Investors should not fear the recent sell off as it is in fact below long term trends of equity market volatility, according to FE Alpha manager Nick Train, who is upping his ‘skin in the game’ by adding to personal holdings in the Finsbury Growth & Income trust. 
Train, who has headed up Finsbury Growth & Income since 2000, is well known for consistently beating the market over recent time periods and his £655m portfolio is number one in the IT UK Equity Income sector since the start of the year with a modest 0.17 per cent return.
More broadly, equity markets are still only just above their initial levels at the start of 2016 in the US and Asia, with the UK, Japan and Europe still down following three months of worry over slowing Chinese growth, a potential US recession and stubbornly low prices for oil.
Performance of fund and indices in 2016
Source: FE Analytics
This has weighed heavily on investor sentiment with gold and bonds rallying, but Train says the past three months of choppy markets are not a sign of further worsening in economic fundamentals.
“Actually, it looks to us as though current volatility is nothing particularly out of the ordinary. I’ve looked back at the volatility numbers for US and UK equities back to 1950 and the annual average volatility, the up and downs of UK and US equities since 1950, is around 15 per cent per annum,” he said.
“Today it is running on an annualised basis at 13 per cent so if anything the volatility is slightly below the long run average. I think the point is this: that when you’ve been in this game as long as I have you come to realise that equities are always volatile.”
“There’s always something to worry about. I think it’s a psychological thing much as anything: investors always seem to want to be believe that today is a uniquely difficult, challenging or risky time.”
Hawksmoor’s Jim Wood-Smith is distinctly more bearish. He thinks the rally in the last month is in fact not founded and simply explained by unwinding of short positions.
“My best guess is that at the start of the year it was too easy to make money by being short of everything related to commodities and resources. Be it oil, or commodities or emerging market equities or mining equities, no matter; these were gold starred and profitable trades. But all good things end. In financial markets, this usually coincides with the time that everyone thinks that they finally understand everything and pronounces that it will go on forever,” he said.
“China’s economy was nowhere near as bad as was being implied by the price falls the world saw. The miners cut or passed their dividends, Saudi hinted that it may stop pumping oil to infinity and beyond. All these were reasons or excuses for the shorts to start to close their trades. So a classic market rout has been followed by an equally classic and ‘inexplicable’ recovery.”
However, Train says the sell-off is just short term volatility and as volatility is below a long term trend rate, such concerns are not warranted.
According to FE Analytics, while Finsbury Growth & Income trust is down 5.3 per cent over 12 months, the FTSE All Share has fallen has not fared much worse being down 5.82 per cent over the past year.
Performance of trust, sector and index over 1yr
Source: FE Analytics
“Much more important than the short term volatility is to consider this fact. Since 1900, the equity market has made a positive return in 73 per cent of all those 114-115 years. In other words [there is] no absolute certainty that equity prices will go up year in year out but still [there are] pretty good odds that despite that volatility, if you hang on for each full year you are much, much more likely than not to see a positive gain,” he said.
The manager, who also runs the £1.9bn CF Lindsell Train UK Equity fund, has a low turnover, high conviction approach to stock picking and also seeks to add to weaker performing positions in his portfolio rather than exiting them entirely.
Most of the holding Train opts for are ‘quality’ firms with strong brands, market strength and often with family control of a business.
This strategy has worked very well for the manager, who is has outperformed the FTSE All Share index every year since 2007 in the Finsbury Growth & Income trust and over one, three, five and 10 years it is also top quartile or top decile. The trust is the best in the sector since Train took over.
Performance trust, sector and index since 2000
Source: FE Analytics
He has mostly been adding to Burberry, the Daily Mail group and Diageo during the recent sell off which have suffered secular as well as cyclical headwinds in the past year.
Performance of stocks and index over 1yr
Source: FE Analytics
Train is also bullish due to what he sees as a strong period for bid activity, which has been a significant tailwind for several of his holdings of late.
“M&A remains robust worldwide in 2016, with the run-rate so far 26 per cent higher than for the comparable first two months of 2015 – itself the record year for global M&A. Perhaps not such a surprise that corporations are looking to combine, when nominal growth is so hard to come by.
“With LSE our portfolios have benefited from one of the eye catching proposed deals of the year to date. We will report further once formal terms are tabled, but in the meantime are far more inclined to add than sell our stake.”
Finsbury Growth & Income is on discount of 0.9 per cent, it’s widest since the financial crisis.
It has ongoing charges figure of 0.78 per cent and is 4 per cent geared. It has a 2.8 per cent yield.