Caledonia Investments (LSE: CLDN) is one of the market's more esoteric investment trusts. Founded by the wealthy Cayzer family, which once owned one of the world's most powerful shipping conglomerates, the £3.1 billion fund now functions as a multi-asset growth and protection vehicle.
Caledonia has been part of the MoneyWeek investment trust portfolio since 2013. We like its diverse approach and its aim of earning solid long-term returns of 3%-6% above inflation, while managing risk during periods of uncertainty and instability. The Cayzers own 51% of the trust, putting it under the stewardship of a powerful long-term shareholder.
However, while the trust has undoubtedly achieved its performance target over the past three, five and ten years, its recent record still leaves something to be desired with regard to its share price, which languishes on a 35% discount to net asset value (NAV).
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Three-way split in Caledonia's portfolio
Caledonia's portfolio is split into three roughly equal pools: quoted equity, private equity funds and private capital. At 25% of net asset value, the private capital pool is the smallest of these three segments. This portfolio comprises ten high-quality UK mid-market businesses with “prudent capital structures”. The largest holding here – and in the portfolio overall – is AIR-serv Europe. This firm designs, manufactures, and maintains forecourt equipment like air, vacuum and jet wash machines. Since being acquired in 2023, its value has grown from £143 million to £215 million as of the end of August. Last year, the company paid Caledonia a £24.5 million dividend.
These types of holdings give the trust an edge over other wealth protection vehicles. Other trusts in the sector usually rely on third-party funds, equities and alternative investments, Caledonia has direct control over these holdings and is not subject to additional fees. It can also buy and sell when it sees fit – if an asset such as AIR-serv is working well, there's no need to sell. Other private capital holdings include hospitality operator Butcombe (4.1% of NAV or £127 million) and garden centre operator Blue Diamond (1.9% of NAV or £60 million). The latest addition is a 61% stake in Conquip Engineering.
Listed equities are 32% of NAV at present. This pool comprises around 30 equity holdings, including tobacco giant Philip Morris (2.9% of NAV or £91 million), Texas Instruments and Microsoft.
Finally, there's the private equity fund pool. At 32% of NAV, this is equal to the direct private holdings, but with holdings in 80 funds across 45 private equity managers, there's more diversification. Caledonia says it's often the only European investor in these vehicles, which are predominantly focused on buy-out deals in the North American mid-market segment.
Caledonia's stubborn discount
Aside from the goal of beating inflation by 3%-6%, Caledonia also uses the FTSE All-Share Total Return index as a benchmark for its performance. Over the past decade, the trust's NAV has beaten the consumer price index including housing (CPIH) by a factor of three times and matched the FTSE All-Share.
However, both NAV and share price have trailed the FTSE All-Share over three and five years, while the share price over five years has fallen short of its inflation-plus target. Management has tried a share split to improve liquidity and has been buying back stock to unlock value. Since 1 April, it has spent £30.6 million buying shares at an average discount of 37%. This has boosted NAV by 3.5p per share, but the discount remains stubbornly wide. More work is needed here.
That said, Caledonia's edge lies in its diversification. In an ever-rising market, its strategy is always going to lag. The test will come in the next crash, when we see if it outperforms investors who increasingly seem besotted with the AI bubble.
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