After 32 years as a professional investor and coming up to 13 of those managing the investment affairs of [the Finsbury Growth & Income trust], I find myself acknowledging the truth of Johnson’s statement. Everyone who faces the intellectual and emotional challenges of the capital markets needs to keep learning – and for me of late it’s been grappling with the implications of cloud computing. But despite this, I know that I benefit just as much from a periodic revisiting of the longstanding principles that Lindsell Train uses to run clients’ equity capital. Reminding ourselves of those principles keeps us on the straight and narrow.
So below, I review the ideas that shape the trust.
“If you want different investment performance, you must invest differently.” – Sir John Templeton
This is an unpalatable but incontrovertible truth. If you want different performance – for which I suppose read “better performance” – then you have to do something that others don’t.
We hope shareholders are happy with the different performance we have been able to deliver for them since 2001.
Performance of trust, sector and index since Jan 2001
Source: FE Analytics
But they mustn’t ever lose sight of the risks that we’ve had to take to achieve that return – we certainly don’t. The portfolio has at times performed very differently from its FTSE All Share benchmark and will do so again, for good or for ill, in the future.
Perhaps the most obvious difference about our approach is the unusually long time horizon we work with, as measured by levels of portfolio turnover. Last year, turnover for the Finsbury trust was under 3 per cent, which means that the average annual turnover since our appointment is less than 6 per cent.
We expect that the typical UK equity fund will experience annual turnover of closer to 100 per cent. We think it’s helpful – though not strictly scientific – to say if a given portfolio turnover is 100 per cent in a year, that implies the investment manager is taking on average a one-year time horizon for each holding.
By contrast, at less than 6 per cent per annum – as it is for Finsbury – the implication is that each position will be held for 17 years or longer. And consistent with that, note that many of our holdings are 13 years old and counting.
The one certain benefit of our relative inactivity – although there are uncertain disadvantages too – is that total running costs for Finsbury will tend to be lower, potentially much lower, than for other funds with a higher frequency of costly transactions.
“Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever.” – Warren Buffett
The explanation for our low turnover – and our choice of the type of company we invest in – is found in the above advice from Buffett.
Now, I always feel a bit guilty tabling this quote as an account of what we do. How can such a simple suggestion – even from the world’s greatest investor – be the basis of a credible and competitive investment philosophy?
But it is what it is and by and large it has worked – for Buffett obviously. In passing, let me assure you that it’s not so easy to identify, then stick with investments in even great companies. The pressure to “do something”, particularly when a great company is going through an inevitable dull patch, is intense.
The dull share performance of Unilever in 2013 is an example. We fortify ourselves during such episodes by remembering the comment below of another outstanding investor – Peter Lynch – who, just like Buffett, is famous for running his winners.
“Other investors invent arbitrary rules for when to sell.” – Peter Lynch
Lynch ran his winners, arguing that if a share has done well – at least for reasons that are explicable and not wholly speculative – then there is every reason to expect it to continue to do well (although always remembering that nothing goes up in a straight line).
He – and we – dispute the conventional wisdom that says: “It’s never wrong to take a profit.” It can be very wrong if by doing so you permanently reduce your interest in a great long-term investment.
Share prices of the best companies double, then double again and again over time. Locking into that observed propensity for wonderful businesses to compound wealth for their owners is at the heart of our approach: running your winners.
For instance, Diageo shares have doubled on their book cost for Finsbury shareholders and much more than doubled against the first price where we began to accumulate, back in 2003.
Performance of stock and index since Jan 2003
Source: FE Analytics
We have no doubt that Diageo shares will double again for you over time – as its cash flows grow and as the pricing power of Diageo’s brands protect you against monetary inflation.
“If a company’s products taste good, buy the shares.” – Vivien Bazalgette
We continue to find inspiration in our stock selection from this recommendation made by my former, much admired boss – Vivien Bazalgette.
We are drawn to companies whose products or services are regarded as irreplaceable by their customers. So, for instance, scientists and lawyers around the world have little option but to subscribe to Reed Elsevier’s services – they can’t do their work without them; the same is true for investment bank customers of Fidessa’s software.
But, as Vivien recognised, consumer loyalty to a tasty product is just as reliable and highly profitable. Finsbury shareholders can take comfort from knowing that their investment is being supported by peoples’ insatiable love of, for instance, Guinness, Johnnie Walker, IRN-BRU, Rubicon, Fuller's London Pride, Old Speckled Hen, Dr Pepper, Cadbury Dairy Milk, Oreos, Toblerone, Magnum ice cream, Hellman’s, Knorr and my own “that without which I cannot do”: Marmite.
These products will be enjoyed 30 years from now and, in an uncertain world, that is enough to mean the companies that own these brands are likely to be terrific investments over time.
“First, identify your great idea. Next, invest into it as much as you can possibly afford. Third, double the size of your holding, so you can no longer sleep at night. Finally – TELL EVERYONE ELSE ABOUT IT!” – Richard Thornton
We run a concentrated portfolio for Finsbury, with rarely more than 25 holdings. In part the inspiration and example for this policy comes from the man who gave me my break into the investment industry.
This was Richard Thornton, the “T” of GT Management, who hired me in 1981. Sadly Richard died in 2013, mourned and respected by colleagues as a rainmaker of the first rank, as well as a formidable stock market operator.
I’ve never forgotten Richard’s account – the quote above – to a group of then feckless graduate trainees – of his secret to investment success.
Richard knew that great investment opportunities are rare and must be backed with conviction, when you happen across one. He also knew how easy it is to suffer “diworseification”, from a lazy proliferation of “it seemed like a good idea at the time” holdings cluttered across a portfolio. So we stick to his advice and all the rest from our elders and betters.
Nick Train is the manager of the Finsbury Growth & Income trust. The views expressed here are his own.
