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

Good morning, and welcome to the F&C Investment Trust PLC Investor Update. [Operator Instructions] The company may not be in a position to answer every question it receives in the meeting itself. However, the company can read the questions submitted today and publish responses where it’s appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Fund Manager, Paul Niven. Good morning, sir.

Good morning, and good morning to everyone that has dialed in this morning. It's great to have you here. I really appreciate your attendance. And for those who don't know me, my name is Paul Niven. I am Fund Manager of F&C Investment Trust. I'm going to make some comments on our investment proposition because we do have a large number of attendees, some current shareholders, I think some prospective shareholders. So I'm going to talk a little bit about our investment proposition. I'm going to talk about our positioning and what's been happening from a performance perspective, and then give some comments as usual in terms of the investment outlook from my standpoint. Now year-to-date, where our share price is up around 6% to 6.5%, around 2/3 of the way through the year. So some way to go. There's been a lot of volatility, as I'm sure you're aware, year-to-date, but it is shaping up to be another decent year in terms of returns for investors in F&C specifically, but more broadly, investors in equity markets. In terms of our performance contributors year-to-date, we did release our interims just a month or so ago. But I think the bigger picture perspective is the private equity, which is around 11% or thereabouts of our overall asset exposure. That's a bit of a drag on performance, lagging reasonable strength in listed markets year-to-date. We've had good returns from Japan, which has been positive in terms of absolute contribution, outperforming global markets. And in relative terms, Europe has also been relatively strong in absolute terms. And our systematic strategies, which we run and shareholders will be familiar, I think, with some of the underlying components of the portfolio, I'll go into more detail as we go through. Our systematic strategies in terms of income and our global enhanced are doing well. Stock selection in Europe and our global focus are struggling to some extent year-to-date. So what I'd propose to do is just run through quickly some of the higher-level perspectives with respect to the trust, and I'll get into the detail in terms of the macro and market outlook. Now this slide, I usually start with this slide. So forgive me, but again, for those that are less familiar with the trust, we've got a tremendous amount of heritage, 150 years. We've got scale. Remember, of the FTSE 100 Index, our market capitalization is more than GBP 5.5 billion. We have a very strong and long history in terms of not only paying dividends, paying rising dividends, 54 years of consecutive dividend rises and paying a dividend every single year since 1868 and strong performance credentials as well for shareholders, which I'm going to describe as we go through the presentation. In terms of our overall investment proposition, the overarching aim is to provide growth in capital and income over the long term for shareholders. The way that we seek to deliver that is by investing in both listed equities and unlisted equities, that's private equity, blending across a range of focused strategies, which are active. And we have made a commitment to net zero carbon portfolio by 2050 or earlier. And the expected outcome and what we have typically delivered is consistency in terms of performance as well as value for money. And again, I'll draw out some of these points as we go through. Now as you know, global equities have significantly outperformed U.K. equities over the last 10 to 20 years. Now the trust did reduce our U.K. bias in the portfolio some time ago, at the beginning of 2013. And this chart shows you that, that was a very well-timed decision. In fact, global equities have produced a compound total return, which is around twice that of the U.K. over the past 10 years. So the per annum compound total return has been 13% for global equities against 8% from the U.K. And that's led to roughly twice the return from global equities relative to U.K. So being global as an investment trust in terms of our exposure to listed equities has been highly advantageous in terms of the returns that we have delivered to you as shareholders. We do seek to give -- to be a one-stop shop for listed equity and private equity. Therefore, we're making decisions strategically about how and where to invest in terms of the opportunity set, in terms of listed equities and private equity. We're diversifying across a range of underlying strategies. So again, I'll be a bit more granular as we go through. But what this shows you, for example, our allocated exposure in terms of the U.S. is around 40% or thereabouts. And we've got four underlying components. So we don't just have growth exposure in the U.S. We've got some value exposure in there as well as the core strategy. So different types of strategy allocations within various regions, and we blend them together to give an appropriate exposure to listed and unlisted growth assets in pursuit of our overriding objective of growing capital and income for shareholders in the long run. On the right-hand side here, I've just updated our top 10 listed holdings. This gives -- there's not much change year-to-date in terms of the names on this list, many familiar names in the top 10, NVIDIA. They are our largest single holding. That's up 24% in dollar terms year-to-date, now a $4 trillion company. Microsoft is up 18% in dollar terms, Meta 28%, Apple is actually down about 4%, Amazon up 6%, and Alphabet up 24%. So many familiar names in the top 10. And I should say just while we're talking about performance, the growth index, U.S. Growth index, i.e., Russell 1000 Growth is up about 12% year-to-date comparing to value 10% positive return year-to-date. So there's not such a big gap in performance terms between growth and value as we have seen in some of the preceding calendar years where growth typically has been delivering quite material excess returns against value. It's been quite close between those two segments of the market or styles on a year-to-date basis. And the Magnificent Seven, that cohort of very large stocks in the U.S., which includes some of the names I mentioned previously, is up 12% in dollar terms year-to-date. Now just pausing briefly in terms of our debt structure. One of the tremendous advantages that we have as an investment trust is our ability to borrow to invest. And I make no apologies for repeating this slide, which many of you will have seen before, which shows essentially the composition of debt that we have on the portfolio, GBP 580 million that we have borrowed. We've got a diversified set of tenors that run out 0 to 10, 10 to 20 and so on. And this shows the fixed rates which were associated with those borrowings. So our blended borrowing rate is 2.4%, and we borrowed out to 2061 for 1.87% fixed. Now those are incredibly low rates of borrowing, which are fixed in terms of interest rates. And as you know, the Bank of England have actually cut interest rates 5x since the middle of last year, since August 2024. So rates are down from 5.25% to 4% at the short end, but longer-term interest rates have actually been drifting higher. So when one looks out in terms of effective borrowing rates that the government is paying, which I'll show you in a few moments, they're well, well in excess of what we locked in to the benefit of shareholders. And that creates a very low hurdle rate from which we can use those borrowings to invest. And if we yield a return which exceeds the cost of borrowing, then that will be advantageous in terms of returns to shareholders over the longer term. Dividends, I mentioned previously that we have a very long history, not only of paying dividends to shareholders, but growing dividends 54 years, and the Board have committed to another rise in dividends for calendar year 2025. So that will be delivered and will be announced early next year. Strong performance, I said that we intend in the long run to deliver long-term growth in capital and income. And obviously, there's numerous comparators and measures that one can look at in terms of the indicators of success in terms of meeting that target and delivering good returns against competing products, whether they're active or passive. This shows you the annualized returns that we delivered in terms of our NAV and also shareholder returns over 1, 3, 5, 10 and 20 years. On the left-hand side in absolute terms and also how we have performed against closed-ended peers, so what quartile our returns were in. So when it's the first quartile, that means we're in the top 25% of returns amongst that closed-ended peer group. Second means that we're in the 25th to 50th percentile for returns against peers. So I think there's a few messages. One, it's been a really exceptional period, not just last 1, 3 years, but longer term in terms of absolute returns for shareholders, driven to a great extent by very strong equity markets. That's led to strong returns for shareholders. And we have delivered consistent returns, consistently good returns, I would say, against both index and peer group, whether that's open or closed ended. And in fact, at the end of 2024, we were beating the benchmark in terms of NAV returns over 1, 3, 5, 10 and 20 years. So again, consistency, and we were first or second quartile against our closed-ended peers over all time periods in both NAV terms and shareholder return terms, and no one else in the peer group had delivered that degree of consistency at that point. So that was very pleasing to see. And looking at this graphically just again over the past 20 years, this shows you the total returns of F&C for shareholders relative to global equities and U.K. equities. So F&C, over the long run, delivering superior returns to the global equity market and well ahead of U.K. equities here. Value for money, I said previously, this is a really important consideration for the Board and obviously, for you as shareholders. And we were pleased to report earlier this year that our ongoing charges have reduced to 0.45% from 0.49%. And we've cut the management fees, which we as a management group receive. And therefore, that is the benefit of you as shareholders. In terms of allocated exposure, I won't dwell on this slide because we've got a lot to get through, and I'm sure there's going to be lots of questions in terms of the outlook. But this is a lot of detail here, clearly. But what this shows you is in more detail what I talked about earlier on, essentially, within the U.S., we've got four strategies there. We've got growth strategy, which is run by JPMorgan, external manager. Clearly, we've got a value strategy run by Barrow Hanley. And we have a couple of strategies running internally by Columbia Threadneedle Investments. So I'll show you how much of the portfolio, I think this is at the end of July, is allocated to each of those components, how many holdings were in each of those components, how many unique holdings there were, measure of activeness. That's only one way we can think about how active a component of the portfolio is. And you can see here, we've got a range of regional strategies, each of which are relatively concentrated in nature, i.e., a relatively low number of holdings. We've got a small number of global strategies, income, global focus and global enhanced. And then we've got some private equity exposure as well. And by blending together those different components of the portfolio, which are managed regionally as well as globally, which have different stylistic characteristics, we look to smooth the performance outcome for shareholders and to blend returns across different sources of return so that we can add returns while reducing risk and employ the principle of diversification to the benefit of shareholders. And this is how things look from a look-through perspective. So if you pull out all the holdings that we have got in the U.S. and global and then we allocate them to how much is in North America and how much is in Europe and emerging markets and so on, this is the picture, including private equity again at the end of July. So you can see the majority of our assets are in the U.S. And this shows as well the sectoral composition within listed equities. And therefore, our largest single exposure from a sectoral perspective is in the technology space. So that's a quick run-through in terms of the background of the trust on how we invest, allocated exposure and so on, and some of the benefits that we have as an investment trust in terms of use of gearing and interest rates that we pay on our debt. Now as with you, I think there's a lot on my mind in terms of markets. A few key issues, I think I want to highlight and I'll expand on these as we go through. Firstly, tariffs, that's obviously been really one of the big, big themes of 2025. Where are we? What does it mean in terms of growth and the outlook for markets and inflation, interest rates and so on. Fiscal concerns, just over night or yesterday, we had the resignation of the French Prime Minister, partly driven by fiscal challenges impacting that country closer to [ hold ]. We have some concerns here with respect to the debt position. Debt levels are high in terms of developed market government borrowing levels, what are governments doing about it, what's happening in terms of government bond markets, does that create a risk to equities? And these are all significant risks and points of concern. U.S. exceptionalism, this covers a number of different and interrelated points, valuations in terms of the U.S. market, the superior growth that's been delivered in terms of the economy there, in terms of the corporate sector, the high margins, obviously driven to a great extent by what's happening in terms of the technology sector, AI. So again, that's a very live theme, and we've seen strong performance in local terms, clearly, for the U.S. market year-to-date. But for sterling investors, returns have been dampened to a great extent by weakness in the dollar. So a big question is U.S. exceptionalism over, and what does it all mean for markets importantly? So I'm going to try and draw some of the points which I'm thinking about from a macro perspective and draw some examples as to what it actually means in terms of what we're doing in the portfolio and what it might mean in terms of the future outlook as well. So let me start with the growth perspective. Now growth is really, really important in terms of the economic backdrop in terms of what it means for inflation, interest rates and indeed asset markets, whether it's government bonds, credit markets and indeed equities because it drives discount rates, which are applied to future cash flows. And in turn, cash flows are driven to some extent by what's happening in terms of the global growth perspective. Now we know clearly, the first 8 or 9 months of President Trump 2.0 has been marked by controversy, uncertainty, a lot of turbulence clearly in terms of policy. But despite that, global equities have clearly surpassed pre-Liberation Day levels. They're up at all-time highs. In many instances, the U.S. is up by about 30% from the lows. The S&P was below 5,000, S&P 500, Bellwether U.S. Index below 5,000 just after the announcement of those wide-ranging and high levels of tariffs. Now the S&P is above 6,500 or around 6,500, I should say. And that is despite downgrades to growth expectations. So what you can see here is how consensus expectations have changed in terms of the growth outcomes in terms of the U.S., Europe, U.K. and emerging markets on a year-to-date basis. And then what the growth outturn was in 2024, was close to 3% in the U.S. and what it's expected to be in 2025 in the U.S. is expected to be about 1.5% or thereabouts. You can see that the U.S. is likely to be the best performing major developed region this year, but it's likely to lag the growth rates in economic terms being delivered in emerging markets. So quite substantial downgrades in terms of U.S. GDP expectations for 2025, but ahead of the growth outturn that is expected in both Europe and the U.K., for example. Now just a few words on tariffs. Clearly, we went from -- if one takes a very long-term lens, tariff rates were very significantly higher during -- one goes back many decades before the First World War. There was -- I'm sure some of you have studied the historical levels of tariffs, but the impact of tariffs, there was the Tariff Act of 1930 that may serve as somewhat of a caution retail that contributed arguably to a really significant 2/3 collapse in world trade within 5 years, and that worsened the Great Depression. After that, after the Second World War, we saw a gradual decline in average tariff rates. We entered free trade agreements after the Second World War. And we ended up with very, very low levels of tariffs in the U.S. and indeed elsewhere typically. President Trump did introduce some tariffs during his first term. They were maintained under the Biden administration. And clearly, Liberation Day, those proposals trend a very dramatic shift raising -- the proposal was to raise average tariff rates from a few percentage points to around 25%. So really very, very significant rise in tariffs was proposed. Now thankfully, we have seen quite considerable moderation. Current projections estimate an average tariff rate in the U.S. of around 17.5% if tariffs are implemented as suggested. Now even in an optimistic scenario, I think U.S. tariffs are going to settle around 10%. We're not exactly sure exactly where tariffs are going to land, but in an optimistic scenario, say we'll land at 10%. If they're all implemented as proposed, we'll end up at 17.5%. Just putting that in context, prior to Liberation Day, we were previously around about the 2.3%, 2.6% level of tariffs, average tariffs in the U.S. So it's really very significant increase in the average tariff rate. The average effective tariff rate as we stand today was around 10%, right? So the impact of that is basically a major tax rise for U.S. consumers, at least a rise in custom duties to around 1.5% of GDP in the U.S. So it's a damper on growth is the bottom line, I think, which we all know. In addition to that, there's the indirect impact of uncertainty, and we also got policies in the U.S. and elsewhere on declining migration. So that leads to slower overall growth and consensus, as you can see here is for growth in the U.S. to be below 2% this year and next. And I would say there's still significant risk in terms of the outlook there. Our base case I think consistent with consensus is there's a slowdown, but not a recession. And that's a really key point, a really key point for markets. It's critical to form a view as to whether recession will be avoided in the U.S. When there's a recession, all else being equal, tends to lead to a negative equity outcome because it typically leads to contraction in margins and earnings. That's bad for equities. If one avoids recession, then one can have a more constructive outlook, I think, for equity markets. And we do think that recession will be avoided. I'm not going to dwell on a few other relevant points. But just briefly, in Europe, clearly, we've had quite a material change in terms of infrastructure and defense spending, partly in response to pressure from President Trump. NATO members in Europe have been spending well below the 2% target for a number of years. That's ramping up. It seems that all members are agreeing to 5% GDP, defense spending apart from Spain, will get an exemption or have an exemption. And of that 5% number, broadly 3.5% will be core military spending, 1.5% will be defense-related areas such as infrastructure and cybersecurity. So that will help European GDP growth in the long run. There is a question, though, what it actually does in terms of corporate earnings growth because that's going to be concentrated in a small number of areas and remains to be seen what the spillover effects will be. And that is a long-term story, I think, in terms of the European perspective. But at the margin, I think unambiguously, it's better news for European growth if one takes that long-term lens. In terms of rates, interest rates, inflation, what's happening in bond markets and this point on fiscal concerns, again, very much in the forefront of investors' mind in France over the past 24 hours. I would say rising inflation, we had rises in inflation in general terms and declining growth, that creates a bit of a dilemma for central bankers. ECB has cut rates 4x this year, Bank of England 3x -- Bank of England, obviously cut a couple of times last year as well. Fed has remained on hold. And the chart on the left here shows expectations of U.S. federal funds rates over coming months and quarters. And the expectation and more than 100% priced into markets now is that the Fed will be cutting interest rates this month by 0.25 point, and there are rate cuts that are expected to progress over coming months from the U.S. So this combination of interest rate cuts, avoiding recession typically is a good environment for equities. I would say, as I mentioned previously, growth risks have increased. And I think that central banks will be focusing more on the growth outlook, and we're seeing a little bit of weakness in the U.S. labor market at the margin. Central banks will be focused more on that than they will be on short-term, arguably more transient pressure on inflation, which we do expect will moderate through time. In terms of bond markets, government bond markets, have seen quite a material backup in terms of rates at the longer end. So yield curves, that's looking at the difference between long rates and short rates. So short rates have typically been coming down in the U.K. and in Europe. But you can see on the right-hand side here, longer-term interest rates have actually been going up in a number of instances, specifically in terms of the U.K. and in Europe. So that leads to a widening gap between long rates and short rates. And part of that relates to concerns at the long end in terms of potential pressure on government borrowing again in the U.K. And we obviously have a big event coming up at the end of November with respect to the budget. Interesting to see what the government do there, but there's a lot of pressure with respect to government debt levels. It does -- in terms of the fiscal position, government debt trajectories do appear unsustainable in some countries, and that is leading to this concern about market's ability to absorb the government supply. Although I'd say I wouldn't -- we're not in panic stations yet. Hopefully, we do not get there because yield levels have risen, but still relatively well contained. It's certainly relatively well contained if one looks at the U.S. And just putting some numbers on this, and one does look at the U.S., U.S. debt is around $36 trillion. That's more than 120% of GDP. The annual budget deficit is more than 7%. And that deficit is expected to remain a little bit narrower than that, in the 6% level for coming years. So there's going to be pressure on government finances and pressure to cut expenditure and that leads to political challenges as we saw in France, as we've seen in the U.K. I think that's going to be an ongoing theme. And in Europe, there's this additional point about extra defense spending, which is going to be forthcoming again, that places some pressure on government finances. So I find that as a risk, not an imminent risk. But clearly, there are scenarios, not central case scenarios, there are scenarios where the bond market gets spooked by pressure on government borrowing. That leads to a backup in longer-term interest rates. And in that event, that would pressure equity market valuations, I have to say. So that is a clear risk. In terms of earnings, and just drawing some more comments in terms of the growth perspective. This shows on the left-hand side, for the global markets, that's all country world, that's global, including emerging markets, how earnings expectations have progressed over fiscal years. So 2025 on the right-hand side there, that blue snow trail. You can see that expectations typically start higher than they end up. So people tend to be too optimistic and then downgrades are forthcoming. On the right-hand side, you can see what's happened not just in the U.S. but across different regions as well as globally to earnings expectations for 2025 fiscal year. So for example, U.S. expectations started out -- the consensus expecting 40% growth in earnings this year. That's closer to 12% now. There's been big downgrades in terms of European growth expectations for the earnings in both the Europe -- in both Europe, sorry, I should say, Japan and the U.K. So there's been downgrades across the board, partly that's related to tariffs, partly that's related to this normal -- what tends to be a normal cycle of downgrades and been too optimistic. I'll make a couple of comments. The last earnings season that we had in the U.S. was actually a very positive earnings season. There's a bit of a game that coming into play in terms of managing expectations, clearly, but there's an average earnings beat in the U.S. of 7% to 8% in terms of the second quarter earnings in the U.S., the Magnificent Seven beat by over 10% expectations. And that led to an 11% year-on-year growth rate in terms of EPS earnings for the S&P, the wider market and the Mag Seven came in with a 26.7% year-on-year growth rate. So very strong growth outturns in earnings being delivered from the U.S. and continuing to exceed growth rates typically seen elsewhere. It was encouraging, I should say, in the U.S. that we saw a broadening in terms of earnings delivery. And I think that goes to my earlier point about there's less dispersed -- sorry, there's less clear water between growth and value year-to-date. The 493 companies outside of the Mag Seven in the S&P went from 0% to 7% delivered growth last quarter. So they lagged very materially the Magnificent Seven clearly, which were at 36%, 37% growth, but it was a significant improvement. So you've had a moderation, albeit better than expected outcome from the Mag Seven in terms of growth rates and an improvement for the rest of the market. So you're getting some convergence and that's a broadening in terms of the market, something that we've been talking about. And that's been evident in geographic terms as well as in -- within the market as well and within the U.S. specifically. Now I want to pick up the pace and just make a few comments because I know there's a lot of questions that we want to get through as many as we can. The U.S. has been exceptional at this point in U.S. exceptionalism and the death of the U.S. This theme has been predicted and overstated many times, and I know that there will be -- there are many bears around with respect to valuations and whether we're in a bubble or not. I don't think we are in a bubble. The punchline, I think markets are exuberant, are fully priced. But is it irrational? Is it irrational exuberance as Alan Greenspan famously coined that phrase back in 1996. No, I don't think it is irrational. And there are reasons to be optimistic actually. The U.S. equity market performance has been world beating. This gives a perspective over the past 5.5 years or so. Last year, U.S. performance has been less exceptional for a U.K.-based investor. A lot of that is owing to dollar weakness, which has been another key theme year-to-date as well, clearly. The U.S. has got several structural advantages at the macro and corporate level. It has delivered superior earnings growth to the rest of the world. What we have seen year-to-date, however, despite those downgrades that I showed you in the prior slide to growth -- to earnings expectations in the U.K. and Europe, we've seen better equity outcomes in terms of performance from those areas because there's been a bit of a value convergence or a convergence in terms of value gap between the U.S. and the rest of the world. I'll just make a point in terms of just the longer-term trends. The U.S. has delivered approximately 4% higher earnings per share compounded per annum against the rest of the world since 20 -- sorry, over the past decade. So it's produced far superior returns, but it's been driven to a great extent, not exclusively as a shorter moment, but to a great extent by that superior earnings delivery, and we are continuing to see superior earnings delivery still coming through from the U.S. And performance has been relatively narrow over the longer term. Year-to-date, again, it's not reflected on this chart per se, but the Magnificent Seven have done about 12%. They're a little bit ahead of the market, broadly in line with growth indices. That's in dollar terms in the U.S., but less exceptional than they have been. And there's been a lot of dispersion, as I said, in terms of some of my comments with respect to individual stock performance within that particular cohort of names. But AI has been a dominant theme clearly year-to-date. Valuations, I think one can make a relatively cautious stance with respect to valuations and where we are. This shows you the P/E ratio, price to earnings ratio, in terms of forward earnings, what's expected over the next 12 months for the U.S., for developed markets, excluding the U.S. and for emerging markets. Emerging markets bottom of the pile there in terms of valuations, so the cheapest against developed markets and top the U.S. The U.S. that's richly priced, but you're paying for that superior earnings growth, which has been delivered historically and which is still expected to be delivered on a forward basis as well. In terms of just thinking about the average stock in the U.S. And bear in mind, if you buy the U.S., you're buying obviously an index. If you buy an index, you're buying -- it's heavily concentrated in terms of technology and in terms of the Magnificent Seven. So you're paying about 23x forward earnings for that market, as shown on the left-hand chart here and in the prior slide, the average stock in the U.S. is trading on around 18x, 17.8 when I put this chart together. So far less highly valued. And therefore, that cohort, narrow cohort of very richly priced stocks, which constitute a large part of the market are driving up overall valuations. And that's reflected on the right-hand side of the chart here, which shows you the expected multiple for the Magnificent Seven. Now again, you can debate the exact metrics here. But to my eye, the Magnificent Seven trading on around the high 20s, 28, 29x forward multiple, that is rich. But again, it's consistent with the expectations which we and the market have in terms of earnings delivery from that cohort of stocks. And it's broadly in line with the average actually that you've seen over the past few years or so. So I think one should be mindful certainly of valuation risks, and it would be very difficult to make a case that there is clear value in terms of the U.S. market, but that area has delivered superior earnings growth historically. The rate of excess earnings growth for Mag Seven is expected to moderate, but it remains superior. And if one looks at that cohort of stocks, which continue to grow very fast in terms of EPS growth, then the valuation picture is not unreasonable, I would say. So conclusions, what does it all mean? There's been an awful lot of bad news and an awful lot of concerns over the past few months, tariff announcements clearly, U.S. rating downgrade, lots of jitters in terms of geopolitics, concern about debt sustainability. And risk assets, equities have obviously shaken off those concerns so far. We had a big setback clearly on Liberation Day and markets have rebounded very strongly. Now the bearish perspective clearly is that this leaves markets complacent. I would be more constructive in terms of the outlook. I am very mindful of the risks, and I certainly do not want to dismiss the risks that markets may face and economies may face. But we are likely to see rate cuts forthcoming in the U.S. soon. Recession is likely to be avoided. Valuations, I think, are rich, but not extreme. And we have seen a broadening in performance in recent months beyond the U.S. There is this issue. It's been coined as TINA, there is no alternative. The U.S. has remained a dominant market in terms of earnings delivery, richly priced to be fair. But we do see better prospects from emerging markets and have been adding to that area in recent months for several reasons. One, the valuation case, you could have made a valuation case for emerging markets for many years, frankly, against developed markets. But the valuation case, rate cuts, weakening dollar, which we expect will continue. They're all good, and better fiscal position for emerging markets, typically in general compared to developed markets. All of those reasons are areas lead to a better outlook in our view for the EM complex. Now I'm going to pause there. I think there are quite a lot of questions, and I'm going to try and run through as many as I can. I'm going to pass back to my colleague, Peter.

Yes. Thanks, Paul. Very interesting, very insightful. We do have quite a few questions, which we'll try to get through. Just to let you know, you can or you are able to download a copy of the presentation after the meeting to go through at your leisure. My name is Peter Brown. I work as part of the Investment Trust team at Columbia Threadneedle. We'd love to encourage questions in the chat, if you wish. If we don't get to them, we will certainly try and answer them after the event, which you can read on the website at your leisure.

Paul, we've mentioned -- or you mentioned quite a few things, and some of the questions do suggest maybe a repeat of what you said, which is not ideal. But if I can just acknowledge some of the questions and give a small response, and I'll try and merge a couple together when there's a common theme. So asset allocation, basically, is the fund prepared for potential correction induced by tech AI burst of the bubbles? And I'll merge that with how resilient is the portfolio if we experience a downturn?

Yes, really good question. Look, I think as I've outlined, there's numerous considerations. There's the political risk, conflicts, macro risks in terms of recession, inflation, interest rates. There's lots and lots of negatives one can point to in terms of risks on the horizon and valuations, as I said, are quite rich. So I think it's quite appropriate to be thinking about what the downside risks are. But I think you've also got to think about what can go right, what can go right in terms of markets. And frankly, earnings delivery has continued to go well. And I gave some statistics in terms of the U.S. I'm not going to repeat that, but we've had better earnings outcome than had been expected. I am a believer that we are going to see in the medium term an improvement in productivity arising from technological change and from the adoption of AI. It remains to be seen in the long run who the winners and losers from that are, and it's going to get very granular very quickly in terms of individual companies' competitive positions. But at the top level, I think AI and application of technology is going to be good for productivity, therefore, good for growth, probably good for owners of capital and good for corporate margins in aggregate. And that's good for equity markets in my view. That will likely mean that there will be a maintenance or improvement in terms of profitability at the overall corporate level. Arguably the labor is the loser in that labor in terms of providers of -- providers of labor are the losers in that scenario. So I think there's many things that can go right. I think the fundamental backdrop is good. I think the -- well, is reasonably good. We're seeing a modest growth slowdown. Rates will be -- rate cuts will be forthcoming. I think that people have missed to a great extent, the rally that's been evident in recent quarters. And there is a tendency, I think, for people to chase that as we move through coming quarters. So I think that if there is a correction and any one of those particular risk factors come to the fore, then as an investor in equity assets, I would say we are exposed. I wouldn't shy away from the fact that we are invested in equities, which will be sensitive to an economic downturn, which would be sensitive to an interest rate or inflation shock. But I think that it remains the right strategy in the long run for shareholders to be invested in those growth assets given prospective returns, given the fact that we do expect many positive drivers in terms of economic and corporate earnings growth over the long run. So I think that we are appropriately positioned, but very cognizant, clearly in terms of risk. Do I think -- I think I've answered this question already. Do I think there's a bubble in terms of AI? As I said, I think there's a lot of excitement. Valuations are reasonably full. But if you look at the Mag Seven, again, 28x on average, that's high. But you compare it to the dot-com area, which might be an extreme comparison, but you're trading in the 80s in terms of companies that were driven by the dot-com theme, and I do remember that very clearly and what happened subsequently. So I think there's a real trend here in terms of AI, what's going to do for productivity. There's going to be some moderation in terms of growth rates being delivered in terms of EPS from the Magnificent Seven, but they'll continue to be superior to the rest of the market, and we're probably trading around there in terms of valuations for that core. Sorry, perhaps a bit long-winded, but I'll try to -- so to summarize, we think the portfolios are properly positioned. If we're wrong, there is a recession, inflation or interest rate chop, we will benefit from having a diversified portfolio, but we'll not be immune in that scenario clearly in the short term.

Thank you. I'm going to merge two questions again. What do you think the future of listed private equity, I assume of private equity? And do you see opportunities there as a long-term investor and I'll merge that with -- it would be great to get an update on the PE exposure and how that has been performing.

Yes. So on listed private equity, I think -- so what do I think in listed private equity. So there's large discounts in that segment of the investment trust space. Optically, it looks like there's some pretty good value opportunities. Many of these portfolios from some of the big listed private equity providers are very diversified, very high quality, likely to produce good returns, I think, in the medium to long term in terms of underlying NEV. There are challenges in terms of the private equity sector, clearly in terms of rising interest -- sorry, interest rates are being cut, but higher interest rates compared to where we had been historically and what that means in terms of financial engineering ability to generate returns going forward. Some of the valuations that were paid or prices that were paid and high valuations on recent investments. But I think it looks quite interesting in terms of that segment of the market. What's the future look like? Well, I think that some of these discounts will have come in a little look wide and probably unsustainably wide and that there may be actions either by Boards or others to seek to drive value in that space. Is it an area of interest for F&C? It's an area that we have looked at, do look at with interest. We need to make an assessment as to how we deploy capital and what the prospect for realization in terms of narrowing of that -- realization of value in terms of narrowing of that discount is in the listed private equity sector, whether it provides a better opportunity than allocating capital to new opportunities. So interesting, I think, in summary, in terms of a potential area for investment, but not an area that we have deployed capital in recent quarters. And the second question -- part of the question was on private equity in terms of the trust. I would say, make a few points. One, we've got a long experience investing in private equity. And in recent years -- and we've had a long experience of having good levels of excess returns from private equity over public equity on the trust. Last couple of years, 2, 3 years have been an exception, I would say, for obvious reasons. Private equity has lagged strong returns from listed equity markets. And we reported our interims a month or so back and private equity had lagged listed equity markets during the first half of the year. So as I said in my earlier comments, private equity is a little bit of a drag on relative returns, not in absolute returns, but in relative returns year-to-date because private equity markets have continued to perform well and better than private equity. There are some green shoots, I would say. We're seeing a bit of an uptick in terms of realizations. We're seeing some falling in terms of some of the blockages, which have prevented some of the market activity, but it's pretty slow in that space. We're continuing to deploy capital selectively, and we're expecting some further realizations to come through in the next few months, quarters on the trust. And we expect that those realizations will be accretive. That's not a prediction, but at the present time, it is likely that we're going to get some more realizations and continue to see some interesting opportunities and unique opportunities in that space. And as a reminder, we're using our internal resource there for our private equity team, which is run predominantly of Edinburgh by Hamish Mair. We work very closely with him on selective opportunities as well as using Pantheon for some venture and growth exposure. So hopefully, that covers those questions.

Thank you. A couple of questions again. How could -- could you please talk through the changes that have been made over the past 12 months and what the next move in reshaping the portfolio is likely to be in your view? Another question, what geographical areas are you looking to reduce in the next few months?

Okay. So what changes have been made? A few changes. One, in terms of strategies. And I mentioned earlier that we've got a range of different strategies, some are run by internal capabilities, Columbia Threadneedle Investments, some by external. We actually divested an entirety from our internal emerging market strategy. We felt it was the right thing to do from a shareholder standpoint to invest with Invesco, who now manage our dedicated emerging market strategy, which constitutes about 5% of the portfolio or thereabouts. We've been adding to emerging markets in recent months for reasons that I outlined, partly due to expected weakness in the dollar, cuts in interest rates and good valuation and more fiscal flexibility in terms of the EM complex as well as expected good earnings growth. So we've been adding to emerging markets. We've done that in part through buying futures. So that's been a move that we've undertaken. At the margin, we've been reducing the U.S. partly to fund that move into emerging markets. Why? It's partly to do with valuations. Again, I'm not complacent with respect to where we stand in terms of valuations. I think there is and was a value opportunity between the U.S. and the rest of the world. And I do expect some broadening out, as I said, we've just been a reasonably consistent theme in recent quarters, a broadening out in terms of market returns. There's been a reduction in the U.S. We've done that through reduction in U.S. core assets, whilst we reduced Japan. Expectation, again, weaker dollar, stronger yen being something of an impediment in terms of Japanese equity returns. That hasn't played out, frankly, in the last month or so. But that's a theme that we continue to run for the time being. And in terms of future changes, I expect that we will continue to add to our emerging market exposure. I think one of the challenges to conundrums we face as with the rest of the market is the U.S. -- the theme of U.S. exceptionalism diminishing, I think, is a fair and reasonable one for all sorts of reasons partly due to perhaps some concern about integrity of institutional structures, which exist in the U.S., whether that's U.S. Fed independence and so on as well as just some more convergence between growth in the U.S. and the rest of the world, which is also driving some of the dollar weakness. But the U.S. is still an exceptional market. It's still a market which has got exceptional companies, is delivering exceptional earnings growth. And therefore, we do continue to have a very significant component of the portfolio allocated to the U.S., and that's been beneficial for shareholders. And one additional point I would make and just reflecting on a point I didn't make in the answer -- one of the answers to the earlier questions was, in the event that there is a downturn, dollar tends to be a risk of currency. So having a reasonable amount of dollar exposure as we do would tend to be a dampener in terms of moderating downside because investors tend to move towards safe haven assets. Dollar tends to be viewed as a safe haven, maybe different next time, but that's historically what's happened in the event of recession. Even it is emanating from the U.S., big risk of events, dollar rises and that would help to mitigate some of the downside. So we look to add to emerging markets, I think one of the key themes that we'll probably push forward with in coming quarters unless there's a fundamental change in the backdrop.

Okay. And on a similar theme, I'm merging, again, another couple of questions. What additional investment management skills do JPMorgan and Barrow Hanley have in managing U.S. equities over and above those available at Columbia Threadneedle? And I'll merge that with, should Columbia Threadneedle be managing material parts of the portfolio as an owner of investment managers in our conflict of interest?

Okay. So just let me take the question up at a slightly higher level and just set the context. So Columbia Threadneedle Investments, we get paid in terms of the -- our management fee is based upon the market value of the company. And therefore, the reason that we get paid on market value of the company is alignment of our interest in terms of management fees to outcomes for you as shareholders, but also arguably reduces this conflict, which we may have between allocation of capital to internal and external strategies. In other words, we don't get paid anymore, they don't get paid anymore by deciding whether to allocate capital to JPMorgan or to Columbia Threadneedle Investments or to Barrow Hanley. And therefore, we made the assessment on what we have internally and what we have externally that JPMorgan Asset Management would be the best solution that we could identify in the market for our large-cap growth strategy assets. What skills do they have above and what do they bring above what Columbia Threadneedle Investments can deliver in that space? Well, I don't want to make that direct comparison. But what I would say is, we expect that manager to deliver outperformance against the comparator index over the long run. And we replaced a long-standing manager T. Rowe Price a couple of years ago with JPMorgan. Barrow Hanley, in terms of the value manager exposure there, they delivered excess returns for us. I think we -- that mandate was awarded back in 2006. So we've taking a really long term through 2005, very long-term view with respect to that allocation of capital and blending internal and external strategies in that way, leads, I think, to the best outcome in terms of prospective returns, i.e. scoping the market for best managers that we see and complementing that with really strong internal capabilities that creates a value for money proposition, 0.45% ongoing charges, which I think compare very, very favorably with other trusts who have this open architecture approach. I think there was a second part of the question, I'm also very conscious on time. Peter, what was the second part of the question?

Is there a conflict of interest between having the manager allocating to internal funds?

I don't think there is a conflict of interest. I genuinely try and do the right thing for shareholders that we're paid, as I said, on market value of the trust, and that removes that potential conflict between allocating internally and externally. And I think the performance outcomes that have been delivered against peers bear out that view whereby we've delivered strong returns in the long run for shareholders and against competing products.

Okay. Thank you. We've hit exactly an hour. So I will leave it there. We will answer the questions, as I've said, post event. But if I could just pass you back to Paul for some final comments, Paul, and we'll hand back to the moderator.

Firstly, thank you so much for attending. Really appreciate you taking the time to call today. This is a great opportunity for us to engage with you as shareholders and prospective shareholders. So thank you very much for your time. There are a lot of questions which have been submitted. We will do our very best to come back to everyone that submitted a question with a written response if we didn't manage to provide -- or I didn't manage to provide an answer. But thank you again for your time.

That's great. Well, Paul, Peter, thanks very much for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback, and that the management team can better understand your views and expectations. On behalf of the management team of F&C Investment Trust PLC, we'd like to thank you for attending today's presentation, and good morning to you all.