Finsbury Growth & Income Trust has beaten the market in nine out of the past 10 years
Thursday 14 Feb 2019 Author: Daniel Coatsworth

Fund manager Nick Train is regularly in the spotlight thanks to the popularity of funds run by his investment company Lindsell Train such as Finsbury Growth & Income Trust (FGT) which has outperformed the FTSE All-Share in nine of the past 10 years.

Despite generating significant returns for investors, Train’s fame also makes him a target for certain individuals who are waiting for him and other household names in the industry to trip up. Just look at how Neil Woodford has gone from hero to zero in the eyes of many investors.

The more famous you get, the greater the pressure not to make any mistakes. A few years ago Train came under fire for his continued support of education group Pearson (PSON) amid a series of profit warnings, although the stock’s recent share price recovery has somewhat silenced these critics.

Train has also received his share of criticism for seemingly doing very little and making barely any new investments despite continuing to charge a fee to investors for his service.

This low portfolio turnover hasn’t stopped an avid group of fans sticking with his funds and their patience is being rewarded.

‘If a strategy is performing, does it matter if there is not much activity driving that performance?’ he says.

‘In the end all that matters is what the returns are like. I guess our investors are patient because performance has fortunately been strong. If performance tails off, which it will do one day, then we’ll find out how patient people are.’

Running an investment fund involves more than simply picking stocks to buy. It is also about knowing which ones to keep through good times and bad, and which ones to avoid. These decisions can involve detailed work, even though it may result in status quo in terms of the portfolio’s structure.

The Lindsell Train style is to pick high-quality stocks that generate large amounts of cash, pay a growing stream of dividends, and have the capability to adapt to changing market conditions.

Portfolios are concentrated with Train focusing only on his best ideas. ‘Rather than holding 40 stocks where 25 are strong and 15 might or might not have a rebound, we prefer to own the 20 best of them,’ says Nick Train.

‘It is easy in this business to dilute your best ideas because there always seems to be another idea just around the corner. Earlier in my career I was guilty of this… you’re not paying attention and suddenly you end up with 70 holdings. We’ve always wanted to focus, focus, focus.’

This approach is higher risk as problems with one or two holdings would be felt harder than a more diversified portfolio, yet the rewards would also be greater when individual stocks do well as their performance wouldn’t be heavily diluted by other holdings.

‘We felt our best shot at generating returns that keep us in business, and our clients want, is to cut back to the best ideas.’

TOPPING UP EXISTING HOLDINGS

Stocks like Diageo (DGE), London Stock Exchange (LSE) and RELX (REL) have helped to drive Finsbury Growth & Income’s performance in recent months with the trust coming out a sticky patch seen in the final quarter of 2018.

The broader market was also weak in this period which presented Train with an opportunity to deploy some of the trust’s spare cash.

‘We had a decision: do we want to initiate a new holding or do we add to some of our existing positions that had been weak? There was plenty to add to existing holdings when prices had come back a long way. For example, we bought a lot more Burberry (BRBY) last year as its share price had gone from £23 to just under £17. That’s a big downward move.

‘In this case, I didn’t need to find a new idea, I could just buy more of the existing and very good idea at a much lower price,’ he explains.

As there is often a good reason why a share price is weak, Train and his team would still need to reappraise the investment case when topping up existing holdings to avoid buying something that has become less attractive. Even maintaining a position amid bad news also needs nerves of steel.

MAINTAINING FOCUS

‘Being willing to sit through periods of poor performance isn’t hard work – hard work is what bin men and cleaners do – but it is emotionally wrenching,’ he says.

‘What makes the current equity market environment so challenging is trying to understand why something is going down.

‘Is it a cyclical phenomenon, a temporarily out-of-fashion phenomenon or something to do with a fundamental change in an industry or business brought about by technology change?

‘That’s what worries Mike (fund manager and business partner Michael Lindsell) and I the most. Everybody can see how rapidly technology is changing things, sometimes for the better, sometimes definitely for the worse.’

One example of a company facing this situation is Schroders (SDR) which accounts for 6.4% of Finsbury Growth & Income’s portfolio. Train says asset managers may find it harder to make money in the future if big pension funds shift their money to passive funds. However, he topped up his holding in Schroders last quarter while the market was weak.

‘It is a fine business which has the most amazingly conservative balance sheet and generates a huge amount of free cash flow.

‘There is a question as to whether active fund management can ever be as good as it was for the last 30 years because of technology change. We think Schroders has enough resources and avenues for growth so it can offset those secular challenges.’

A DIFFERENT TAKE ON TECH

The fund manager often talks about technology yet his portfolios are a million miles away from tech funds. You’re more likely to see a food seller in his holdings than lots of software or hardware business. 

One position is FTSE 100 media group RELX, previously known as Reed Elsevier, which has made a shift from printing material to providing it digitally.

Scientists, lawyers or people in the insurance industry subscribe to the tools and information provided by RELX as they are seen as essential to doing their job.

‘There are two dynamics: first is the underlying growth rate of the scientific, legal and insurance communities which for many decades have grown ahead of GDP growth,’ explains Train.

‘On top, that transition from providing information in the form of paper, books or journals to providing it via software as a service has done two things. First, it dramatically reduced the cost of delivering the service. And it has massively increased the utility of the service to the customer as it is much easier to search online than go to a bookcase of dusty journals to find information.’

Train says RELX has a major opportunity to sell additional software services and tools to its already captive audience base, which is also growing. ‘It seems like a deeply entrenched business,’ he adds.

LEARNING FROM THE BEST

Fundamentally Train looks for companies with high returns on invested capital with low capital requirements. This is also something central to the investment strategy of Warren Buffett, someone to whom Train holds in high regard.

Part of the Lindsell Train process is for the team to spend a lot of time reading biographies of famous investors, industries and how-to books on investment.

‘I’m sure reading has made us better investors. And there are a handful of books which I look back over my career and say that book changed the way I think about investing and for the better.’

For example, Robert Hagstrom’s book The Warren Buffett Way had a ‘massive impact’ on Train when it was published in the 1990s, he says.

‘Buffett and (his partner Charlie) Munger are the reason Lindsell Train is in business. We have a huge debt of gratitude. Their track record is unbelievable but at the same time their transparency and willingness to share the principles that have allowed them to achieve that track record is such an act of generosity.’


FINSBURY GROWTH & INCOME TRUST

SHARES SAYS: Nick Train is a respected fund manager and one of the best in his field. This investment trust would suit someone who is patient and wants to have exposure to high quality companies. You should expect to generate the bulk of your returns through capital gains as the yield is only 1.9% at present. The trust will give you exposure to such names as Unilever (ULVR), Mondelez and Heineken. Buy at 787p.

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