"It feels like '87," says Foreign & Colonial chief

Despite rising stock market volatility and the potential for a further correction in share prices, investors should "start lacing up their buying boots" was the message today from Jeremy Tigue, manager of the legendary £2.6 billion Foreign & Colonial Investment Trust.

Tigue, whose trust is the oldest investment fund in the UK and is widely held by small private investors, was speaking to City analysts following the release of Foreign & Colonial Investment Trust's interim results for the first half of 2007.

"Stock markets are increasingly unsettled with ever more erratic swings in share prices. Although there have been pockets of problems, predominantly from the slowdown in the US housing market, the world's economic fundamentals are in good shape," explained Tigue. "There is a clear disconnect between market behaviour and the underlying economic picture. In this respect 2007 is starting to feel very similar to 1987 when markets took a short, sharp hit, providing savvy investors with a breadth of opportunities."

Tigue stresses that current conditions do not point to an all-out sustained bear market but the "cards are stacked towards a further correction" . He explained that in preparation for this the Foreign & Colonial Investment Trust portfolio has become more defensive in recent months. In particular, the trust had benefited strongly by short term borrowing in Japanese Yen, a country where interest rates are very low, to invest in higher returning opportunities elsewhere – a strategy that has been popular with hedge funds known as the 'Yen carry trade' - but his increasingly cautious view on markets prompted a decision to repay all short term borrowings in May and June.

"Having concentrated all of our short term borrowing in Yen for some time and benefited from the steady weakening in the currency against the pound sterling, we decided in May that the party was coming to an end and wanted to avoid being in a position where we might become forced sellers. The recent rally in the Yen has proved that we were right to have taken that particular risk off the table," said Tigue.

"Yet with global growth remaining strong, inflation under control and the emerging markets of India, China and Brazil showing impressive resilience in the face of recent stock market falls in the developed world, we are poised for opportunities to buy into the dips. After all, corporate profits remain robust and many companies have been raising their dividends," he said.

Sanguine on private equity fears

One area where Foreign & Colonial Investment Trust has been focusing on is private equity, companies whose shares are not traded on stock markets. Five years ago the trust announced it would allocate 5% to private equity which it revised up last year to a target of 10% by 2009. Its current exposure is 6.5%, up from 3.5% at the end of last year.

"The original commitments we made, principally via private equity funds of funds, are themselves increasing their investments but we are also allocating cash into new private equity funds and diversifying our exposure. In particular, we have raised our private equity exposure in Asia."

The refinancing problems surrounding several high profile deals including Alliance Boots and Chrysler, have lead some industry commentators to point to a private equity bubble but Tigue remains sanguine.

"There may be a bubble in certain areas of the global private equity market, such as large-scale buyout activity, but our diversified exposure both in terms of geography and sectors should protect us from any serious pull-backs. With a plethora of restructuring opportunities the outlook for private equity activity remains strong," said Tigue.

'Firing on all cylinders'

In its interim results released to the Stock Exchange this morning Foreign & Colonial Investment Trust revealed that it had delivered a Net Asset Value return of 10.1% per share in the six months to 30 June, well ahead of both its benchmark index which returned just 7.4%, as well as the average return of 8.6% by its close peer group of large global generalist trusts. Superior performance has resulted in an accrued performance fee, not yet crystallised, of £4.6 million at the half year. The trust also increased its interim dividend for the 37th year in a row by 10.2% to 2.7p per share, delivering on the objective of growing dividends faster than inflation, and is on track to achieving a final dividend of 3.15p for the year.

"This has without doubt been a very good period for our shareholders. The four key tools at our disposal - stock selection, asset allocation, the use of gearing and share buybacks - each made a positive contribution. We were right to remain under weight the US and benefited significantly from significant over weight positions in emerging markets and developed Asia. Stock selection from our team was particularly strong in Asia and also positive in major markets such as the UK and Europe. Pleasingly, there was also a strong turnaround in the performance of the US multi-manager portfolio ," concluded Tigue.