“Sin stocks” such as alcohol and tobacco are safe bets in providing stellar growth over the long term, according to Nick Train (pictured), although the manager has recently been adding to a holding that is in the bad books for an altogether different reason. 
Almost a third of the FE Alpha Manager’s Finsbury Growth & Income Trust is currently allocated to beverages ranging from soft drinks to alcohol.
In fact, as reported by FE Trustnet earlier this month, French alcoholic beverage company Rémy Cointreau became the first new stock that Train has purchased in more than four years due to its well-established brand (Rémy was founded more than 300 years ago) and the rare and luxury goods that it has to offer.
“To be honest with you, I’m delighted. We would happily own more drinks, either in terms of names or even in terms of proportion of the trust. I can’t right now think of any investment I’ve made in a drinks business that hasn’t worked out over time,” he said.
The four FE Crown-rated Finsbury Growth & Income Trust has a 42.9 per cent weighting in consumer services at the moment, which is almost double the size of the trust’s next largest weighting in services.
A stock that doesn’t follow this trend, however, is British publishing company Pearson, which sits below drinks giants Diageo and Heineken at number eight in the fund’s top 10 holdings.
Pearson has suffered multiple blows this financial quarter, having reported a 2 per cent decline in earnings compared to its performance over the same time period last year.
Performance of stock vs index over 3yrs
Source: FE Analytics
This led to its biggest performance slump in decades last week following a profit warning, which prompted analysts to question the quality of the company’s structure.
The publisher has since been downgraded by JP Morgan, Goldman Sachs and Investec among others.
“We do have a very painful stock at the moment and that’s Pearson, which was down again [on Wednesday]. I can’t bear it,” Train said.
“We are very, very stubborn investors, rightly or wrongly. Sometimes stubbornness is good in a competitive market, sometimes it isn’t. Michael [Lindsell] and I are very reluctant to give up altogether on the strategic bull pace for Pearson.”
The manager said that the bull case partially derives from a research note from Merrill Lynch, although he admits that it was published before the company’s string of recent problems.
One reason to remain invested in the stock, according to Train, is that it is transferring vital educational data from analogue into a digital format, which he says should be a lucrative venture.
“If Pearson can make this digital transition in the United States and then start exporting that know-how globally, as it is uniquely positioned to do, then we’re going to see this as a great growth business. We bought a few more shares [yesterday] in fact, but it’s frustrating,” he said.
Train says that his frustration with Pearson can be put into the context of another kind of frustration regarding the stock market, which was recently aired by Scottish Mortgage manager James Anderson.
“I was fortunate enough to share a platform with him earlier this year and I was very impressed hearing him present. I thought I was bullish but goodness me, he is bullish. A quote from him that I scribbled down is what I think is the absolute epitome of the growth investor – he said he’s never seen a stock trading below book value that he’s wanted to buy.”
Train said that Anderson challenged UK investors in his speech by expressing his disdain for the UK stock market.
This is a sentiment that Train has shared for a number of years and he has not found a single UK stock he has wanted to invest in since 2008.
The Finsbury Growth & Income Trust is allowed to invest up to 20 per cent of its portfolio in non-UK equities and this weighting is almost at maximum capacity.
“Anderson asked when the last time was that the UK produced a new truly great global business, and it’s a telling question. Where is the UK’s Facebook or Google or Alibaba?” Train continued.
“This can be related back to Pearson. Here is the world’s biggest educational publisher that has invested more in tech than any other quoted company and yet it is still so far from being able to be discussed in that group of global tech leaders.”
Despite the manager describing Pearson as “as close to being a mistake as we have made for a long time”, he has had success with other stocks that have aimed to transfer analogue content into digital.
One such example is RELX, formally known as Reed Elsevier, which is currently the trust’s second-largest holding in the portfolio at 8.8 per cent. The analytics company has consistently outperformed its FTSE 100 index, most notably over the last three years when it more than quadrupled its performance.
Performance of stock vs index over 3yrs
Source: FE Analytics
“Analogies between companies are very dangerous, as is the hubris of a number of years of outperformance, so we will monitor [Pearson] and we’ll take the loss at a point at which we think it’s no longer credible to believe this company can make this transition,” Train said.
The manager, who runs two open-ended funds and two investment trusts, has more than doubled the performance of his peer group composite over three, five and 10 years.
Finsbury Growth & Income Trust, which is trading on a 0.7 per cent premium, has more than doubled the total return of its peer average in the IT UK Equity Income sector and more than tripled the performance of its FTSE All Share benchmark.
The £650m trust is 3 per cent geared, yields 2.1 per cent and has an ongoing charge of 0.82 per cent.
