Nick Train resists the temptation to change his style after weak period
Investment styles don’t work all the time and periods of underperformance should be expected. How fund managers navigate such periods can be very instructive and investors might learn a lot from their actions.
Style drift is not uncommon during difficult times as managers attempt to limit the damage to short-term performance. To his credit, Nick Train, manager of the popular Finsbury Growth & Income Trust (FGT), has demonstrated a steadfast commitment to the same investment approach which has brought so much success. He certainly cannot be accused of style drift.
In the trust’s half-year report, Train apologised for his failure to deliver ‘acceptable’ performance over ‘what is now no trivial period’.
The period of poor performance now stretches back for 18 months with the trust’s net asset value gaining 6.9% compared with 31.6% for the FTSE All-Share index.
This has resulted in the trust trading at the widest discount to net asset value in over a decade at 8%. The board has been buying shares to control the discount.
Train is resolute that his investment philosophy of running a concentrated, low turnover portfolio, comprising shares in outstanding companies held for the very long term remains the best way to deliver returns for shareholders.
He argues changing approach ‘would be a disservice to shareholders’, adding: ‘It would dilute or even take away the opportunity for them to invest into a distinctive and disciplined investment strategy.’
Finsbury Growth & Income Trust has certainly proved its worth over long periods, delivering share price total returns of 192% over 10 years compared with 109% for the FTSE-All Share, according to FE Fundinfo.
Numis argues investors should look through recent underperformance which it says has been driven by ‘significant market gyrations through the Covid-19 reopening, and now the impact of an inflationary/rising rate environment’. It adds: ‘Given the unique investment process, we would expect performance to be different to the benchmark.’
One of the important financial characteristics for Train in identifying outstanding companies is their ability to sustain at least a low double-digit return on capital for long periods of time. This metric compares a firm’s net income as a percentage to the capital it needs to run the business.
A good rule of thumb, explains Train, is that over very long periods, average shareholder returns should mirror the return on capital achieved by the companies in the portfolio.
Train has calculated the weighted average return on capital of all the holdings in the portfolio is north of 15%. He believes the Finsbury Growth & Income Trust portfolio offers ‘attractive return on capital delivered by companies with long histories of stable, high returns and critically with good reason to think those returns will be maintained over time’.