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Finsbury or Temple Bar: Which equity income trust is right for you?

06 August 2014

FE Trustnet asks which of the two largest and most retail friendly closed-ended funds are best suited to different types of investor.

By Alex Paget,

Senior Reporter, FE Trustnet

Following the implementation of the retail distribution review (RDR) last year, investment trusts have become increasingly popular with retail investors.

Within this series we have focused on comparing and contrasting open-ended funds, but as more money has been flowing into the investment trusts, we will drill down and analyse which popular closed-ended funds suit certain types of investors.

To start with, we look at Nick Train’s Finsbury Growth & Income and Alastair Mundy’s Temple Bar IT.

Both portfolios sit in the IT UK Equity Income sector, both are run by experienced fund managers who also have open-ended portfolios – Train has the CF Lindsell Train UK Equity fund while Mundy has Investec UK Special Situations – and both have a strong retail following.

Train took over the £490m Finsbury Growth & Income trust in December 2002, while Mundy took over his £880m Temple Bar IT in October 2002.

According to FE Analytics, Train has the stronger long-term track record.

Since Mundy began managing his portfolio, it has returned 325.50 per cent, underperforming against Finsbury Growth & Income by more than 150 percentage points.

Both trusts have comfortably beaten the sector and their benchmark – the FTSE All Share – over that time, however.

Performance of trusts vs sector and index since Oct 2002

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Source: FE Analytics

Though Train has beaten Mundy over the longer term, the managers have had similar return profiles over the last decade or so.

The two portfolios both underperformed the FTSE All Share in the years leading up to the financial crises when investor complacency was rife, but have managed to protect investors during times of stress.

This is an impressive feat given that trust managers can have to deal with both a fall in their NAV and a widening discount when the market plummets.

Our data shows that in the crash year of 2008 Train’s trust lost 29 per cent and Mundy was able to limit losses to just 13 per cent. In comparison, the sector fell 36 per cent.

In 2011, when the eurozone crisis intensified and investors moved quickly to de-risk their portfolios, both trusts delivered a positive return while the sector and index fell.

Performance of trusts vs sector and index in 2011

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Source: FE Analytics


However, both portfolios have also participated in the recent bull market, beating the FTSE All Share in 2009, 2010, 2012 and 2013; though Finsbury Growth & Income has delivered a greater return in each of those years.

While it is interesting to see how the two managers have fared in different market conditions, we all know that the past is no guide to future performance.

So, what do the two trusts offer investors now? On the face of it, they look quite similar as both are concentrated portfolios made up of largely dividend paying, mega-cap stocks.

Mundy holds just under half of his assets in his top 10 holdings and is taking large stock bets on the likes of Royal Dutch Shell, HSBC and GlaxoSmithKline.

Combined these make up 24.4 per cent of the trust. Train, on the other hand, has 64 per cent of his portfolio invested top 10 stocks.

Unilever and Diageo are his two largest individual holdings, making up 9.2 per cent and 8.6 per cent respectively, but he holds at least 5 per cent of assets in each of his top 10 holdings.

Though there two portfolios look similar and there are a number of stock-overlaps, Charles Tan, investment analyst at Cantor, says the managers go about building their closed-ended funds in different ways.

“One of the great sound bites you get from an Alastair Mundy presentation is ‘the number one rule of investment; don’t lose money’,” Tan (pictured) said.

ALT_TAG “He is definitely an acquired taste as he invests with a contrarian mindset. While I think he will outperform over the long term, his style means that investors who own the trust can go through periods of pain.”

“He currently takes a very cautious view on the world and doesn’t believe there is much value across the broader market. Because of that, he is currently holding larger, some would say more boring, companies. Basically, things that you and I would still need even if there were another financial crisis.”

Mundy has warned about excessive bullishness in the current market on a number of occasions.

However, though he is bearish from a top-down level, the major reason why Temple Bar IT looks the way it does is because the manager, due to his contrarian approach, will primarily invest in companies where the share price is trading significantly lower than its average, relative to the FTSE All Share.

Not many companies fit his criteria at the moment and, as a result, he holds 14.5 per cent of his portfolio in cash.

Tan continued: “Nick Train has a big emphasis on cash flow and he follows the belief that ‘profits are opinion, cash is fact’. He focuses on companies that have really strong cash generation, have strong recognisable brands and that he believes will still be around in the next 20 years’ time.”

Tan says this highlights the major difference in styles, as although Mundy and Train may hold similar stocks, they hold them for very different reasons.


“Mundy will tend to focus on companies that have fallen a lot, while Train will continue to invest even if it looks quite expensive. Some of his holdings will trade on 20 times earnings, but he is just focused on the cash flow.”

“If he sees that they have good growth potential and a sustainable business model, he will pay up for quality,” Tan added.

This different approach is highlighted in the two portfolios’ current dividend yield.

Temple Bar IT yields 3.11 per cent, while Train’s yield is significantly lower at 2.17 per cent.


The expert's view

Tan rates both trusts highly and says that both will perform in a similar way over time, outperforming during times of stress and underperforming when the market is driven mainly by sentiment; like they have been this year.

Performance of trusts vs sector and index in 2014


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Source: FE Analytics

He says it therefore comes down to individual investor preference over which style they prefer best.

“In many respects these are personality trusts because you invest in them because of the manager,” Tan said.

“The names Finsbury Growth & Income and Temple Bar aren’t that recognisable, but most UK investors will know of Nick Train and Alastair Mundy.”

Both portfolios are trading around a 1 per cent premium to NAV. Tan says investors should have no issue with buying in at that level as both have always traded at close to par over recent years, due to their managers’ strong retail following.

The one difference, however, is that Temple Bar IT has no discount mechanism in place, which is a potential risk, while the board on the Finsbury Growth & Income trust have vowed to buy back shares if the discount were to widen past 5 per cent.

The other slight difference is that Train’s trust is 4 per cent geared, while Mundy has no leverage; which is likely a reflection of Mundy’s view of the market.

Temple Bar is also cheaper. Its ongoing charges are 0.49 per cent, while Finsbury Growth & Income’s are 0.85 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.