Caledonia Investments: Active management pays off
Caledonia Investments has a unique, some might say quaintly old-fashioned way of monitoring its interests. Active doesn't begin to describe its management style.
If the trust's executive directors like a company's prospects they don't mess around with a 1%, or 2% stake – it is more likely to be 10%, or even 15%.
But, crucially, Caledonia always insists on taking a non-executive seat on the board. From this vantage point it is able to influence strategy and ensure investors' interests are best served.
Imagine if Royal Bank of Scotland's Sir Fred Goodwin had been subject to this sort of powerful boardroom scrutiny. He might have thought twice about pulling the trigger on the woefully mis-timed acquisition of ABN Amro.
And a feisty heavyweight presence in the boardroom of HBOS might have even encouraged former chief executive Andy Hornby to stand up to corporate lending boss Peter Cummings.
All this is idle speculation, of course. What you can say is this direct approach to investment management works very successfully for Caledonia.
Not that this is evident from last year's figures, which showed the company's total investment return down 26.3% and its net asset value off 27.7%.
However, the year ended March 2009 was a period of exceptional volatility – although it is worth noting that the investment trust still beat its benchmark – the FTSE All-Share Index – which fell 32.2% in that time.
But Caledonia prides itself on being a long-term investor, and on that score it has delivered spectacularly.
Total returns in the past five years have grown by 39%, and over 10 years the figure is an impressive 147% Contrast this with the All-Share Index, which has returned 7%in the past five years and lost investors 6%over the past decade.
According to boss Tim Ingram, Caledonia outperforms it in any five-year period you care to choose, though the aim also is to deliver absolute returns for investors and a progressive dividend in that timeframe.
While its shareholdings are mainly in listed small and mid-cap companies, Caledonia will sometimes back private firms where it sees potential.
Ingram says his managers have a rigorous way of assessing potential investment candidates with the emphasis on the entrepreneurial track record of the management – rather than simply assessing the prospects of the firm in the way traditional fund managers do.
'Companies don't make you money, people do,' Ingram asserts.
'Unlike many investors we will do due diligence on the management team to find out whether they are money makers.'
That means a lot of background checking of the individuals in charge of the target companies.
Ingram says the price of the investment is also crucial, which means sometimes Caledonia is forced to walk away from a hot prospect that is deemed too expensive.
'You can have a fantastic managerial team but if you have to pay too much to get in there you can't make money out of it,' he adds.
Caledonia's cautious approach and patience – on average it invests for more than a decade at a time – probably owes much to the fact that it is essentially a family company.
It was initially bankrolled by the Cayzers when they switched their money from shipping into stock market investment in the 1960s and today they still hold a 45% stake in the group.
There are three Cayzers on the board of the company. But aligning the family interests with those of the wider investor base seems to have worked.
'It is very simple: they are supportive, involved shareholders,' Ingram says of his main stakeholder.
In the three months to June 30 the company's net asset value has risen 9% to 1706p and the share price's discount to NAV has narrowed to 7.7% from 17.3%. This means the company's investment and stock market performance have improved markedly in one quarter.
So have we missed the boat? Not really. Caledonia should be bought as a long-term investment – and held for a minimum of five years. This makes it ideal for the retail saver looking to buy and hold a very consistent performer.
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