Train (pictured), with his high conviction approach to the UK equity market and focus on quality companies with reliable earnings and strong franchises, took charge of the Finsbury Growth & Income Trust in December 2000.
According to FE Analytics, the closed-ended fund has beaten its FTSE All Share benchmark in 12 out of the last 14 calendar years, only underperforming the index in 2002 and 2007. It means that since he has been at the helm, Finsbury Growth & Income has returned 340.88 per cent while the index is up 96.16 per cent.
Performance of trust versus sector and index since December 2000
Source: FE Analytics
The star manager launched an open-ended version of his strategy – the five crown-rated CF Lindsell Train UK Equity fund – in July 2006 and while it failed to beat the FTSE All Share in 2007, it has not once underperformed against the IA UK All Companies sector in a calendar year since its inception.
In fact, it is the only fund in the sector to have turned in top quartile returns, and beaten the index, in each of the last seven calendar years.
Source: FE Analytics
Cumulatively, our data shows the now £1.4bn fund has been the sector’s fifth best performing portfolio since launch with returns of 188.84 per cent, beating the wider UK equity market by 121.47 percentage points in the process.
Clearly after a period of such outperformance, investors could be forgiven for expecting more muted returns from Train’s fund – especially has he has hardly changed his portfolio over the years.
However, the manager is confident that his portfolio is well-placed to outperform once again as consumer staple companies, which he has a very high level of exposure to, are set to receive a huge boost from the falling oil price.
He points out that the 60 per cent fall in the oil price over the last two years is a “very, very significant” macroeconomic event for the UK stock market and a gift for investors as it represents an unexpected dividend “to companies and to consumers all around the world”.
“The price of energy, a key component in most people’s day to day budgets has gone down a whole lot,” Train said.
“We can’t think of a single industry that is more benefitted by the fall in the oil price than the consumer branded goods companies that form the backbone of Finsbury Growth & Income trust’s portfolio, so the Diageos, the Unilevers, Heinekens of this world are key positions for the portfolio.”
Train holds 9.1 per cent of his trust in Unilever, 8.1 per cent in Diageo and 6.3 per cent in Heineken meaning he has 23.5 per cent of his portfolio in those three mega-caps. He has even more in his fund, as they represent 24.9 per cent of his total assets.
“As the cost of energy falls, so these companies’ costs decline, but more importantly for literally billions of consumers around the planet the fall in the cost of energy means that they have a few extra rupees, pesos, renminbi or dollars in their pockets to buy another cake of Dove soap – Unilever’s brand – or another bottle of Heineken beer.”
He added: “That combination of falling input costs and yet growing consumer spending power resulting from the fall in the oil price is very, very bullish.”
According to FE Analytics, Unilever and Diageo are up 10.44 per cent and 4.47 per cent year-to-date, thanks in part to the 0.9 per cent fall in the oil price.
While we don’t have data for Heineken shares, the performance of the three companies has meant Train’s trust and fund are outperforming once again in 2015 with returns of around 10 per cent.
Performance of fund, trust, stocks and index in 2015
Source: FE Analytics
While this has given his portfolios a short-term boost, he thinks the fall in the oil price – which now stands at $53 a barrel – will give longer-term support for those companies as it means central banks won’t be forced to tighten monetary policy.
“If interest rates do stay lower for longer, that is great news for the valuation of blue chip high quality shares, exactly the sort of shares we look to focus on in the portfolio.”
Another reason why Train is confident over his portfolio is because the likes of Unilever and Diageo offer attractive yields and are delivering strong dividend growth.
He also points out that, except for one exception, every single company in his trust has increased its dividend over the last year while 15 per cent of his portfolio have grown their pay-out between 1 and 5 per cent and 60 per cent have grown their dividends by 5 and 10 per cent.
“[Those include] really reassuring recent dividend hikes of say 9 per cent from Diageo, 6 per cent from Pearson and another 6 per cent dividend increase from Unilever,” Train said.
“Then the remaining quarter of Finsbury’s portfolio has just increased its dividend by a minimum of 10 per cent and in some cases by materially more, including the two real stars in the portfolio: Heineken, which increased its final dividend a couple of weeks ago by 40 per cent, and Schroders, which increased its final dividend last week by 28 per cent.”
“When you average all those rates of dividend growth across the entire portfolio, I reckon you get dividend growth of just under 10 per cent.”
As a result of Train’s process and strong past performance, his portfolios are highly-rated by the fund management industry.
His CF Lindsell Train UK Equity fund sits on the FE Select 100 and hold’s Square Mile’s highest AAA rating.
FE Alpha Manager Bill McQuaker is one of the 14 fund of funds managers to count the portfolio as a top 10 holding and he recently described Train as one of the “best in breed” UK managers available to investors.
McQuaker (pictured), who heads up the Henderson Multi Manager range, is a big fan of the fund as, due to Train’s approach, he has around 50 per cent of the portfolio in high quality mega-caps which offer ballast and can outperform in more difficult conditions.
The rest is in higher beta names that are very sensitive to the stock market, which perform well when risk appetite is growing.
McQuaker also points out that the fund has performed very strongly over recent years due to Train’s decision to avoid commodities. While this has been a good call for the manager, McQuaker says that if those areas perform well, he will almost certainly underperform given their weighting in the index.
“[He hasn’t had] a single share in oil companies and has no miners. That has been the thick layer of cherry jam over this delightful cake he’s baked over the last five or six years. Not having those areas has been wonderful for him because they’ve been a big headwind for stock markets.”
“There is a catch, that when resources are doing well, Nick finds it almost impossible to outperform, and 2006/7 he had a very difficult time.”
Performance of fund versus sector and index between July 2006 and July 2008
Source: FE Analytics
According to FE Analytics, during its first two years Train’s fund underperformed both the sector and index with losses of 11 per cent while the FTSE All Share Mining index was up close to 70 per cent.
The CF Lindsell Train UK Equity fund has a yield of 2 per cent and an ongoing charges figure of 0.77 per cent. His trust is trading on a slight 0.15 per cent discount to NAV, has a yield of 2 per cent, gearing of 4 per cent and ongoing charges of 0.82 per cent.