Foreign & Colonial Investment Trust Ord FRCL

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1 Page 1 of 7 Morningstar Research Report Text as of 18/04/2018, Data as of 14/09/2018 Morningstar Benchmark MSCI World NR USD Morningstar Category TM Global Large-Cap Blend Equity Last Closing Price GBP Last Closing NAV GBP Discount/Premium % Latest Published NAV Latest Published NAV Date 13/09/2018 Traded Currency GBX Yield 1.45 Dividend Frequency Quarterly Total Assets Mil 4,205.0 Net Assets Mil 3,864.3 Market Cap Mil 3,909.1 Net Gearing % 7 Avg Daily Shares Traded Mil (3 month) 0.32 Inception Date 01/01/ k 80k 60k 40k 20k 10k Returns Price NAV Category Index 4k 5 Discounts Premium 0 Discount -5 Average Line YTD Performance % Fund Price Fund NAV /- Category /- Benchmark Morningstar Analyst: David Holder, Senior Analyst The conduct of Morningstar's analysts is governed by Morningstar's Code of Ethics, Securities Trading and Disclosure Policy, and Morningstar Manager Research Integrity Policy. For information regarding conflicts of interest, please click Executive Summary People: Paul Niven was appointed in July 2014 having worked closely with former long-standing manager Jeremy Tigue. Niven brings extensive experience in asset allocation and manager selection. He outsources stock selection to regional specialists. Parent: Following a long period of change, BMO/F&C is in the process of finding its new identity. Board: The board is arguably over-resourced, at eight members with varying tenures. Chairman Simon Fraser brings extensive and deep investment experience, having been CIO at Fidelity International and holding other senior positions within the group. Process: The manager sets the asset-allocation strategy for the fund and delegates stock selection to his appointed regional specialists. These are both internal BMO managers and external managers where the expertise is lacking inhouse. Performance: Performance has been strong over the longer term and since Niven assumed control in July In addition, significant outperformance over the peer group has been accomplished with less risk. Fees: Fees are competitive at 0.365% on the market cap, which gives incentive to the manager to grow assets. However, the use of third-party funds, especially in private equity exposure, results in a higher ongoing charge from the very low headline figure. Role in Portfolio Core. The fund offers a well-diversified portfolio comprising predominantly quoted global equities with an element of private equity exposure. The fund is suitable as a core building block for portfolios and has demonstrated steady outperformance with lower risk. Modestly geared, it would be a good choice for a first-time investor seeking long-term global equity exposure. Morningstar Opinion 18 Apr 2018 In the year of the 150th anniversary of the creation of this venerable institution, we are pleased to say that investors remain in very safe hands with Foreign & Colonial Investment Trust. The fund's objective is to grow both capital and income, and in both respects it has delivered. In particular, the fund has paid 47 years of consecutive dividend increases with the expectation that this will continue. Paul Niven joined F&C in 1996; he chairs the investment policy group, has headed the Multi Asset solutions team since 2002, and is head of asset allocation and implementation at BMO/F&C. This background makes him an exceptional fit for this fund with its emphasis on global asset allocation, manager oversight, and allocation to private equity investments. Private equity differentiates this trust from its peers. The trust has historically used HarbourVest and Pantheon as agents for access to these funds, which incurs substantial costs and is inflexible in that funds are drawn down and paid back at the manager's discretion as part of pooled investor commitments. In future, the board and the manager are emphasising the in-house resources at BMO to access private equity investments on better and more flexible terms; in 2016, an initial direct investment was made. The fee structure here is transparent and ultimately competitive, with ongoing charges of some 0.79%. There is limited use of third-party managers, and exposure to external private equity managers who typically charge relatively high fees is reducing. Overall, the fees investors pay here are competitive versus the peer group. The board here numbers eight, which is large, but it brings extensive investment experience to bear on the management of the company. The board is very conscious of ensuring that the trust remains valid and attractive for existing and new investors in an increasingly complex financial world. Chaired by Simon Fraser since May 2010, it is exploring additional ways to market the trust in the digital age, which should broaden the appeal of what is a core investment proposition. Niven has proven to be an assured pair of hands for the management of this trust. His experience in asset allocation and manager selection is extremely relevant here; in addition, he can draw upon considerable resources throughout the BMO group. Our conviction remains undiminished and we maintain our of Silver.

2 Page 2 of 7 Morningstar Research Report Text as of 18/04/2018, Data as of 14/09/2018 People Manager Paul Niven Manager Start 01/07/2014 Avg. Manager Tenure 4.2 Years Other Funds Managed The responsibility for management was passed from the long-standing Jeremy Tigue to Paul Niven in July Niven has been with the firm throughout its corporate changes, having joined in 1996, and he is chairman of investment and asset allocation committee, tactical asset allocation, implementation committee, and past chair of the manager selection committee and has been responsible for the management of multi-asset solutions since Niven is part of the eightman BMO/F&C multi-asset team, which has an average tenure of 20 years' experience. He then utilises a number of regional in-house specialists for stock selection but will also use third-party managers where expertise is lacking--for example, Barrow Hanley and T. Rowe Price for US exposure. Private equity exposure has historically been outsourced via HarbourVest and Pantheon. It looks likely these partners will be reduced at the margin as cash is allocated to in-house expertise. This also serves to limit costs and increase flexibility. There is also an allocation to the multi-manager team, led by the experienced duo of Rob Burdett and Gary Potter, for investment in third-party equity funds of their choosing. Niven speaks frequently to each of his underlying managers and has real time look-through to each of the individual sleeves. In addition, discussions with the multi-manager team are useful in unearthing external managers of interest. Parent Fund Advisor Domicile Website F&C Asset Management /F&C Management Ltd UK F&C Investments is beginning to find a new identity as a part of BMO Global Asset Management. Following several years of corporate structural change, including a series of mergers and acquisitions and finally being taken over itself, F&C now seems to have a stable corporate outlook. The firm was formed out of a merger between Isis Asset Management and F&C Group in In July 2009, the business demerged from former parent Friends Provident and was listed on the London Stock Exchange. In September 2010, F&C acquired the investment boutique Thames River Capital, and in early 2011, activist investor Sherborne built a significant stake in the business and embarked on a strategic review of the firm. As a result, F&C's chairman Nick MacAndrew was ousted and significant cost-cutting measures were announced, having an impact most notably on back-office operations. In May 2014, BMO Financial acquired the company and folded it into BMO Global Asset Management. Board of Directors Tender Offer Buyback Authorization No Yes The fund's board is one of the largest on an investment trust and comprises eight. The average tenure is approaching six years, and although there is no firm rule as to length of board tenure, it is reviewed around 10 years' service. The board bolstered its investment management experience through the appointments of Sarah Arkle, former CIO of Threadneedle; Nick Moakes, former Asian and emerging-markets equity director at Black- Rock; and Francesca Ecsery, who brings marketing industry experience. In addition, Moakes has experience within private equity, something that is salient here. The most recent appointment in September 2017 was Beatrice Holland, who brings extensive asset management experience from her time with Credit Suisse Asset Management in Global Fixed Income and equity analysis at Morgan Grenfell Asset Management. It's encouraging to see that all (bar the most recent appointment) directors are shareholders in the fund, as we like to see alignment of interests with shareholders. The board meets at least eight times per year on a formal basis, as well as ad hoc informal meetings and an annual strategy meeting. Simon Fraser has been in the chairman's role since May 2010; in the year of his appointment he hired an external consultant to help him review the board's effectiveness. Hence, we've seen a number of recent changes to the fund such as the amendment to the fee structure, which should better serve investors.

3 Page 3 of 7 Morningstar Research Report Text as of 18/04/2018, Data as of 14/09/2018 Process: Investment Approach Investment Objective: To secure long-term growth in capital and income through a policy of investing primarily in an internationally diversified portfolio of publicly listed equities, unlisted securities and private equity, with the use of gearing. Hedging Policy Tactical Use of Cash Process: Portfolio Positioning Morningstar Holdings Based Style Map Deep Val Core Val Core Core Grw High Grw Giant Large Mid Small Micro NULL No Paul Niven is responsible for setting the asset-allocation strategy and gearing decisions, with stock selection responsibilities delegated to colleagues or external managers. Niven's role is to monitor the overall portfolio from a risk perspective to ensure the sector biases match his macro thinking. He also keeps a keen eye to the income characteristics of the portfolio and the style and market-cap biases within the portfolio. He will scrutinise and manage private equity opportunities as they arise. Given his extensive experience in chairing the asset-allocation and implementation committees at BMO/F&C, he is ideally placed to carry out this role. The regional managers blend top-down analysis with bottom-up fundamental screening in their respective universes. Historically, the fund's benchmark was 40% UK/60% World ex UK. The board changed this on 1 Jan 2013 to the FTSE All-World Index, reflecting a more global asset allocation; hence, the UK weighting has reduced to around 4% from 30% (April 2018). Private equity holdings add an element of liquidity risk, but this exposure is reducing as those businesses mature and cash is returned. Paul Niven, in conjunction with the board, aims for a 5%-15% range for this exposure (currently 6.3%). There is an acknowledgement that Two global equity subportfolios have been created, one with a focus on income (initiated in 2013) accounting for 10.6% of assets and a global multimanager portfolio (initiated in 2014) currently with 7.8% of the trust's assets (December 2017). The aim of these portfolios is to limit dependence on the UK (exposure has significantly reduced in recent years) for income generation and to increase portfolio diversification by accessing burgeoning external fund management talent. These portfolios are managed by the quant and multi-manager teams, respectively, at BMO/F&C. The emerging markets element of the portfolio, which accounts for 11.1% of assets, is managed by LGM, which is a BMO owned entity. the trust has been overexposed to private equity at times, which the board is keen not to repeat. The portfolio is slighter lower down the marketcap scale than the peer group but inhabits the core ground of the Morningstar Style Box. There is a decent allocation to higher-growth markets such as smaller companies, Asia, and emerging markets than the benchmark and peers, which is pleasing to see within the context of a diversified but core portfolio. World Regions Assets % Greater Europe United Kingdom 6.18 Europe-Developed Europe-Emerging 0.65 Africa/Middle East 1.72 Americas North America Latin America 1.71 Greater Asia Japan Australasia 0.35 Asia-Developed 2.93 Asia-Emerging 7.52 Not Classified 0.00 Asset Allocation Top 10 Holdings 31/07/2018 % Assets Long Short Net Cash Equity Bond Other % Assets Amazon.com Inc 2.04 Microsoft Corp 1.39 UnitedHealth Group Inc 1.06 Anthem Inc 1.03 Alphabet Inc C 0.82 Facebook Inc A 0.79 Booking Holdings Inc 0.73 JPMorgan Chase & Co 0.73 Novo Nordisk A/S B 0.71 Utilico Emerging Markets Ord 0.71 Sector Weightings % Equity h Cyclical 44.3 r Basic Materials 5.1 t Consumer Cyclical 16.1 y Financial Services 20.6 u Real Estate 2.4 j Sensitive 33.5 i Communication Services 1.8 o Energy 5.0 p Industrials 11.3 a Technology 15.4 k Defensive 22.2 s Consumer Defensive 8.7 d Healthcare 12.3 f Utilities 1.2

4 Page 4 of 7 Morningstar Research Report Text as of 18/04/2018, Data as of 14/09/2018 NAV Performance Analysis Data as of Trailing Returns Price Total Rtn % +/- Bmark 3 month Month Year Year Ann Year Ann The trust has significantly outperformed peers over multiple time periods. From Paul Niven's appointment here in July 2014 to April 2018, the fund has returned annualised NAV growth of 14%, 1 percentage point ahead of the FTSE World Index and some 3.8 percentage points ahead of peers. Performance through 2017 was strong at 17%, comfortably ahead of comparators. The US allocation performed well, with T Rowe Price especially strong, as was the allocation to Global Small Cap (managed in-house). The fund's European managers were also ahead, but the UK element, whilst strong in absolute terms, modestly lagged the FTSE World Index. The private equity allocation also lagged, returning 5.9%. Over a longer five-year view, Japanese performance has been notably strong, whilst most areas except for emerging markets outperformed local comparators. Trailing Returns NAV Total Rtn % +/- Bmark +/- Cat %Rnk In Cat 3 month Month Year Year Ann Year Ann Calendar Total Returns Fund(price) Fund(NAV) YTD 0 Discount / Premium Data as of Discount / Premium % 6 Mo 1Yr 3Yr High Average Low Z-Statistic The fund's 10-year average discount is around 9% but has ranged from low mid-double digits to very low single digits. Since 2005 the board has targeted an average discount of 10%, which was amended to 7.5% in May There is a stated objective to continue to close the discount, and the company is active buying back shares into treasury, which will only be reissued at a premium to NAV to be accretive to NAV. There are currently some 19.6 million shares held in treasury, around 3.6% of the issued share capital. Over 4 million shares were bought back in to treasury in The company has lately seen a significant rerating given good performance and a heightened profile; as at April 2018 the discount was 2%. Risk & Return Data as of Morningstar Rating Return Risk Rating 3 Year Above Avg Avg 5 Year High Below Avg Q 10 Year Above Avg Avg Overall Above Avg Avg The fund's standard deviation (a statistical measure of risk) tends to be marginally higher than peers but less than the index, whilst its beta, or sensitivity to market movements, is at or below that of the market and below that of peers. The fund's risk-adjusted returns, as evidenced by its Sharpe ratio, are strong and significantly above those of the global large-blend equity Morningstar Category. Tracking error is modestly greater than the peer group's but relatively low at 2%- 3%. Historically the fund has tended to perform well in up markets and lose a little less in down markets, as shown by its upside/downside-capture ratios. The fund is diversified with around 450 holdings and holds some third-party funds. The modest allocation to private equity is an additional source of diversification and returns but comes with its own risks. Volatility Ratios 3 Yr NAV 5 Yr NAV Standard Deviation Mean Sharpe Ratio Sortino Ratio Risk vs Index 3 Year 5 Year Alpha NAV Beta NAV R-Squared NAV Treynor Ratio NAV

5 Page 5 of 7 Morningstar Research Report Text as of 18/04/2018, Data as of 14/09/2018 Fees Management Fee % 0.37 Ongoing Charge ex Perf Fee % 0.52 Fees are competitive at this fund, and it has a cost advantage when compared with the global large-blend equity category median. From the start of 2011, F&C has been taking an annual management fee of 0.365% of the fund's market capitalisation on a monthly basis, which they feel aligns investor and manager interests. The previous performance fee was scrapped in 2011 as a result of a board review of charges. The new arrangement replaced a fixed fee of GBP 6.7 million and two separate performance fees, which resulted in a higher total cost. The ongoing charges for fiscal 2017 were 0.79% (2016: 0.79%). The board has recently carried out a review as to the suitability of the fee structure and is comfortable that it represents good value for investors. We would tend to agree although there is always room for improvement in this regard. Gearing Total Assets Mil 4,205.0 Net Assets Mil 3,864.3 Dividends Dividend History YTD Dividend Special Dividend Total Investors here can expect gearing to be 0-20%; given the global exposure here, it is in the form of various multicurrency facilities. There is a revolving credit facility of GBP 50 million at 1.12%, a facility maturing in April 2019 of some USD 80 million (4%), and JPY 6,600 million (2.5%). In July 2015, the manager took the opportunity to secure seven-year borrowing of GBP 50 million (denominated in EUR) at a rate of 1.69%. In addition, the fund has borrowed GBP 25 million at 2.8% maturing in 2028 and GBP 50 million at 3.16% maturing in There is a small perpetual of GBP 0.6 million at 4.25%. Most recently, the company secured a 30-year facility for GBP 75 million (2.92%) to be drawn in May Gross outstanding debt is GBP 296 million. The borrowing arrangements here give the manager a good blend of short- and longer-term debt at competitive rates; as at the end of December 2017, the blended average cost of borrowing was 2.8%. Currently net gearing is 3% (April 2018). In 2013 the board moved to a quarterly payment cycle for the annual dividend, rather than semiannual. Income is an important feature of this fund and a key objective for the fund is growth in both capital and income. The board aims to pay a rising dividend in absolute terms each year and has achieved this for 47 consecutive years, which is an impressive feat, and speaks to the longevity of investment approach pursued here on behalf of investors. At fiscal 2017 the fund declared dividends of 10.4p (2016:9.85p) per share on revenues of 11.67p (2016:10.57p). The board has income revenue reserves of 16.8p or around 19 months' worth of income at the current level of dividend. It is the board's intention that the annual dividend is consistently covered by earnings, but will dip into the reserves to allow the manager flexibility to meet the investment objective through the various phases of the economic cycle. The fund currently yields 1.66% (April 2018).

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