There is little value outside a handful of stocks in the broader UK equity market, according to FE Alpha Manager Nick Train (pictured), who is increasingly looking abroad for new ideas in his low turnover portfolio.
Train, who has headed up the £623m Finsbury Growth & Income trust since 2000, is – seemingly perennially – bullish on the outlook for the 20 or so UK stocks he has in his portfolio but he says he cannot see any new company that is worth buying in the FTSE.
“Over the last seven years I have only added one new UK-based holding to the portfolio: Burberry back in 2008. We have not unearthed many new ideas in the UK stock market. We like what we are already invested in, but we have been invested in many of those for 15 years or longer,” he said.
“There are a shortage of these sorts of strong-branded names – sometimes with family control – available for us in the UK.”
“We are very cognisant that there is a maximum proportion that we are permitted to own in non-UK securities. That proportion is 20 per cent and we are around 19 -20 per cent.”
Train has bought just a few new names in the past five years but these have tended to be non-UK, although European firms: Remy Cointreau and Heineken.
The lack of opportunity in the UK could present a real issue for the portfolio, Train says, as he is also expecting an ongoing trend of high bid activity that could see his holdings transfer into non-UK listed holdings and thereby breaching the IT UK Equity Income sector’s rules.
“We are in a takeover boom currently and my own view is that M&A activity so far in 2016 is running in line with last year, which was the all-time record. I expect to see a lot more particularly in the industries that we are invested in,” he said.
“Clearly there could be circumstances where if we lost two or three UK stocks to takeovers it would not be obvious what we'd replace them with. In those circumstances I think we'd to discuss the situation with the board. They'd then need to ask shareholders for greater flexibility for the investment approach.”
“I fear that that would mean we'd cease to be a UK growth and income fund and maybe become a global trust. I’m not sure I want that but force majeure might require it.”
Train’s top 10 in Finsbury Growth & Income is mostly UK stocks with just two of his major positions non-UK listed: Heineken and Mondelez.
Source: FE Analytics
A recent article on FE Trustnet pointed out that non-UK holdings have become increasingly popular with UK equity income managers.
Our data shows that UK exposure in the two main UK equity peer groups of the Investment Association universe – the IA UK Equity Income and IA UK All Companies sectors – has decreased to its lowest level in at least three years.
The average UK equity weighting in the IA UK Equity Income sector is now 88.7 per cent, compared to 94.03 per cent three years ago. In the IA UK All Companies sector the same trend is also apparent.
The manager’s strategy of very low turnover and high non-UK holdings does appear to have worked well for Finsbury Growth & Income. The trust has outperformed the FTSE All Share for the past eight years running and is top quartile so far in 2016.
Over one, three, five and 10 years it is also top quartile with the trust being the best in the sector over the latter two time periods as well as top since he took over more than 15 years ago.
Performance trust, sector and index since 2000
Source: FE Analytics
“My sell -discipline is that it is best never to sell. There are exceptions to that and we will sell but the last time was around three years ago,” Train said.
“We will sell for the same reasons as anyone else. If we think the valuation of something has become absurdly high or because we absolutely lose confidence in the calibre of the franchise or the capital allocation of the company.”
Publishing giant Pearson, the manager’s worse performing stock last year, which he bought further into following its March plunge, could be one contender.
The stock is at almost half its recent price high following further falls and Train says: “We have got perilous close to selling with Pearson but not quite yet.”
Performance stock and index over 1yr
Source: FE Analytics
Finsbury Growth & Income is on discount 0.2 per cent, has ongoing charges figure of 0.78 per cent and is 4 per cent geared.