F&C Investment Trust PLC (0XW.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the F&C Investment Trust Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. I'd be most grateful if you could get that to your kind attention. And I'd now like to hand over to Christine Cantrell, Director, Head of Investment Trust. Good morning.

Thanks, Mark. And we're delighted to be here, and it's the first time presenting in this forum, and F&C Investment Trust is the flagship investment trust of BMO Global Asset Management now called as Columbia Threadneedle with over GBP 5 billion worth of assets under management and having been run for over 150 years. So I am thrilled to get some feedback from you and also questions at the end, which I'll then pose to pull on your behalf. So thanks very much, and I'll hand over to Paul Niven.

Great. Good morning, everyone, and thanks very much for attending. I'm going to run through 3 broad areas this morning. Firstly, a bit of an introduction to the trust for those are less familiar in terms of how we manage the underlying assets portfolio. And then I'm going to move on to 2021 results and give you an overview of our performance key drivers. And then I'll move on to discuss the outlook. So there's a lot to get through. And I'm going to just switch off my camera so that you have a full sight of the slides, and I'll come back on screen at the end to obviously answer any questions which you may have. So let me start very briefly with a little bit of an overview of the trust. As Christine said, we have been around for over 150 years, is the world's oldest investment trust predating mutual funds bearing 50 years. We've paid a dividend every single year since launch back in '68. And prior to this year, we've paid 50 years of consecutive dividend rises, and we are proposing actually our 51st for 2021. There's been a high level of consistency in terms of management of the underlying portfolio. All the other managers have lost 150 years, I'm the third manager since 1969, and I took over responsibility for the trust in mid-2014. It is very much a growth-focused trust, and that has been the case since the mid-1960s. And in fact, one can go all the way back to 1920s, when we made our first investments into equities and one of those investments was Shell, which we still hold today. And we've also been investing in private markets for eBay long time. And one of the unique features of our advantages of investment trust is that they have a close-ended structure. It means that we can take a very long-term perspective and essentially buy illiquid assets. And investment in private markets is something that the trust has been doing for a very long time. And I'll talk about how we approach that today because we do have investments in unlisted private equity as well as listed equities. And we've got scale. So our market cap -- and this is at the end of January, it was in excess of GBP 4.5 billion and in assets of GBP 5 billion. Obviously, the numbers have come down somewhat since then. Moving on, just a brief overview. There's a lot of information on this slide. But the way that we approach portfolio management is to allocate capital across a range of different underlying strategies. And this shows the picture again at the end of January. So you'll see there's a range of regional strategies and a range of global strategies. And we're investing in the listed space directly. So essentially, we appoint managers from within BMO or from across the market to select underlying stocks within a clearly defined mandate. So for example, you can see at the top here, we've got U.S. growth, 15.7% of the portfolio. That manager holds 67 stocks, and that's managed by T. Rowe Price. Now other components are managed either by BMO Global Asset Management or indeed affiliates like LGM and Pyrford. So a range of different underlying strategies in the listed space. We also have a range of exposures within private equity, where we invest into both funds but also co-investments and co-investments are essentially direct stakes in unlisted companies, whereas funds obviously pool across a range of different underlying holdings. Now the vast majority of that private equity exposure is unlisted and very long term in nature. And typically, when one buys one of those unlisted private equity funds, we're looking at a 10-plus year life. In fact, maybe a 12- to 15-year life is actually more realistic. So a very long-term commitment of capital in the private equity space. And you can see there at the end of 2021, we had in aggregate, about 10% within private equity. Those fund-to-fund investments, those that have followed the trust for longer, those are historic commitments, all commitments that were made quite some time ago are near diminishing and will head towards the 0 in coming years. So we've been making a number of funding co-investment commitments in recent years. Now the purpose of this approach, we're a generalist trust, and that means that we do not have an out and out growth or value bias to take 2 examples of how one might approach investment in equity markets. But you can see here, somewhat stylistically by adding the risk of each of those individual strategies, how you end up with an aggregate risk number all the way to the right. But the point of investing across a range of different strategies, all of which do something slightly different on the portfolio in terms of where and how they invest leads to a compression in risk. So essentially, returns can be additive but risk is not. And again, to play that back slightly differently, by investing across a range of different strategies, we expect a smoother outcome for investors rather than investing all of our capital in one particular style or manner of investing. And I'll get in to talk about growth and value as we go through the presentation, but that's obviously front and center of investors' minds right now. Just briefly on performance, there is a write of performance numbers in the pack and I've just picked here the performance outcome since I took responsibility for the portfolio. On the left-hand side there, you can see left to right, i.e. median and that's basically global equity open-ended funds. So OEFs, which are open ended. We've got the Vanguard ETF, which is a passive fund, then we've got a market benchmark, which is our benchmark FTSE All World global equity benchmark. And then the 2 bars at the right are essentially FCIT's performance outcome in underlying NAV terms, what's happened in terms of underlying asset growth at the portfolio level and what's happened in terms of share price total return. And I've compared both of those numbers to the AIC median, which is basically the closed-ended or investment trust equity sector comparators. So I think the message I'd like to convey here is that our performance has been clearly very strong in absolute terms. It's been a very favorable environment for investors in equities over the last few years, but we've also delivered very good returns, I think, against various comparators whether they are closed ended, open-ended and also against the market benchmark. Now I would say in the last year or so that we have seen a disappointing trend in terms of our distinct. We had actually reached the point you can see actually towards the end of 2018 and through 2019, we were issuing shares. We were trading at premium, and there's been a journey in there from what's been a quite persistent discount prior to 2014. And in the last couple of years, really since the pandemic hit in the early part of 2020, we saw a discount widen and it has not recovered yet. And obviously, greater risk aversion in the market in the last few weeks has exacerbated this trend such that we're trading actually wider than where we ended 2021. So performance, I think, is good. Discount has been somewhat disappointing in the last couple of years having been on a very positive trend. Now let me just move on to the 2021 results, and I'm sure we've got a number of shareholders on the line. So I'm going to give you a sense about what the highlights were and some of the key drivers of performance over the course of that 12-month period. So we delivered a shareholder total return of 19.4%. NAV total return was better still at 21.7%. And the benchmark that is the FTSE All World Index, which is a global equity benchmark reaching 19.5%. We saw a widening in discount from 5.4% at the start of the year to 7.3% at the end. And that widening obviously led to a reduction in return for shareholders, and that's the reason why there is a little over 2% gap between underlying asset growth and the return to shareholders of the 21.7% against 19.4%. In response to widening of our discount, we bought back 9.9 million shares. The reason that we undertake buybacks is that buying back at a discount NAV is accretive in terms of enhancing the NAV return. And we do think that it's appropriate and the Board are committed to undertake buybacks and no market conditions where the discount is unreasonably wide. Net revenue return per share. We obviously had a challenging period in 2020, but it was a good recovery in terms of underlying revenue, which grew by 15.2 -- sorry, 15.2% on the year to just under 11p per share. And that led the Board to propose a 5.8% rise in dividends for 2021, a 12.8p dividend per share and repeating the point I made earlier on, we paid a dividend every single year since we launched back in 1968, and this will be the 51st consecutive annual increase. I'll give you the detail in a moment, but one of the highlights from last year was really the returns on our private equity exposure. We materially exceeded listed market returns. And again, reflecting what I said a few moments ago, we've got some older commitments, somewhat historic in nature and newer commitments and the newer commitments really delivered a very pleasing return on the year. We saw a year where interest rates rose relatively materially in terms of bull markets, and that reduced the value of our outstanding debt. So as a trust, we can borrow to invest, and we do have longer-dated borrowings. And essentially, we mark those to market. And what that means is that when interest rates in the market are rising, it reduces the value of the outstanding debt, and that was beneficial last year, I think, 0.6% to overall returns from an NAV perspective. Our charges reduced down to 0.54%. I'll get into a little bit more detail on that. But essentially, we've -- the management fees on the products have been cut for 2022, and it will fall further in 2023. And importantly, the last point on this slide is that we made good progress in our ESG agenda. We did meet the commitment, the Board made a commitment to be net zero in the underlying portfolio by 2050 at the latest. And there's been enhanced reporting and progress towards that objective. And we have undertaken selected exclusions on the portfolio. So just briefly adding a little bit more color to that in terms of the value bridge to get to that overall shareholder return of 19.4% on the right-hand side there, which you can see compared to pretty much in line with the benchmark total return for the year. Just running through left to right, underlying portfolio, 19.2% return. Gearing, in a rising market, gearing was additive to returns. We ended the year with 9.4% gearing at the portfolio -- on the portfolio and added 2.5%. We undertook buybacks, as said 9.9 million shares bought back in the year. That added 0.1% because interest rates rose, as I said, that added because the value of the debt outstanding that we had issued reduced, and that was helpful. And then we had fees, management fees, and interest and other expenses, and those obviously detracted from overall returns. So if you add those components together, and you can see that we delivered a NAV total return of 21.7%. Rising discount led to a shareholder total return of 19.4%. A bit more detail. This shows you the direct allocation to different parts of the portfolio. So reflecting on the slide I showed you right upfront as to the different components of the portfolio that we have. You can see that we have 40.6% allocated to North America. But the underlying allocation and what I mean by that is when we take all of the underlying components, whether they're allocated directly or through a global strategy or through private equity, the underlying geographic exposure to North America was actually 57.8%. Benchmark waiting, that's going back to the FTSE All World, 62.4%. And then we've got the portfolio performance, what that direct allocation delivered against the index. So in the case of North America, it was a year of underperformance, unfortunately, 23.7% against the index of 27.6%. Now -- and you can read through for each of those lines, I'll draw out some of the highlights from this. Now as said previously that we have a range of underlying strategies. We've got a growth manager, we've got a value manager in the U.S. Both areas delivered very strong returns in excess of 20%. But we saw underperformance from our growth manager T. Rowe Price last year. They delivered a return of 20.9%, which was quite far behind actually the growth index. While our value manager delivered return of 26.5% ahead of value comparators. And we also run a component within the portfolio, where the BMO run internally, which has got a little bit of a volume base, and that delivered a return of 36.4% and actually was the highest absolute gain of any component of the listed strategy. So you add that all together in terms of North America. And due to the underperformance from growth, unfortunately, we lagged in that area. Europe, we also -- we're slightly behind benchmark, just under 14% against '17. Japan and emerging markets, both areas in a broader context of quite anemic growth at 2.6% and 3.8% delivered on the portfolio, but both areas delivering excess returns against benchmark comparators, albeit relatively small compared to the holdings that we have in North America and Europe. And then moving down in the global space, we have an income strategy, that income strategy, buying stocks, which basically have a yield in excess of the market. Again, something of a value bias on it. So you're buying stocks that are cheaper than the market. That had a really very, very strong year, up by 30.7%. But there was a really -- as elsewhere in the portfolio, a really wide range of returns within global strategies, small cap. We have some small cap stocks in there they delivered 11.7% and a sustainable or ESG-focused strategy was also slightly behind at 16.8%. So again, you add those components together and global strategies, we're just slightly behind that broad benchmark return. So listed market exposure, I would say it was a bit of a mixed bag, very strong performance from value, very strong performance from income, some other good returns from emerging markets and Japan was also slightly behind. But it was really growth, small caps our sustainable strategies and also Europe, where we struggled. But private equity was an area of very good levels of return, 30.1%, which is more than 10% ahead of listed markets. And I'll get into some of the drivers of that in a moment. But it's very pleasing to see that level of return from private equity. And we do, as I said, aim to have between 5% and 15% of the portfolio in private equity assets. So that 10% allocation is around the middle of that range and in line with where we want to be. So moving on. I just want to give you a bit of a sense of what we actually did in terms of allocation changes on the year. And what this shows again, is the primary components of the portfolio in terms of strategies, each of which is allocated to a manager who picks underlying stocks and what the changes were in the year. And there's a few points of significance I would point out. We came into 2020, which is the dark blue bar here across each of these areas with a very high weighting towards U.S. growth stocks and contrast that with U.S. value, which is Barrow Hanley, you run that U.S. value component for us. So we're just under 25% in U.S. growth, and we had around about 13% of those in U.S. value. So for those 2 components, there's broadly 2/3 growth, 1/3 value. From the early part of last year, we started divesting out of U.S. growth. So those are -- the manager has got heavy exposure to names like Amazon, Facebook and so on, high growth, highly rated, fast-growing companies that have performed fantastically well. And actually, that trend of reduction of exposure to U.S. large cap growth carried on a trend that we started in the second half of 2020. So there's a continuation of that trend. So at the end of the year, which is the lighter blue bars there, you can see that the exposure we've leveled up broadly the exposure between growth and value in the U.S. And actually, year-to-date, we've gone further in the early part of the year, we move more out of large-cap U.S. growth and U.S. large cap growth has been underperforming year-to-date, as I'm sure you are aware. We allocate more to that U.S. core strategy that I said a fantastic 2021 also has a little bit of a value bias to it. We reduced emerging markets in the earlier part of the year. Emerging markets, as I said, were a pretty disappointing area for performance. Relocated more to global income. You can see just over halfway along the chart here. Looking again to access more vale also yield pickup and again, cheaper areas of the market with more cyclicality. And private equity made good progress towards that 10% allocation at the end of the year. So a little bit more detail on private equity. We saw, as I said, very strong returns overall in 2021, 30.1% for the full year. And that continued a long-term track record of delivering good excess returns against public market equivalents and public market equivalent to listed equities. We saw good returns from those older holdings, those fund-of-fund investments that some of you who are long-standing shareholders may recall that the trust invested in back end between 2003 and 2008. There was a program of investment with those 2 managers. So a return there. Again, it was ahead of listed markets 23.1%, but good cash flow coming back. As I said, we're realizing cash from that area of the market or that area of the portfolio, I should say. And over time, we'll expect that allocation to diminish. Our recent commitments that we started making several years ago through BMO predominantly using a bit of the internal private equity team with the BMO to help us select attractive funds and co-investments, that gained by 39.2% on the year. We saw quite a significant uplift in value from a number of holdings, one of which to call out is what I call the inflection strategic partner as that was written up by almost 50% in the year. And that basically is actually a holding in the economics of a third-party private equity firm. So it gives us the other side of that private equity trade, obviously, private equity firms are attractive from the perspective of the normally high levels of fees. But the overall -- the successful managers of which inflection certainly is one, have a high level of persistence of the income and obviously very long-term mandates. So it was due to very strong operational performance that holding was written up materially over the course of the year. We've got a couple of holdings within -- we classified private equity, but you might be familiar with. There are actually a couple of investment trusts. So they're closed-ended funds, which trade in the listed market, but they invest into unlisted holdings at the underlying level. In the case of Syncona, that's life sciences. In the case of Schiehallion, that is a disruptive technology, later-stage pre-IPO investments. And Syncona struggled last year, the premium declined materially the holding declined by 18.8% in the year. For Schiehallion, where we took a C share issue during the year, that gained by 30%. So that was a strong return. We made some new commitments to BMO, and that's part of this long-term program that we have of maintaining private equity exposure. And again, those that hold the trust will be aware that in the prior year 2020, we made a $180 million commitment to Pantheon in a new program to invest into the top-tier hard to access leading growth in venture funds. At the end of the year, we had just over GBP 50 million worth of NAV in that strategy. It's very, very early days for that strategy given the level -- the time frame attached to those commitments, but nonetheless, it's good to see progress there. So a very good year for private equity, really good progress in most areas. Just on the dividend, the headline I've given you already up by 5.8% is the proposal, 12.8p for the year. There's a small increase in special dividends that we received from underlying holdings. Our FX movements were certainly -- were negative at GBP 4 million on the year. An important point I would make is that it was pleasing to see a rise in net revenue per share. The dividend, however, does remain uncovered. We have undertaken extensive modeling as to expectations for the future. But we do have very healthy levels of revenue reserves of 17.8p per share, which is GBP 93.8 million as of the end of 2021. And that is before the payment of those turn final dividends. Now you compare that revenue reserve per share of 17.8p to the dividend of 12.8p. And you can see that we're in a relatively comfortable position, I think, in terms of being able to not only continue to pay dividends, which we will fund from ongoing revenue receipts, but if required then we do have that revenue reserves. And I'm not suggesting we will get to this point, but we have very, very substantial capital reserves where they are to be required. So the Board are committed to raising dividends for shareholders over the longer term. Gearing, there's quite a lot of information on this slide. What I would say here is we've got very, very low cost of gearing. We ended 2021 with GBP 550 million of gross debt. That was 9.4%, gearing levels at the portfolio level. Blended borrowing costs, 2.2%. Borrowing costs are very, very low. We undertook one issue during the year. The rates are outlined, and you can see that was GBP 140 million with rates -- sorry, with borrowings out to 2056 with a rate of 2.33%. And we agreed to borrow a further GBP 140 million, which we've drawn actually just at the beginning of this month. And those rates were extremely attractive. So the trust has now got borrowings out to 2061. And that borrowing out to 2061 was secured at 1.87%, very, very attractive rates of borrowing. If you look at the gilt yields. Gilt yields to be for a 4-year 40-year government borrowing, U.K. government borrowing are 1.6%. So we locked in at 1.87%. And if we can make an excess return above our returns or, I should say, above 1.87% over that longer time period, then it's going to be accretive to returns for shareholders in that terms. So we thought it was a very good time to look at those long-term rates. We've got some short-term borrowings, which have grown GBP 50 million right now and also some debt, which is coming due in July. So you add those 2 components together, and that's GBP 120 million approximately. So we'll use some of that recent drawing essentially to refinance shorter and maturing debt. Just on charges, charges have come down. This gives us a bit of a longer-term perspective. We ended the year at 0.54%, ongoing charge for the trust, which is good progress. And the management company, BMO have agreed to -- with the Board to reduce management fees further. So we get incentivized and paid on market capitalization of the company. So our interests are aligned with those of the shareholders, and we've cut -- there's tiering in terms of fees, which is outlined in the slide here. So anything think above GBP 4 billion is 25 basis points, and then there's levels below that. Basically, at the lower level, the fee has been cut from 0.35% to 0.325%. And from next year, that lower tier will be removed altogether. So again, good progress on fees. Just a few words on sustainability in ESG, which I know is a very big area of focus for a lot of our shareholders. And we have, in recent years, I think, made really good progress in terms of reporting to shareholders what we're doing in terms of underlying engagement with the companies which we invest in. There is a sense of -- well, there's much more detail in our annual report and accounts. We bought stocks. We raised issues with companies through engagement. And it is noteworthy, I think, and again, more detail in the annual report that climate changes is going further up the agenda in terms of engagement. That's consistent with our path to net zero and climate change represented 22% of engagement activity, up from 16% the prior year. We also report the carbon intensity of the portfolio and -- against the benchmark, and we've done that for a number of years, represented in the bottom right-hand side of the slide here. And you can see that the benchmark at a broadly flat outcome in terms of carbon intensity. Our exposure, actually, in terms of carbon and underlying holdings did rise in the year. That was a function of this move more towards cyclicality and value. But the long-term trend clearly is one of seeking to deliver on that net zero target. And on that point, I'll just make a couple of additional comments, which is that we are now measuring and reporting on how underlying companies that we invest in on your behalf are aligned or aligning to a net zero objective. And our intention is to work with companies through engagement to ensure that we have a common view in terms of getting to that net zero target. And finally, just on sustainability. We also report more detail in the annual report on the alignment of the portfolio to sustainable development goals. Again, that's our focus, I think for many investors. Now to rattle through a couple of additional slides, now again we've got a few comments on where we are and where -- what we think in terms of the outlook. Just very briefly, this is the overall look-through exposure of the portfolio, again, referencing what I said there on about pulling all those holdings that we have and thinking about where they are geographically. And in the listed space, where we're invested on a sectoral basis, and you can see that over 50% of the portfolio is in North America, the next largest area is Europe. We still got a large component of the portfolio in technology, albeit within gravity of moving of the large-cap tech space and those higher, more highly valued technology stocks. Just in terms of performance, I gave you some performance stats earlier on, let me draw your attention just to the NAV return here, which is over the last 10 years, is 14% per annum, obviously, a great outcome for shareholders over the longer term, equity market has been very strong, but really consistency for a generalist trust. So we look to provide a smoother performance outcome than one we see in portfolios, which are much more focused on more particular way or style of investing, and therefore, consistency in terms of return against peers and benchmark is something that we seek to deliver on. So that was, to some extent, the easy part in the sense of that is where we are and what's happened in terms of 2021. I'll make a few comments just in terms of the backdrop where we are and where we possibly might be heading in terms of markets. I preface all of these comments with the statement that clearly, we, as I'm sure you are very cognizant of the historically significant events in Ukraine, the huge humanitarian and human cost that this is placing on civilians and military in that area. And the events are extremely fluid and also very fast moving. So in the sense that we've had this conversation just a few weeks ago, I think many of the key messages would have been markedly different, but things have moved on very, very materially and not in a positive way and markets have obviously responded accordingly. So let me just run through a few slides. Now what I would say at outset is while these slides are up to date in terms of the data, which goes into them in most instances, so that this data on this slide is from the 8th of March, we're yet to see the full ramifications of the conflict in terms of pursuit to inflation and also growth expectations. And on those 2 points, I mean clearly, we're looking at a worse growth outturn globally than where we were -- what we were looking at a few weeks ago. And we're looking at higher inflation than what we would have been expecting a few weeks ago. We were expecting that growth in all major areas in the developed space would have been above trend in 2022. And post the invasion, we see the U.S. as much better insulated from what's going on in terms of rising commodity prices. Eurozone much, much more exposed, clearly, and the U.K. also relatively exposed to what is happening in terms of energy costs, but Eurozone is the obvious area which is likely to get hardest. Now putting some numbers on this is extremely difficult at the present time. What I would say is it is entirely possible and indeed probable that we may well be seeing some negative quarterly growth readings coming through from Europe and the U.K. in coming quarters. So it is possible that we may see a technical recession, particularly in the Eurozone as we move through 2022. And that is not a view that we would have held just a couple of weeks ago. And the other point I'd make is that people and us included, we're actually hoping that Europe might deliver better growth than the U.S. this year, there's virtually no chance that, that will be the case this year, given again what's happened. And in fact, previously, one may have hoped that Europe would deliver something like 3.5% to 4% overall GDP growth it is likely to be closer to 1% to 2%. So there's quite a markdown turning to the growth expectations in the Eurozone in particular. And there is downgrading in growth expectations, upgrading in inflation expectations. And obviously, we saw inflation in the U.S. at 7.9% yesterday, and that was before the impact of the recent spike in commodity prices. This creates quite a troubling backdrop in terms of how central banks respond to rising inflation and also deteriorating growth. One positive, I would say, however, amidst all the uncertainty is that we call these COVID piggy bank. Basically, there's been a significant rise in savings from consumers in the U.S., U.K. and the Eurozone you can see here through the pandemic people spent less, saved more. And this means that they may be somewhat better insulated from some of the shock, which is about to hit in terms of inflation and consumer confidence, I should say. Again, look, I've got the consensus inflation numbers here for the U.K., U.S., Europe and also Japan. Japan is quite noteworthy in the sense it's been very, very anemic in terms of upgrades to expectations. The market is somewhat in terms of consensus behind the curve in terms of where these numbers are going to get is entirely possible that as we move through the year, the inflation in the U.K. could be hitting something around the 8% level as we move through to April and maybe through to October, where we see the price cap on energy lifted. And as I said, in the U.S., we saw a number of 7.9% yesterday. So really quite troubling signs in terms of inflation. The one positive is that as we move through the year, the base effects become more positive. What that means is that in order to get continuing rises in inflation, one needs to seek sequential rises in prices and because there have been quite a rise in inflation last year, base effect means that there's going to be a bit of a drag to some of these inflation rates as we move through the next few months. But it's obviously a pretty challenging environment for inflation. And we monitor what the market is pricing in now, this is quite a complex chart in terms of what I -- how it's calculated. But in simple terms, this is the long run market expectation for inflation in the U.S. So the market in the U.S. is now for the next 10 years, seeing inflation is going to be around about 2.7%. That is the highest that it's been certainly for the last decade and the highest since the series is available. It's still relatively low in absolute terms and not as high clearly as some of the headlines that are coming through short term, but it's quite a material uplift. And this is consistent with our view that we thought post-pandemic, there was going to be a structural rise in inflation. But again, putting it in context, the market is expecting that inflation will be less than 3% per annum over the next 10 years. And that some of these moves that we're seeing lots in commodities, but more widespread or somewhat transitory in nature. And that's a risk, clearly. Interest rate expectations, just very briefly on this. This looks in Europe and the U.S. and the U.K. about what the market is expecting in terms of policy rates 1 year forward. And there have been a steady upward march in terms of interest rate expectations because growth of [ literal vast ] inflation was heading higher. Central banks had signaled tightening to come. But the last couple of weeks have seen in most areas, the U.S., we're still expecting -- markets still expecting around 1.75% interest rates at the end of the year. But there's been something of a reassessment of just how far and how fast interest rates are going to go up. This, again -- and some of you would be familiar with inflation-linked bonds and index-linked gilts in the U.K. This is the TIPS market, which is from the U.S. Now what's been going on in recent years in general terms, it's been a collapse in real yields. So this basically is taking bond yields -- government bond yields and adjusting for those inflation expectations. So essentially, you take the bond market, you look at what interest rates are further out the curve and then you take off expected inflation and interest rates have been negative in real terms for the last few years. And that is a tremendous support to equity markets because you're buying in equity markets, what you're buying is expectations of a future stream of dividends or cash flow. And essentially, if you use a discount rate, then lower discount rate, all else being equal, means that you pay more for equities. So lower discount rates, low real yields have been supportive for equity markets. And the trend probably a couple of weeks ago have been the real yields still negative, but they were hitting higher because growth was robust, inflation was rising. Central banks were going to be tightening. And what we've seen is that real yields have actually come back down quite materially. The other point on the growth value trade, which again, I'm sure many of you are familiar with is that I would argue in many of this, I think would concur that growth stocks, highly valued, fast-growing equities, again, like Amazon, Facebook and so on have been supported by very low real yields because they are longer duration. They're more expensive, more of the profits are in the future. And that rise in real yields was unhelpful. That's somewhat reverse that makes a somewhat more -- not necessarily challenging picture, but certainly a more balanced picture in terms of what that means actually in terms of the growth value trade. On balance, however, there's a lot of information on this chart or these 2 charts, I do apologize for that. Key mention on the left-hand side is, basically, when central banks tighten, real yields tend to rise, at least based on history. So I think on balance, actually, real yield is probably going to rise. That means growth stocks fully remain under some pressure, at least in the short term. And the other point is there's tremendous distortions affecting bond markets at present. Bond yields are abnormally low. They probably should be harder to monitor growth rates and inflation, but Central Bank buying has depressed yields very, very materially, and that's going to be ending relatively soon. So rattling through a few final slides before I pause and open for questions. This just looks at what happened last year, right? So you can see the orange -- there is orange bars that there show that there was a reduction in the multiples across all equity areas last year. But the blue line, the blue bar earnings growth, that was much greater than the derating in markets. So actually, you saw rising bond yields, lower multiples in markets, but very strong earnings growth. When real yields are rising and yields are rising and central banks are tightening, then you tend to pay less for equities. And again, we've seen that this year. The question is to what extent earnings growth is going to offset what is likely to be an ongoing reduction in market multiples. The multiples are high compared to history. We kind of get away from that. We're starting a day. I don't think a picture change that materially. But this was the NASDAQ, which just helps U.S. technology stocks. U.S. and global ex U.S. And there's a big gap between the U.S. and rest of world, and the NASDAQ continues to trade expensive. On this point about the trade-off between lower multiples and reasonable earnings growth. The expectations are still that earnings are going to grow by 7% or 8% in the U.S. this year. There may be some -- maybe some modest downgrading of that but unless we see a more pronounced economic downturn, I think that we will get a reasonable earnings outturn certainly in the U.S. this year. And again, that is helpful in terms of offsetting some of that multiple compression. I'm going to make one final point, which is on just the value growth trade. And this just shows the price relative of growth against value in recent years, which is the red line there. And what the earnings relative is. And the point is in recent years you paid, if you beat our earnings growth from growth stocks, fast-growing growth stocks, I'm not surprised, but you've paid an increasing premium for the -- for those growth stocks. And then this is not completely up to date. This slide, but again, the picture is not changed that lot. There's quite a big gap there. And I sense there remains some vulnerability. And again, that is the reason -- one of the reasons we felt there was going to be more of a positive macro backdrop from inflation interest rate perspective and growth perspective for value over growth. So we've been selling out some of those large capital stocks. The environment now, which looks a little bit more stagflationary without overstating that point is a little bit more nuanced, I would say. So we're pretty balanced in terms of the exposure between those areas, but I'm very mindful of that large gap in terms of historic premium that is paying but one is paying for growth stocks. Now I'm going to pause there. I'm very happy to pass back to Christine and open for -- thanks for your attention.

That's great. Christine, perhaps if I just give you a few moments. [Operator Instructions] I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Christine, if I may hand back to you just to manage through the Q&A. And of course, I'll pick up from you at the end before asking investors for their feedback.

Great. Thanks, Mark, and thanks, Paul, for enlightening us of various order markets, which is very difficult at the moment. So one question and I'm going through first some of the pre-submitted questions because it's only fair since people sent those in a few days ago. One is regarding the changes to the portfolio in light of the war of Ukraine now? Now I know you focused there on kind of your changing view of Europe and maybe even on growth stocks. But is it too short term and that achieved to say you're making changes to what's happening in Ukraine?

Yes. Look, I think -- and there are several aspects things again, things are moving very, very fast. And clearly, the backdrop is to be significantly different than what we would have assumed a few weeks ago. On the direct exposure to Russia, we had 0.3% of the portfolio in Russian securities at the end of the year. We made steps to reduce that exposure after the invasion, but markets are essentially shut now. So the holdings that we have there have been written to 0. In fact, market index providers removed Russian stocks at 0. Beyond that, we -- there's a few things that we have done. We have raised cash, which we started to do, and the effect of that is essentially some modest reduction in gearing. We had a long sterling position on and have a long-standing position on, which is through a forward contract, and we've reduced that somewhat as well. And so we've got a very small portion of the portfolio actually in sterling assets. We also got sterling borrowings. But if there's a much more significant risk off event, then sterling would tend to decline against the dollar, and we're very mindful of that possible eventuality. So we took off some of that long sterling position which basically pushes us back longer dollar, and that's a bit of a hedge against a bigger risk of move. We also reversed out some of our European equity position as well actually for the reasons that I outlined in terms of that being the area that is most exposed to what's going on right now in terms of economic and earnings impact as well as generalized rise in risk premium on European assets. People are very concerned about the direct impact of the invasion of commodity prices feed through to growth in earnings.

Right. Thanks. That makes sense. Switching tech, so have you considered a more aggressive approach to reducing the discount on the share price?

Yes, very, very good question. So as I said, we bought 9.8 million shares, which is a reasonable chunk clearly last year, and that's between 1.5% and 2% of outstanding shares, which were purchased last year. Our sense -- well, firstly, we buy back shares when we're treating at a material discount in normal market conditions, and we'll continue to do so for the reasons I outlined it, as I said, accretive to NAV. Our sense is that the share register is relatively in balance and we saw that by the fact that we were treating at a premium, not that long ago, actually and we'll continue to operate a buyback policy in the manner that we have done for shareholders because it is accretive to NAV. But I don't think it's appropriate to be buying at a time of -- buying significant shares at a time of financial stress because essentially, that shrinks the company is not in the best interest of shareholders long term. So there's a bit of a trade-off there. And I think we tried to strike that balance. And I think there was a question, which I'll answer now as well as to what's the impact of share buybacks short and longer term. So as I said last year, that added about 0.1% to overall NAV returns over the last 5 years to the end of 2021. Share buybacks added 0.3%. And that contrasts with more than 80% return in NAV. So it's been helpful to buy back shares at a discount, but that's in the context of overall returns last year, as I said, in that terms of 21.7% and around 83% or thereabouts over the last 5 years.

Great. Now by gearing, who decides on the level of gearing and what effect does it have on average of our annual performance?

Okay. So the level of gearing the Board determined a gearing policy, and we operate within parameters of 0% to 20% in terms of gearing. I outlined how we've taken on some longer-term structural debt which is fixed rate in nature. So we take that those loans out over a very long period of time have certainty in terms of what we're going to pay. And the Board agree -- I work very closely with the Board in terms of when the right time is and what the structure of the debt should be. But ultimately, the Board made a decision as to whether we should be issuing long-term debt and how much and what the overall structure looks like, and I obviously help in that process, but that's a Board decision. We have shorter-term debt facilities, what's called a revolving credit facility that we can just go to a bank and draw down capital. We can draw up to GBP 150 million with 24 hours' notice from that facility. We've GBP 50 million drawn today, and I control that and the shorter-term gearing levels within parameters agreed by the Board. And I made the final point that I obviously have very regular contact with the Board in terms of not only tactical but strategic positioning and therefore, discuss gearing levels with them.

Perfect. Gosh, I'm looking at the time. Maybe I'll ask one more, and there's been a few in, I'd say, private equity and in particular, this one about small cap. And can you explain why there's any 5% allocation to small caps when large caps have outperformed the markets in the long term?

Yes. Okay. So we've actually been reducing small cap, and we are likely to reduce it further. And it is true that over a very long time period that small cap has outperformed large cap. However, it's been relatively lumpy in terms of that performance profile. And my sense -- and certainly, if one looks over a shorter time period, in more recent years, the last decade or so, you can see that's a bit of an anomaly. But there's been an increasing market concentration and large caps have outperformed small caps, and that's been due to the dominance of the small number of stocks as I'm sure people are aware. The approach which we are likely to have going forward, and it's partly because I think small caps will be a little bit more tactical in nature going forward. Small cap in value could be an attractive area to invest if we're looking at higher interest rates, higher inflation, but we'll have more of a barbell. So large cap and private equity. I think that small cap, smaller companies may struggle to absorb, and this is a very generalized term coming. But small caps may have less control actually in terms of input costs that large companies do and that might be problematic for small cap margins in general. That's just we are being generalization. And in private equity, we'll focus on the very best venture and growth managers where there's persistence of returns. And then selective mid and smaller company buyouts, mid-market buyouts. And that's a bit of a barbell. So you've got in the private equity space, venture and growth-based managers and smaller than small cap, mid-market buyouts will be an area of focus against large capital portfolio. And my final point because I did see it as a question. I know there are a number of questions which I apologize. We will not have thing to go through, but we do look at private equity returns, net fees, net of all fees and against public market equivalents. That's really, really important, right? So absolute returns are one thing but adjusting for what you're paying for exposure and making a like-for-like comparison on a public market equivalent basis is the way that we think about private equity returns and assessing whether it's a good or a bad decision to invest in that area.

Great. And I think we have time to ask one more question because it is very topical point about ESG. So [ Sears ] is asking, regarding ESG reporting, do you have plans to identify real carbon reduction versus offsetting and where it's not available from companies currently, can we use our position of the company position like BMO to push for it to be reported. So that's obviously asking about engagement and whether we're doing enough to really push the underlying companies to improve?

Yes. It's a really good question, and I probably don't have this crisp and clean and answer as I shoot for that particular question. What I would say is, it's an area obviously of increasing focus. You've had a really important point here as to what is -- what's real and what's in terms of carbon reduction and what is a continuation of activities against offsetting. It's something I'll take away and I would get the details of the of the individual shareholders who asked the question. I'll come back to with a more thoughtful answer because we've got a really large team within BMO and more broadly CTI, more than 20 individuals just in the BMO side, focusing on engagement on particularly these issues, so we can come back with a more thoughtful response. But it's sounding that we're spending a lot of time and attention with in terms of individual company engagement and making sure they're doing the right thing. And it comes back to this point about reporting on where the companies are genuinely aligned or aligning to that net zero goal or whether there's some small covers going on, which I think is implied in the question.

That's great. Christine, Paul, thank you very much indeed for your time this morning. And also thank you to all the investors that have submitted questions today. And of course, we'll make these available to the company. So any further questions that do come in, Christine, and Paul will make those available to you. Paul, Christine, I know investor feedback is particularly important to the Trust, and I shortly redirect investors to provide you with their thoughts and expectations. But before doing so, Paul, if I may, just ask you for a few closing comments.

Well, firstly, I'd like to thank everyone on the call for making the time to attend. I do hope you find it useful. There's obviously a tremendous -- period of tremendous uncertainty. We are clearly pleased with the results that we delivered last year, but very much focused on the continuation of the long record we have in delivering growth in capital and income for shareholders. So thank you again very much for your time, attention and support this morning.

Paul, thank you very much indeed. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the management team to better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the team at F&C Investment Trust, we'd like to thank you very much indeed for attending this morning's presentation. That concludes today's session, and good morning to you all.