Private equity proved to be a rare bright spot in a half-year sea of red for F&C (FCIT ) investment trust, which has sold its global smaller-companies exposure and cut gearing as fund manager Paul Niven raises defences against a likely recession.

The £4.5bn flagship trust of what is now Colombia Threadneedle Investments, following the acquisition of BMO Global, slightly underperformed a falling market in the first half of the year.

Reporting interim results for the six months to 30 June, the UK’s oldest investment trust said its 400-stock portfolio fell 10.8%, below the 10.7% decline in the FTSE All-World index, as all areas of public investment slumped and underperformed their stock market benchmarks as surging inflation, rising interest rates and the war in Ukraine took their toll.

A defensive Niven, who took charge of the 154-year-old trust eight years ago, continued to cut holdings in expensive US large-cap growth stocks in the expectation they would suffer further falls as investors re-assessed their prospects.

‘In addition, we made the decision to divest entirely from our exposure to global small-cap stocks, having initially reduced our holdings last year,’ the manager said.

‘In our view, small-cap stocks are less likely to perform well in an environment of rising inflation and we decided to focus our exposure on the large-cap space. Small-cap holdings modestly underperformed over the first half,’ he said, justifying the move.

North America, where 39.6% of F&C’s assets are directly invested, slid 12.1% overall in sterling terms, although there was a marked divergence between the two external fund managers the trust uses. In-favour value-style manager Barrow Hanley held up with a small 0.6% decline, but T Rowe Price, whose growth approach is similar to the UK’s Baillie Gifford, posted a big loss of 25.8% as the market shunned more speculative, disruptive technology stocks.

It was a similar story in global strategies, emerging markets, Europe including the UK, and Japan, which retreated 11.9%, 12.5%, 13.8% and 16.8% respectively, as F&C’s in-house managers attempted to buy into cheaper, higher-yielding shares.

By contrast, private equity, where Niven has allocated 13% of assets to funds investing in unquoted companies, stood out with a strong 4.7% return. The most recent commitments to Pantheon returned 7.9% in the first half, while older holdings managed by Pantheon and HarbourVest gained 6.6%.

Listed private equity funds disappointed, however, with life sciences fund Syncona (SYNC ) slipping 3.8% and Baillie Gifford’s Schiehallion (MNTN ) plunging 43%.

Mick Gilligan (above) of Killik said F&C ‘looks to be pulling in its horns’, but expected the private equity exposure would be a negative contributor in the second half of the year as more up-to-date valuations came in and reflected the global downturn.

Fortunately, the sharp fall in bond prices as investors ramped up their interest rate forecasts also cut the value of F&C’s debt, which it uses to gear up long-term returns. This decline added 2.5% to net asset value (NAV) and reduced the total underlying loss to 9.6%.

However, dwindling investor demand for F&C shares in a bear market saw their discount – or gap to NAV – widen by 2.2%. This eroded much of the positive debt impact and, with the trust slightly geared into a falling market, left shareholders nursing an 11.8% decline.

Following a recovery this month after a difficult June, F&C currently stands third out of 17 trusts in the AIC Global sector with a one-year shareholder return of 1%. Over five years it ranks fifth with a total return of 54.9%.

Opportunities ‘emerging ‘

Gearing, or borrowing, reduced from 9.4% to 6.5% (with debt measured at ‘par’ or the original sum borrowed) as Niven (above) lifted cash levels by almost £300m to £352m to repay a €72m (£60.6m) loan, but also looked for areas of value in a chastened market.

While acknowledging the global economic backdrop was ‘challenging’ and further near-term risks remained for equities, Niven said opportunities were also emerging. ‘Valuations have corrected and are more attractive for long-term investors. While margins are a risk, equities will provide some hedge to inflation as corporates pass on price rises to consumers,’ he said.

‘With a relatively high holding cash and diversified exposure across a range of different equity strategies we believe that the company is appropriately positioned for the difficult market conditions that we expect,’ Niven added.

Analysts generally agreed. Although there was some disappointment at the underperformance of the listed equity strategies, F&C’s broad exposure, lowish costs of 0.5%, its strong revenue reserves, determination to deliver long-term dividend increases over inflation and buy back shares to narrow the 8% discount impressed.

Christopher Brown of JP Morgan Cazenove reiterated an ‘overweight’ rating and said F&C ‘remains one of our preferred picks’.

Gilligan agreed: ‘This is a solid, low-cut, one-stop equity shop for the private investor.’