The discount must be closed by Caledonia Investments

Although returns are on track and Caledonia Investments offers something special, the shares have underperformed and the discount is still stubbornly large

One of the more obscure investment trusts on the market is Caledonia Investments (LSE: CLDN). The 3.1 billion fund was established by the affluent Cayzer family, who formerly controlled one of the most significant shipping companies in the world. Today, it serves as a multi-asset growth and protection vehicle.

Since 2013, Caledonia has been included in the investment trust portfolio of BFIA. We appreciate its multifaceted strategy and goal of generating strong long-term returns that are three to six percent higher than inflation while controlling risk during unpredictable and unstable times. With 51% of the trust owned by the Cayzers, it is under the control of a significant long-term shareholder.

Even though the trust has clearly met its performance goals over the last three, five, and ten years, its share price, which is currently trading at a 35% discount to net asset value (NAV), still needs improvement.

Caledonia's portfolio has a three-way split.

The three roughly equal pools of quoted equity, private equity funds, and private capital make up Caledonia's portfolio. The private capital pool is the smallest of these three categories, accounting for 25% of net asset value. Ten excellent UK mid-market companies with "prudent capital structures" make up this portfolio. AIR-serv Europe is the biggest asset in this portfolio as well as the entire portfolio. This company creates, produces, and maintains forecourt equipment, including vacuum, jet, and air wash machines. By the end of August, its value had increased from 143 million to 215 million since it was purchased in 2023. The business distributed a 24.5 million dividend to Caledonia last year.

The trust has an advantage over other wealth protection options thanks to these kinds of holdings. While other trusts in the industry typically rely on equities, alternative investments, and third-party funds, Caledonia has direct control over these holdings and is not charged extra. Additionally, it has the ability to buy and sell whenever it sees fit. If an asset, like AIR-serv, is performing well, there is no need to sell. Other private capital holdings include garden center operator Blue Diamond (1.9 percent of NAV, or 60 million) and hospitality operator Butcombe (4.1 percent of NAV, or 127 million). A 61 percent share in Conquip Engineering is the most recent addition.

Currently, listed stocks make up 32% of NAV. About thirty equity holdings make up this pool, including Microsoft, Texas Instruments, and the tobacco giant Philip Morris (2.9 percent of NAV, or 91 million).

The private equity fund pool comes last. This is equivalent to the direct private holdings at 32 percent of NAV, but there is greater diversification with holdings in 80 funds spread across 45 private equity managers. In these vehicles, which are primarily focused on buy-out deals in the North American mid-market segment, Caledonia claims that it is frequently the only European investor.

The obstinate discount of Caledonia.

Caledonia uses the FTSE All-Share Total Return index as a benchmark for its performance in addition to aiming to beat inflation by three to six percent. The trust's NAV has matched the FTSE All-Share and outperformed the consumer price index including housing (CPIH) by a factor of three over the last ten years.

But over the past three and five years, both NAV and share price have lagged behind the FTSE All-Share, and over the past five years, the share price has failed to meet its inflation-plus target. The management has been repurchasing stock to unlock value and has experimented with a share split to increase liquidity. It has spent 30.6 million since April 1st purchasing shares at an average 37 percent discount. Although NAV has increased by 3.5p per share as a result, the discount is still obstinately large. Here, more work is required.

Caledonia's advantage, however, is its diversity. Its strategy will always fall behind in a market that is constantly growing. It will be put to the test during the next crash to see if it outperforms investors who appear to be more and more enamored with the AI bubble.