In the latest update for his £494.9m Finsbury Growth & Income Trust, Train (pictured) points out that the portfolio has exposure to mega-caps alongside mid and small-caps but asserts that none of these holdings were bought because of their size.
“Biggest is not necessarily best, if it’s investment returns you’re after. We believe what really matters is the calibre and unique nature of the companies you’re invested in. This is what makes money over time. And, to reiterate, we think we own a collection of special companies,” he said.
Finsbury Growth & Income’s largest holding is a mega-cap - global drinks brand Diageo, which has a current capitalisation of £44bn. He owns the company because it is the world’s number one spirits and dark beer company, not because he think large caps are set to outperform.
“Although this is a major company by any standards, it ranks only eleventh largest in the FTSE All-Share Index and is dwarfed by other giant constituents, such as Royal Dutch Shell, £144bn or HSBC, £120bn,” he explained.
“Diageo seems even smaller from a global perspective, barely making it into the top 75 members of the MSCI World Equity Index by market value.”
Buying on merit and not just to keep a hand in with the index means the trust has zero exposure to mega-caps in the oil, banking, telecommunications, mining, utilities and pharmaceuticals sectors, which together account for more than half the value of the UK stock market.
“We acknowledge, therefore, that whatever else the company's investment strategy is, it is not currently a means to get exposure to UK or global ‘mega-caps’. By extension, we also acknowledge that in the circumstances of a prolonged period of outperformance by sectors dominated by such big boys we could lag,” the manager explained.
Train runs a concentrated portfolio of around 30 stocks, which means it looks “materially different” to its FTSE All Share benchmark and has above average risk. Train has built a strong reputation as a stockpicker and tends to avoid selling companies unless they lose their long-term competitive advantage.
Avoiding so many mega-caps means that the trust is overweight lower down the cap spectrum, but Train argues that his holdings in this part of the market are not expected to behave like typical mid and small-caps.
“It must be true that given your portfolio is so underweighted to mega-caps, we must also be overweight in mid and small-caps, even though we do not think about portfolio construction in this way.”
“UK market followers know that mid and small were at the vanguard of the rally of the last couple of years and it could be that, willy-nilly, we have been beneficiaries of this investor preference and could be vulnerable to any change in preference.”
Train claims to take a very different approach to most fund managers when it comes to investing in these companies. The typical approach, he says, is to switch in and out of small and mid-caps in the hope of profiting from anticipated changes in economic activity or changes in other investors' risk tolerance.
“Although what we have described above is a perfectly valid way of approaching the investment challenge, it is the antithesis of what we do. In particular we do not own any mid or small caps for their purported leverage to an economic cycle.”
Illustrating this, Finsbury Growth & Income has never owned companies in cyclical sectors such as auto parts, building materials, chemicals, construction, electronics, forestry & paper, general retail and housebuilders.
Train added: “The closest to such that we do own are the regional brewers, Fullers, Greene King and Young & Co - however in our eyes they are the exception that proves the rule, because their appeal is precisely that their business is not affected, or not affected much, by the rise and fall of consumer confidence in the UK.”
Given he avoids most mega-caps and mid-cap plays on the economic cycle, which companies will Train buy?
The trust owns, for example, Fidessa because it is the world’s leading trading and investment infrastructure software provider, Rathbone because it’s the UK’s top private wealth manager and IRN-BRU because it’s Scotland’s top soft drink.
It also larger companies in its portfolio, although the manager explains why they are dominant in their market. The trust holds the world’s number one beer brand (Heineken), the UK’s top asset management company (Schroders) and the US’s most prevalent food manufacturer (Kraft).
Train said: “What we're conveying here can be summarised as ‘size doesn't matter’ - that much. In our opinion your portfolio comprises a collection of exceptional brands and franchises, many so at global level, or if not, strong regional or national champions.”
“What is attractive about them has nothing to do with their market capitalisations. Many of them could be described as small companies, certainly by global standards - but that does not mean that they are not dominant in their own way.”
Train has managed Finsbury Growth & Income since December 2000, over which time it has returned more than twice the gain of the average trust in the IT UK Equity Income sector and more the three times the return of the FTSE All Share, as the graph below shows.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The trust has beaten the All Share in nine of the past 10 full calendar years, with the exception coming in 2007, as well as over 2014 to date. It has also outperformed the sector in eight of the past 10 full calendar years, with 2006 and 2007 being its weaker years.
Finsbury Growth & Income has ongoing charges of 0.85 per cent with no performance fee. It is 5 per cent geared and is trading on a 1.05 per cent premium.
