of Microsoft, AG Barr and Spirax Sarco, with the portfolio generating an impressive 21% return in the year. This area of investment has been gradually scaled back with the team taking profits as the market has risen.

Its final component, the income pool, had 20 positions at the end of March and generated £13m of income that was equivalent to an annual yield of 5.8%, although this included special dividends.

Theanalysts at Winterflood describe Caledonia as one of the best kept secrets in the investment trust sector. They say that as a self-managed investment trust with a large family shareholding, it can take a very long-term approach, which is a distinct advantage when it comes to investing in private companies.

There is an inherent conservatism to the fund’s approach that would suit many private investors.Over the last five years thereturns and volatility compare favourably with its Flexible Investment peer group, yet the shares are available at a wide 16% discount to NAV. It is probably fair to say that Caledonia would not keep pace with a strongly performing market, but it is certainly well-positioned to outperform over the long term.