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Investing in Caledonia Investments

Caledonia Investments logo

Important: What follows is not a recommendation to buy or sell shares in Caledonia Investments. I am just a private investor, storing and sharing my notes. Read my disclaimer.

Name: Caledonia Investments
Ticker: CLDN
Business: Investment trust
More: Trustnet / Google Finance
Official site: Caledonia Investments

I have a soft spot for family vehicles like Caledonia Investments. I’m reassured to think that crusty old Barons and Earls are keeping a gimlet eye on the same investment that I’m in.

These trusts also appeal to me because:

  • I believe wealthy old money knows how to stay wealthy.
  • Big investment trusts are a relatively economical way to buy active management, if that’s your wont.
  • They are invariably interestingly diversified.
  • I’m a sucker for the romance.

Like anything on the stock market, investment trusts can attract their fair share of flighty managers and corporate conquistadors — or sometimes they simply bungle badly. With a wealthy family trust, I’m more confident that I can wait out misadventures knowing that seriously rich people are batting for the same cause as me – but with rather bigger bats!

For all these reasons and one more, I’ve made a substantial investment over the past few months in Caledonia Investments.

The extra kicker is that as I write, this investment trust stands at a discount of nearly 20% to its Net Asset Value (NAV). I consider this discount very likely to narrow over the medium term.

Wiping out the discount so that the shares traded at the estimated value of their underlying assets as of today, I’d see a 31% uplift to my shareholding’s value, even if Caledonia’s own investments did not to rise in value at all!

In reality, however, I expect Caledonia’s assets to at least keep track with the UK stock market; the trust has beaten the FTSE All-Share index in all but one year out of the past ten.

On a total return basis, Caledonia outperformed the same index by 113.5% over ten years, as of 31 March this year — a superb result! No lost decade for investors in Caledonia.

Past performance doesn’t guarantee anything, but I believe the combination of what I consider an unwarranted large discount, the strong family interest, and a track record of good asset allocation is a recipe for decent returns from here.

A potted history of Caledonia

Caledonia arose from the wealth of the Cayzer family, which made a mint or two from steamships in the 19th Century.

The Cayzers bought the wonderfully named Foreign Railways Investment Trust in 1951 as a holding vehicle for their family wealth, though they showed rather less sentimentality than me when they renamed it Caledonia Investments Ltd.

In 1955, Caledonia then gobbled up the Cayzer family’s interest in the British and Commonwealth Shipping Company, and the resultant entity was floated on the London Stock Exchange in 1960.

Caledonia subsequently divested itself of the British and Commonwealth holding in 1987, and became more like the opportunity-seeking investment vehicle it is today.

It was restructured as a formal investment trust in 2003.

Don’t discount the family factor

Now, there are some investors who would say this convoluted history justifies a discount on the trust, especially when added to the ongoing involvement of the Cayzer family, who have their own colourful back stories.

But as I’ve said above I’m in the opposite camp, in that I like the family factor.

I’d also note that the share has sometimes traded at a slight premium to net assets in the past, so clearly the Cayzer family effect alone can’t explain the discount:

Caledonia has traded above net assets, though not in the past few torrid years for equities.

It has to be admitted though that Caledonia’s family owners have been a fiery lot over the years: More 1980s Dynasty than 19th Century dynasty.

The turn of the 20th century was marked by a big bust-up, which this article from The Telegraph from 2004 captures:

One of the City’s most bitter family feuds moved towards peace yesterday when Caledonia Investments announced a special dividend costing at least £64m to buy out dissident members of the Cayzer shipping dynasty.

The scheme has been devised to end three years of feuding in the family, which owns 37.5pc of Caledonia via the Cayzer Trust Company and 12pc through individual family members.

Rebels led by Sir James Cayzer, the 72-year-old patriarch who gives his address as Kinpurnie Castle, in Angus, and has a fleet of Rolls-Royces but no driving licence, have campaigned for Caledonia to be broken up and its assets distributed.

Rows and power struggles have turned on matters ranging from a controversial investment in a boat by the trust for the millennium celebrations to Dotcom-era underperformance.

And while those fractious days would seem to be behind it, various offshoots of the Cayzer family still own 46% of the trust’s shares. What’s more, last year Will Wyatt, the distant grandson of clan founder Charles Cayzer, took over as CEO, returning the trust to direct family control.

For some this sort of thing – and the potential for another flare-up — is untenable.

For me it’s all part of the fun of investing in family houses. But if it doesn’t float your steamboat, then you should certainly look elsewhere; the Cayzer involvement is surely here to stay.

No big buybacks

The family holding presents a more concrete concern, however, even for us spreadsheet-wielding romantics.

An undertaking to the UK’s Takeover Panel means Caledonia is unable to execute any share buybacks that would take the Cayzer concert party’s holding above 49.5%.

That’s important because — as investors at rival mega-trust Alliance are presently discovering — buying back shares can be an effective way of narrowing a large discount to a trust’s net assets.

Personally, I don’t think it does much good for ongoing shareholders. Yes, your shares are rising in value, but your company is spending your assets to get that result. It’s all rather circular.

The hope of course is that the discount will narrow faster than the rate you’re spending money to narrow it, as other investors should buy the shares if the discount widens too much, anticipating it will be closed again by buybacks.

But it doesn’t always work that way.

Worries about what’s under Caledonia’s kilt

It’s all rather moot, anyway, because Caledonia isn’t buying back substantial amounts of shares.

Instead, we’ll need to see a decent investing performance and a change in sentiment to narrow the discount.

The key to the latter, it seems to me, is that a big slug of Caledonia’s money is in private equity funds or directly invested in unlisted companies (including, rather fittingly, 100% ownership of The Sloane Club in London) and the market seems to lack confidence in these unlisted holdings.

A similar argument was made a couple of years ago to justify the discount at RIT Capital Partners, the family vehicle of the Rothchilds.

Indeed, I discussed RIT Capital Partners on Monevator when it was trading on a double-digit discount in 2009. Since then the discount on Jacob Rothchilds’ warchest has turned into a premium, and anyone who bought the shares when I wrote has seen a return of around 46%, versus less than 29% in the FTSE 1001.

This return is especially impressive when you consider that RCP was holding plenty of cash at times – although equally it was also invested in flightier foreign markets, too, so the comparison with the FTSE is a crude one.

My highland fling with Caledonia

While RIT has an even more stellar ten-year record than Caledonia on most measures, the main reason for that recent outperformance is simply that the discount on its shares disappeared to become a slight premium. This transformed the trajectory of its share price.

I think RIT has a good chance of doing well from here, too – and to retain its value better than a tracker should the market dive — and I still hold some.

What I’d class as the easy justification for investing in those shares has passed, however. If anything, the slight premium bothers me.

But the window has not yet passed for Caledonia. The fund sits at a 20% discount despite the fact that net assets were ahead 6.5% over the past year, versus a 5.4% performance from the All-Share. Consider that it has 6% or more of its money in cash, and the 20% discount looks even more untenable.

Yes, Caledonia has a new manager, who seems to favour resource companies over the financial firms that long dominated Caledonia’s roster (and the CVs of some of his aristocratic forebears).

And yes, he’s also reshaping the trust’s strategy to concentrate on fewer holdings, where Caledonia’s investment can result in a more meaningful influence at board level, as well as looking to boost the trust’s market-lagging 2.2% dividend yield.

Even on this last point, Caledonia already has a 44-year history of raising its dividend – another super achievement.

Yet the market seemingly prefers to fret that this £1 billion company has lost nearly £200 million of its value down the back of an antique sofa than to look at its medium-term history of wealth preservation, market-beating returns, and a growing income.

I think the market is wrong. It’s true that buying trusts on a discount can be a hit-and-miss affair; the market isn’t entirely dumb, and often the discount correctly anticipates dawdling performance or worse.

But I think the old money factor tilts the odds in Caledonia’s favour. In my worst case scenario, the discount doesn’t narrow much and I buy into a secure and rising dividend with one-fifth knocked off the price.

If you too are tempted to invest in Caledonia, then you’ll want to read the latest annual report to see where it is putting its money and how recent changes will affect its portfolio going forward. As ever, do your own research – I am not responsible for your actions.

My own money is where my mouth is. I’ve put roughly 6.5% of my net worth into Caledonia Investments, and writing this post I’m thinking to myself that this sum could rise still higher!

Note: I take no responsibility for the accuracy of this post. Read my disclaimer.

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{ 24 comments… add one and remember nothing here is personal advice }
  • 1 mark senior July 8, 2011, 12:33 pm

    Dear Investor,

    I have been reading your blog for some months now.

    Indeed i used some of your old blogs to set up 2 portfolios roughly based on the “lazy” principal that you have written on extensively over the last couple of years.

    This particular blog on Caledonia IT is so good i felt i had to let you know.

    Well done and thank you.

    I currently run several family/friends portfolios that run to over £1m in total, as such I am always looking for ideas for further research. By nature I am a value investor but prefer to find value in collective investment rather than individual shares.

    I tend only to use individual equities in my “income” portfolios, i can buy Vodafone just as well as Neil Woodford!

    I am currently running two virtual portfolios alongside two real portfolios.
    the first virtual portfolio heavily uses HSBC and L&G trackers in a similar style to your latest portfolio.
    The second one is more complex, it uses ishares etf’s, alongside selected IT’s and 1 oeics, aiming to give a more rounded asset allocation.

    Once again thank you for this article and the others that you have written.

    Kind regards

    Mark

  • 2 ermine July 8, 2011, 3:38 pm

    You old romantic TI 🙂 I’ve wondered whether old money would return to prominence with the strategic shifts in the economy. An industrial economy needs lots of cheap energy to feed growth. As that gets dearer capitalism might shift to the husbanding of capital and modest growth rather than gung-ho entrepreneurialism.

    The Telegraph article on how 50% of the owners of this trust carry on was a rum old story. I can see the attractions of the 20% discount and the dividend growth history is great, albeit from a low base. But the family soap opera is scary!

  • 3 Alex July 8, 2011, 3:56 pm

    1. Hi TI, As ever, thanks for another interesting article. I agree with you that the back stories of some of these ITs are fascinating – as is that for the entire IT industry.

    2. Caledonia is in the ‘Global Growth’ AIC (Association of Investment Companies) Sector. (I don’t think you actually mentioned this.) I find it strange then that Caledonia uses the FTSE All-Share Total Return as its own benchmark. Do you agree?

    3. Oh, people might want to know the current TER: at 1.17%, it’s above average for the sector (0.85%, N= 30).

  • 4 The Investor July 8, 2011, 4:53 pm

    @Alex — Thanks for the comments! I’ve given up finding a perfect benchmark for these ITs, they all have strengths and weaknesses. The very diversification of the trusts (which I like) works against benchmarks, they’re better thought of as cheaper easier alternatives that an investor must eschew.

    Re: The higher TER, that will be down to the high proportion of hands-on activity and unlisted company investing the fund is involved in, compared to a pure stock picking IT. It doesn’t worry me but certainly worth a mention. Cheers!

  • 5 The Investor July 8, 2011, 5:10 pm

    @ermine — Indeed! Like being a shareholder in a BBC costume drama.

  • 6 harry July 8, 2011, 6:05 pm

    Good article. I’ve really only used collective investments in my SIPP and this one used to be a core holding. I too was tempted by the ‘family money’ tied up in it (also own RIT) and articles like this
    http://citywire.co.uk/new-model-adviser/funds-watch-canny-caledonia-the-uks-berkshire-hathaway/a267553
    but agree performance has been lacklustre and I sold out. I’ve been watching this share though and must admit i’m tempted by the discount. You even get a discount on buying British Empire (8.6% 0f the fund) which is no bad thing!!

  • 7 oldtimer47 July 8, 2011, 10:29 pm

    Thanks for another good article. I took a look at their website and was very impressed by the clarity of their reports and factsheets. I was disappointed to see that I had just missed out on a 26p / share dividend that went ex-div on the 6th July – I do hope you bought before then !

    Peter

  • 8 The Investor July 9, 2011, 10:52 am

    @Mark — Thanks very much, glad you liked it.

    @OldTimer47 — I did, but I’m not too bothered about ex-dividend dates with shares. I believe in most cases the market is efficient with this sort of technical detail, and so share prices will rise or fall depending on whether the dividend is due to holders or not.

  • 9 Monevator July 10, 2011, 6:17 pm

    @Harry – I’ve had a smaller direct holding in British Empire for a few months, too. The discount on that trust has narrowed recently, but it’s still there, and its managers reckon their investment companies (mainly collectives) are on a big discount, too!

    Discounts on discounts on discounts – surely it’s still a good time for a brave hearted investors with a long-term horizon.

  • 10 harry July 10, 2011, 10:27 pm

    @Monevator – I’m still on a very steep learning curve with my SIPP but I figure having these kind of closed-end funds as a core will serve me well over the next 10-15 years (retirement), and as I am no longer forced to buy an annuity, another 10-15 after that. So, I have a (very) long-term horizon to aim at and therefore don’t think I need a ‘brave heart’ to invest now.

  • 11 The Investor July 10, 2011, 11:07 pm

    @Harry – Apologies if I’ve misunderstood ‘steep learning curve’ but I’d caution that you can never really know what it feels like to see your portfolio *halve* in value in a bear market until it happens.

    The long-term perspective is vital, but personally I think a certain amount of bravery is always required when buying equities, if one truly understands these risks. And I say that as a rampant perma-bull for equities by money blogger standards! 😉

    Anyway, I don’t and can’t give personal advice, and we’re in agreement I think that this trust looks good value. 🙂

  • 12 Alan July 11, 2011, 7:19 am

    Superb article. Thanks for sharing it. Templeton Emerging Markets and Black Rock Latin America are two other popular investment trusts currently available on discount, though not as generous as this one.

  • 13 The Investor July 11, 2011, 11:10 am

    @Alan – Thanks, glad you liked it. I also own some Templeton Emerging Markets, although I top-sliced too soon after the sharp rally from the March 2009 lows (after it near-doubled in a year!)

    You’ll know of course that discounts on ITs aren’t the be-all and end-all: Alliance Trust is an example of a huge trust that’s trapped optimistic investors waiting for its big discount to narrow for years. However I think that’s partly because management has been too-powerful there, and also it has a horde of private investors who could not care less about the share price it seems…

    With luck Caledonian’s major holders and alignment with management will sidestep that fate here.

  • 14 harry July 12, 2011, 9:38 am

    @M – You’re spot on with your understanding of my ‘steep learning curve’.

  • 15 The Investor July 12, 2011, 11:53 am

    @Harry – Here’s a post you might enjoy from a couple of years back on my own learning curve. It’s called Coping With The Guilt Of Losing Money, and it’s a bit out of date (obviously my holdings have massively bounced back, but also I’m no longer even considering buying a house at today’s London prices).

  • 16 harry July 12, 2011, 9:35 pm

    @M – Also a great article and makes me feel better that other people make similar mistakes! Thanks.

  • 17 Steve November 8, 2011, 2:38 pm

    Am I correct in thinking CLDN have just increased the TER from 1.05 to 1.50 ?

  • 18 The Investor November 8, 2011, 4:36 pm

    @Steve — Do you have a source for that please? I can’t see any recent RNSs in the subject.

  • 19 Steve November 8, 2011, 5:54 pm

    Hi Investor – Was just updating my portfolio in Morning Star and noticed the uplift to 1.55 under the fees menu. As below, appreciate their infomation may be wrong.

    Caledonia InvestmentsCLDN.Fees and Expenses
    Annual Charges Stated Management Fee Self managed
    Total Expense Ratio (2011) 1.55%
    Management Fee Summary The company is self managed.

  • 20 The Investor November 9, 2011, 11:09 am

    Hmm, thanks for that Steve. According to the AIC website, the Lipper TER is still 0.8%:

    http://www.theaic.co.uk/Search-for-an-investment-company/Company-profiles/Conventional-companies/Profile/?company=153

    That was as of March, though.

    While the share price has had a horrid time the NAV hasn’t come down so much as to double the TER! The company did announce in its final results that it was planning to do a fair bit of restructuring though (boosting income, primarily, as well as concentrating its holdings more) which can be expected to increase churn costs in the short term.

    Perhaps Morningstar has some insight into the latest figures on the back of that?

    The company plans to release half year results on November 22nd, so we may get more insight then.

    It’s been a good excuse to check up on Caledonia, actually. Its shares have done nothing good since I bought them — in fact they’ve underperformed the FTSE by about 5% — but the NAV has held up much better than the shares.

    The discount is now around 20%! I still think that’s an opportunity in the fullness of time.

  • 21 Aston January 18, 2012, 7:53 pm

    I see that CLDN is now embarked on a share buy back programme in an attempt to narrow the discount. e.g. they bought 220,000 shares today. Can you elaborate on the comment you make above about the Cayzer’s holding restricting the overall size of any buyback programme? – at this rate they will get to the ‘ceiling’ pretty quickly. Maybe the Cayzer’s are selling into the buy back?

  • 22 The Investor January 19, 2012, 11:36 am

    @Aston – Good spot. I did notice my Jabba The Hutt-like slug of these rising from their torpor. Unfortunately I can’t on a quick scoot through the last 2-3 reports find any more details (at least not searching for ‘buy back’, it might be there with different terminology) so I can’t really add to my comments above. It’s just what I have in memory; it’s also related to the huge amount of cash the company has on its accounts.

    If you think it’s a crucial factor for your investment case, please do research and report back – I’d love to know more.

    Personally I am content to think the discount will close when the market gets going again. But at a 20%+ discount I certainly can’t see a much better use of CLDN’s cash than buying its own shares…

  • 23 Steve W July 23, 2015, 8:22 pm

    It’s been a while since I looked over CLDN with current management fees of 2.61% when I am sure they were around 1% a year ago. This would seem very high or am I missing something.

  • 24 Andrew Smith November 15, 2015, 6:51 pm

    Just found your blog. Very interesting. I’ve just started a monthly saving plan investing in the shares of Caledonia Investments. Thought I would give it a try. The dividend record is very impressive but I see it’s still at a 20% discount.
    Investing via a monthly saving plan means I benefit from any dips in the share price.
    Are you still invested in Caledonia?

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