Caledonia Investments deals with its reduction

Caledonia Investments, a family-controlled trust, has started repurchasing shares and is considering splitting its stock

With a sizable founding family stake, Caledonia Investments (LSE: CLDN) is one of the few surviving investment trusts. The Cayzer family, one of the most influential shipping dynasties in the world in the late 1800s, owns 48% of the £2 billion trust. It currently oversees £20.9 billion in assets, all of which are internally managed and distributed among three roughly equal-sized pools: quoted equity, private equity, and direct investment in private companies.

The BFIA investment trust portfolio has included Caledonia for a long time. We appreciate its broad strategy and goal of generating strong long-term returns of 3% to 6% above inflation while controlling risk in unpredictable and unstable times.

The varied strategy of Caledonia.

The portfolio's private capital component is concentrated on reputable mid-market businesses in the UK. Eight businesses make up the holdings, and five of them account for more than 90% of the net asset value (NAV) of the pool. The biggest is the global multi-family office Stonehage Fleming, whose value increased by 32% over the course of the year. Caledonia aims to generate returns from this portion of its portfolio of 14% annually.

Specialized venture capital and private equity funds make up the fund portfolio. These are divided between Asian growth companies (37 percent) and mid-market companies in North America (63 percent). Twelve to five percent annually is the goal here.

Lastly, 18 holdings total, divided between two global income and capital growth strategies, make up direct equities. These strategies aim for annual returns of 7% and 10%, respectively. Among the holdings are the UK kitchen supplier Howdens and the Chinese e-commerce and technology conglomerate Alibaba.

To date, Caledonia has produced NAV total returns of 9 percent annually as of March 31. Private capital, funds, and direct equities have all achieved 12 and 4 percent, 13 and 3 percent, and 8 and 4 percent, respectively. This is right at the top of its target of inflation plus 36%, and it compares to 6.2 percent for the FTSE All-Share index.

It has not been a particularly good year. In comparison to the FTSE All-Share, which had a 10.5 percent return over the year ending March 31, the NAV total return was 3.3 percent. Private capital returned 3 points 7 percent, funds returned 2 points 2 percent, and quoted equities achieved 4 points 7 percent, despite a 7 points 3 percent decline during the market volatility in March. This is not reason for concern because the long-term record is strong.

Increasing the amount of liquid assets.

A major problem that has always plagued the trust is the large discount to NAV, which over the last 12 months has ranged between 30 and 40 percent, making it one of the worst in the industry.

Although the discount has increased recently, it was typically around 20 percent prior to that.

In the past, the large discount and lack of liquidity in the shares have been attributed to the controlling stakes held by members of the extensive Cayzer family. But the business has made an effort to alter this during the last 12 months.

Apart from continuing to pay yearly dividends that rise by inflation or more over the long run (last year's dividends were 73p per share, yielding 1p9 percent), Caledonia has started a share buyback program. It paid 63 million for the repurchase of 1 million shares, or 3 percent of its shares, during the most recent fiscal year. Since March 31, an additional 247,000 have been repurchased at a cost of £9 million. In order to provide a more even income stream, the final and interim dividend split will also be more evenly distributed.

A 10:1 stock split has also been suggested by the board. Improving liquidity by lowering the price and increasing the number of outstanding shares should make it simpler for investors to purchase and sell shares. This could theoretically make the stock more appealing and make it available to a larger market.

In the end, a stock split is essentially a cosmetic alteration. It does, however, indicate that Caledonia wants to lower the discount when combined with other measures. It might serve as the impetus for the market to reinvest in the trust.