Finsbury Growth & Income

Wednesday, January 9, 2019 - 15:45

Finsbury growth

Finsbury Growth & Income is a highly-concentrated investment trust with a portfolio of mainly UK stocks, aiming to achieve capital and income growth in excess of that produced by the FTSE All-Share.

Fund manager Nick Train ignores the benchmark entirely - investing in companies which he believes will perform well regardless of their weighting in the index. The trust tends to invest in companies that have been resilient over various cycles and exhibit steady earnings growth over the long term.

He runs a highly-concentrated portfolio which currently stands at just 24 stocks and Nick is renowned for his very long-term, low-turnover approach. For example, the most recent addition to the portfolio was Manchester United last summer, and prior to this he had only added one new stock to the portfolio over the past four years. This, along with his focus on high quality, cash generative companies with strong franchises means his portfolio is highly differentiated to his peers in the AIC UK Equity Income sector.

Over the past five years (to the end of May) the trust has delivered an NAV return of 73%, beating the AIC UK Equity Income sector by a considerable margin and doubling the returns of the FTSE All Share. Its returns over the longer term have been equally as strong, with the trust having beaten the index in nine out of the past 10 calendar years.

The premium has fallen to around 0.5% in the recent market sell-off, with the board committed to buying back shares if the trust moves to a 5% discount.

Portfolio

Finsbury Growth & Income Trust has a highly concentrated portfolio of mainly UK companies, managed with an ultra-high conviction and low turnover stock picking approach by Lindsell Train co-founder Nick Train. The portfolio is made up of just 24 stocks, with the top 10 holdings accounting for c.80% of total NAV. Aside from Lindsell Train investment trust, it’s pretty much the most concentrated “mainstream” trust out there.

Top 10 holdings

Asset allocation

Source: Finsbury income and growth

Designed to offer capital and income growth and total returns in excess of the FTSE All Share, the portfolio is dominated by three themes. The first theme, consumer goods and services companies, is central to the portfolio – making up a combined 67.2% of its assets. Its constituents are often very well-established names with multi-decade or even centuries of success – including Burberry, RELX and Unilever. Financials (e.g. Hargreaves Lansdown or London Stock Exchange), which the manager views as market proxies – performing well when the market itself performs well - are the second theme; and companies which via technology are radically improving productivity and opening up entirely new products and services to their customer base, are the third, including Sage Group for example.

As such, and as the chart below shows, the portfolio is made up of just four sectors (in the traditional sense).

Asset allocation

Asset allocation

Source: Finsbury Growth & Income

Technology remains the smallest sector allocation. However, Nick is not disinterested in the bull market being driven by digital technology. He uses Gillette’s poor performance in the USA as an example of how the internet is changing the power of the large brands, something he is increasingly focused on.

Rather than investing in specialist technology companies, which would not typically be considered his expert area, Nick looks look for the companies that will benefit from technological improvements. An example that he gave in our most recent meeting was Manchester United. Due to the large revenue generated from gaming rights, should VR continue to grow, he believes the club could be a huge beneficiary.

Nick has a highly disciplined approach to stock selection and his ‘wish list’ is made up of a small number of market-leading companies, which he will not buy unless he can do so at the right valuation. This does not happen often, so portfolio turnover is very low. In fact, until last summer, Manchester United was the only new name that had been added to the portfolio in four years. Since the start of 2018, no new additions have been made, only further increases to existing holdings. Within the top 10, the largest additions have been made to Burberry - as successful turnaround company Groupe Bruxelles Lambert increased their stake - London Stock Exchange, Mondelez and Schroders. Having owned them for many years, Nick feels, in particular, that the investment propositions at Mondelez and Schroders are attractive and the weak share prices in 2018 have been opportunities to increase his investments. With fair reason to be cautious, Mondelez has been adversely affected by the general pessimism of packaged food companies, in particular in the US. On the other hand, Schroders has been weak due to unhelpful markets and questions over the viability active management.

Nick has a clear focus on the long term, and thinks the fundamental strength of a business should be all that drives an investment decision. Macro factors are impossible to predict, and their outcomes even more so, he says, and cannot be used to drive a meaningful investment process. As such, he pays very little attention to the macro environment. Whilst the portfolio is predominantly invested in UK equities, the manager has latitude to invest up to 20% of the trust on a global basis.

Gearing

Gearing is employed on a structural basis to enhance returns, and is currently in the form of a three-year revolving facility for a maximum of £75m with an additional £25m available if required. The net gearing figure is currently 2%, having fallen over recent years as the size of the trust has grown.

When asking Nick why he chooses not to increase the gearing, particularly if he does not a take a macro view, he simply responded ‘it helps him sleep better at night’. Expanding upon this, he recognised the concentrated nature of the portfolio, and stated that the trust doesn’t need to add leverage through gearing like some “closet trackers” might.

Gearing

Source: Morningstar

Returns

The trust has one of the best track records of consistent outperformance in the AIC UK Equity Income sector.

This boils down to Nick’s approach. Firstly, his exposure to large-cap defensive companies with reliable earnings like Unilever and Diageo means the trust has offered protection in falling markets in the past. This positioning has also suited the market rally over the past seven years or so, as investors have preferred less economically-sensitive dividend paying stocks in a world where economic growth has remained subdued, inflation has stayed stubbornly low and central banks have driven bond yields to record low levels via ultra-loose monetary policies.

Performance

Source: Morningstar

Secondly, though, his exposure to high growth mid and small-caps also means the trust has been able to keep pace with strongly rising markets. Over five years to the end of May 2018, the trust has delivered an NAV total return of 73.2%, compared to returns of 30.6% from the FTSE All Share.

Finsbury Growth & Income has beaten the index in nine out of the past 10 years, outperforming in every calendar year since the global financial crisis except 2016 (a difficult year for all active managers thanks to the natural resources “dead-cat” bounce) when it lagged the FTSE All Share by 4%. Though 2016 did prove to be a relatively muted year for the trust, it has returned to outperformance, beating the benchmark by 8.6% and 3.1% over 2017 and 2018 (to the end of May) respectively.

Returns

Source: Morningstar

Nick doesn’t like to take macroeconomic views, as he aims to invest in undervalued growth companies that are cash generative enough to consistently deliver strong returns. With this said, he recognises that over the past 18 years the trust has underperformed during periods of rising interest rates, rising inflation and accelerating economic growth. In this environment the general consensus is that value and cyclical stocks will be the stronger performers, which the trust does not hold. However, the past two years have seen strong returns for FGT, while Rio Tinto, a very cyclical stock, doubled in price. This shows that this rule of thumb doesn’t necessarily apply, and the trust can continue to perform strongly in periods that one might not expect it to.

The trust has underperformed the index since global stock markets began to fall in September of this year. In this period, growth has underperformed at the expense of value, and higher-rated stocks have suffered the most. Nick’s portfolio is more expensive than the market and so has been hit hard. Stocks with emerging market exposure have also been hurt more than the market, and FGT is invested in some of these also.

Performance

Source: Morningstar

Dividend

The trust aims to grow capital and income. However, given the focus on growth and the strong share price performance of many stocks it holds, the trust only yields 2%.

The board has the aim of providing a progressive dividend. In this they have largely been successful, although the company had a difficult period during 2010, suffering from Lloyds Bank being prevented from paying a dividend on its preference shares. As such, dividends during 2010 and 2011 were below the level paid in 2009. Other than then, the board has paid a rising level of dividends.

Dividend

Source: Finsbury Growth & Income

Although coming from a lower base, the trust has delivered the one of strongest dividend growth rates in the sector over five years (7.33%) and as it has paid a covered dividend in each of the past six years, the board has been able to build up sizeable revenue reserves. In the financial year ending September 2018, the trust has paid two interim dividends so far, totalling 15.3p per share, a 7.7% increase on last year’s 14.2p.

As of the 2018 half year report, revenue reserve cover for the trust stood at 0.73x, which is above average for the sector.

Management

Fund manager Nick Train co-founded Lindsell Train, the management company behind the trust, in 2000, after a 20-year investment career, most of which was spent at GT before it was acquired by Invesco.

Lindsell Train won the mandate for this trust in 2001. In total, the team runs £2.3bn worth of dedicated UK funds, alongside a Japanese strategy (led by Michael Lindsell) and a global strategy that both founders work on. Lindsell Train is 73% owned by the two founders and 2.5% owned by other staff; the balance is owned by Lindsell Train Investment Trust.

Discount

The trust has a rigorous discount control mechanism, which means that the shares should trade between a 5% discount and a modest premium of 2%. The board has committed to buy back shares at around 5% and holds them in treasury. As the graph below illustrates, this has had the effect of minimising discount volatility – certainly relative to the average seen across the AIC UK Equity Income sector.

Over more recent times, the trust has been growing gently through the issuance of shares at a slight premium to NAV. Unusually, the trust has permission to issue shares at a discount to NAV - and has done so in the past - if the discount at which it is issuing the shares is narrower than the discount at which they are trading at the time. However, this only applies to shares held in treasury, not 'new' shares.

Although the premium has fallen to under 1% in the sell off since September, the trust remains highly-rated relative to its peers thanks to its long-term track record and exposure to global growth stocks.

Discount

Source: Morningstar

Charges

Finsbury Growth & Income has an ongoing charges figure (OCF) figure of 0.7%, putting it below the 0.81% average for UK equity income trusts. The management fee is 0.6% on the first £1bn of market cap and 0.54% thereafter. Frostrow Capital receives one third of this and Lindsell Train two thirds.

December 2018

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