The Analyst: People, not portfolios, are best bet

The life of a manager can be tough. It's a difficult game and the pressure to perform is intense. Each day, thousands of people open the paper to see how you're doing; if they don't like what they read then your job will be on the line.

Sporting managers the world over can relate to that, but it is just as true of investment managers. The modern obsession with the short term is invading the financial sphere. This isn't just happening among amateur investors either, but with some professionals, too. Short-term market noise can easily hide the investments with good long-term value.

In any business, it pays to stick with talented people and this is especially true in investment. There are many factors beyond a company's control that can derail their short-term performance, such as politics or even natural disaster.

However, the best investors know that long-term value is what's most important.

Warren Buffet once said: "Investing is simple. All you do is buy shares in a great business with managers of the highest integrity and ability, then own those shares forever."

This week, I shall feature an investment trust – Caledonia Investments plc – that epitomises this long-term philosophy. An investment trust differs from a unit trust in several respects, but the underlying principle is the same: by purchasing shares in the trust, you gain access to its portfolio of investments. The key difference lies in the fact that investment trusts themselves are traded on the stock exchange like any other share. This means that the performance of their share price will not necessarily match that of the underlying portfolio.

The managers of Caledonia Investments are true long-term investors and aim to hold stocks for at least 10 years. The trust is principally invested in the UK, although the managers have the freedom to go overseas when they spot attractive opportunities. Currently, the portfolio is 75 per cent invested in the UK, with 8 per cent in Europe, 8 per cent in North America and 9 per cent in Asia. The managers are looking forward all the time, constantly searching for the next area of potential. For example, it now holds 5 per cent of the portfolio in India.

The trust currently has significant exposure to the financials sector, but not to the banks that have struggled so recently.

Instead, the managers have bought shares in other investment managers, such as Polar Capital, Rathbone and Close Brothers. The last of these is the trust's largest holding, at 10.9 per cent. The second biggest position is, in fact, another of the big name investment trusts: British Empire.

Investors in the trust also get exposure to unlisted shares that they wouldn't normally be able to access; these account for approximately 15 per cent of the portfolio. One of these is the private equity vehicle Apax Summer, which holds a controlling interest in Incisive Media, a UK business information provider well known to those in the business community.

Another aspect to the trust is that it can borrow money to invest when the managers are feeling especially bullish; this increases the potential return at the cost of increased risk.

The objective of Caledonia Investments is to provide a positive return over five-year periods while paying a growing income to investors. It has now increased its dividend for 40 consecutive years, a truly remarkable achievement.

So why has the trust done so well? The company and its management have extremely good contacts, meaning that they often get first refusal on potentially lucrative long-term investments. So committed are they that, in most cases, they have a representative on the board of the companies in which they invest. While they don't wish actually to manage the business themselves, having a representative on the board does give them a huge insight into the workings of the company and also puts them in a position to influence the decision-making process where necessary.

Investment is very much a people business, and Tim Ingram, the chief executive of Caledonia Investments, sums it up well by saying: "It's people that make money, not sectors."

In my opinion, the managers of this trust are some of the best and smartest in the investment trust sphere. I hold it in my own ISA and I expect that it will remain there for many years. If you want to be in the forefront of deals and want a genuinely long term investment, then I believe Caledonia Investments is well worth your consideration.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

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