Finsbury Growth & Income

Finsbury growth

Finsbury Growth & Income has a highly concentrated 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, a major shareholder in the trust, 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 which have shown themselves to be resilient over various cycles and exhibit steady earnings growth over the long term.

He runs a highly-concentrated portfolio which currently stands at just 25 stocks and Nick is well known 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 90.6%, beating the AIC UK Equity Income sector by a considerable margin and doubling the returns of the FTSE All Share. It’s returns over the longer term have been equally as strong, with the trust having beaten the index in nine out of the past ten calendar years.

Finsbury Growth & Income has a rigorous discount control mechanism. Strong demand for the shares has allowed the board to raise c.£70m of assets over the course of 2017.

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 25 stocks, with the top 10 holdings accounting for c.75% of total NAV - making it one of the most concentrated trusts in the market.

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, dominates the portfolio – making up a combined 65.7% of its assets. These are often very well-established names with multi-decade or even centuries of successful history – including Burberry, RELX and Unilever. Financials (e.g. Hargreaves Lansdown or London Stock Exchange) are the second theme. Whilst not 'cyclicals' in the traditional sense, the manager views these as a useful market proxy - performing well when the market itself is in positive spirits. Companies which, via technology, are radically improving productivity, and opening up entirely new products and services to their customer base are the third theme - Sage Group is an example.

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

Asset allocation

Asset allocation

Source: Finsbury Growth & Income

Technology remains the smallest sector allocation. However, this isn’t to say that the trust isn’t looking to participate in the bull market being driven by digital technology. Nick is increasingly thinking about the technology sector, and uses Gillette’s poor performance in the USA as an example of how the internet is changing the power of the large brands.

Rather than investing in the specialist technology companies, which would not typically be considered their expert area, they look for the companies that will benefit from technological improvements. An example that Nick 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 they 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, which 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 ten, 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 this year are an opportunity to increase his investment. With fair reason to be cautious, Mondelez has been adversely affected by the general pessimism of package food companies, in particular in the US. On the other hand, Schroders has been weak due to unhelpful markets and the questions over active management.

Nick has a clear focus on the long term, and thinks the fundamental strength of a business should be all that drives a stock 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 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.

Peer group

The third largest trust in the UK Equity Income sector, Finsbury Growth & Income is a highly differentiated portfolio compared to the rest of the AIC UK Equity Income sector. With only 25 stocks in the portfolio, the trust is comfortably the most concentrated across the UK equity income sector. Relative to its closed ended peers, the trust has delivered exceptional returns, ranking in the top five trusts over both the short term (six months) and longer periods (one, three and five years). Additionally, the trust has almost double the second greatest level of alpha (a statistic which demonstrates the value a manager has added) across the 23 trusts, achieving 6% p.a.

Peer group

*excluding trusts with insufficient track record / data

Source: Morningstar | 01/06/2013 - 31/05/2018

Gearing

Gearing (borrowings used to fund investments) 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.

Nick avoids using gearing because, in his own words, ‘it helps him sleep better at night’. The concentrated nature of the portfolio, he argues, make gearing less of a necessity than it might be for a more diversified portfolio - particularly for 'closet tracker' style mandates.

Gearing

Source: Morningstar

Returns

The trust has one of the strongest 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 90.6%, compared to returns of 45.4% from the FTSE All Share over that period.

Performance

Source: Morningstar

Finsbury Growth & Income has beaten the index in nine out of the past ten 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 four percentage points. Though 2016 did prove to be a relatively muted one for the trust, it has returned back to outperforming, beating the benchmark by 8.6% and 3.1% over 2017 and 2018 (to the end of May) respectively.

Nick doesn’t pay much heed to the macro, focusing instead on finding undervalued growth companies that are cash generative, and can deliver consistently strong returns. Nick recognises that over the past 18 years the trust has underperformed during periods of rising interest rates, rising inflation and accelerating economic growth. During these periods where rates are rising value and cyclical stocks, which the trust doesn’t hold, tend to be the stronger performers but as the manager points out we have in the last two years seen a number of stocks of this type - Rio Tinto being a good example - do well, while the trust has continued to generate strong returns.

2018 has been good so far for the trust. In May alone there were three double digit gainers to the portfolio of only 25. Burberry, Remy Cointreau and Manchester United, the latter up over 16%, all contributed significantly, and Nick believes the common denominator is the fact all three are global, elite brands with a strong presence in Asia.

Returns

Source: Morningstar

Dividend

As its name suggests, the trust aims to provide both capital and income growth. To that end 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 that, 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. The board has so far increased the first dividend for the 2018 financial year to 7.2p, from 6.8p and representing an increase of 5.9%.

As of the 2018 half year report, revenue reserve cover for the trust stands at 0.73x, which is above average for the sector. Its yield is by some margin the lowest in the sector at 1.8%, though, which is partly due to the trust’s strong share price appreciation over recent years.

Management

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

Lindsell Train won the mandate for this trust in 2001. In total, the team run £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 though 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.

During the past six months (to the end of March) 6,750,000 new shares were issued raising £50.6m. Since the end of the half year, to 18 May 2018 , a further 1,635,000 new shares have been issued raising £12.4m.

Discount

Source: Morningstar

Charges

Finsbury Growth & Income has an ongoing charges figure (OCF) figure of 0.68%, six basis points above the average for the UK Equity Income peer group according to data from Morningstar. However, this figure has decreased dramatically over the past six months, dropping from 0.74%. The trust pays a performance fee to Lindsell Train.

July 2018

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