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Nick Train: My plans for Finsbury Growth & Income following the EU referendum

27 June 2016

FE Alpha Manager Nick Train, manager of the Finsbury Growth & Income trust, explains how his strategy held up during Friday’s Brexit induced volatility and how he is positioning the portfolio for the future.

By Nick Train,

Lindsell Train

Things are moving so quickly across markets and for Lindsell Train’s UK strategy that it is hard for me to be clear about just what has happened to date and why, much less what may be to come. 

But a few things are clear.

Finsbury Growth & Income Trust was having a poor second quarter up to the day of the referendum, with June itself particularly weak. Actually I ascribe this relative weakness much more to specific stock/company issues than the positioning of the portfolio to the outcome of the vote, with one exception. 

Performance of trust versus sector and index in Q2 2016 so far

 

Source: FE Analytics

So, performance recently had been hit and understandably so, by disappointment about the reported results from two key holdings – Daily Mail and Burberry. 

Diageo too – a major position – has not proven as “defensive” or resilient as its industry classification might suggest, because of the warranted concerns its earnings hiatus that set in two years ago is not ending any time soon. 

Then there is the 7 per cent position in London Stock Exchange. In contrast to these others LSE has traded absolutely as a Brexit chip, with significant upside if the politics allow its merger to proceed and some downside (although much lower in our opinion) if not. 

No surprise that LSE had detracted from our performance in the run-up to the vote.

The second thing that is clear is that the strategy proved very resilient on the day of the Brexit result. It looks as though there may have been a c3 per cent relative gain on Friday 24th alone.  The drivers here are obvious. 

Companies with low business exposure to the UK economy did well, especially those with “defensive” characteristics. 

We have calculated in the past, though this is inevitably rough and ready, that at least 75 per cent of the earnings of our portfolio do not derive from the UK – emphasising the global nature of many of the franchises we hold – and that this is likely a higher proportion than for the FTSE All Share index, which has more exposure to domestic UK earnings (although still less than many uninformed observers realise). 


So Friday actually saw share price gains for our three biggest holdings – Unilever, RELX and even Diageo (amounting to c30 per cent of our fund NAV alone).  Global companies all, with reassuringly predictable earnings. 

Performance of Train’s largest UK-listed holdings over 1 month

 

Source: FE Analytics

In addition Burberry and Pearson (c9 per cent of the total portfolio) also gained, as the very international nature of their business outweighed investor concern about their short term earnings. 

Elsewhere, the non-UK stocks we own all did relatively well, in part because of their non-Sterling domiciles and their “defensive” qualities – Heineken, Mondelez, Dr Pepper, Remy and Kraft.

What hit our performance on Brexit day – notwithstanding the above – was our UK financials. 

Notably Hargreaves Lansdown and Schroders, which both had double digit falls.  Daily Mail was weak too – as a more UK-exposed company.  While some UK banks and other financials fell by up to 20 per cent it was notable that LSE was “only” down c8 per cent. 

This share price was supported by the joint announcement from LSE and the Deutsche Bourse that their merger remains on track – but perhaps also by the recognition that LSE’s earnings are not as vulnerable to UK economic activity as a domestic mortgage lender, for example.

What happens next?  Of course we don’t know.  But we take an optimistic view. 

We expect the UK to be able to reach an acceptable trade agreement with our friends on the continent, while at the same time increasing the number of other important economies with whom we will be able to trade more freely. 

This should be good for the UK economy and enhance the long run earnings power of our portfolio companies. We very much hope this is the outcome of the inevitable period of uncertainty and disruption which looms. 

On that point we urge all our clients to remember how critical the “long term” is for the valuation of UK equities and not to obsess too much about short term earnings disruption. The duration of an equity asset can be roughly calculated as its dividend yield divided into 100. The UK stock market has a dividend yield today of c4 per cent. 


This means, whether they know it or not, investors in UK stocks are taking a 25 year view at least of the earnings power of the companies they are in aggregate invested in. It follows the success or failure of UK companies and the impact of Brexit on this possible success or failure, is already (and correctly so) being judged over decades, not over a few quarters or half years.

In fact on a 25 year view we expect the significance of this vote for the earnings and share price performance of UK companies will be relatively minor.  Far more important will be the UK’s participation in the wealth creation promised by new technology and, still, the emergence of billions of new consumers into the global market place. 

We hope and certainly intend Finsbury Growth & Income’s portfolio will offer exposure to these wealth drivers.

Performance of trust versus sector and index under Train

 

Source: FE Analytics

The portfolio has a modest amount of cash today.

Unless we find ourselves facing significant share buybacks next week we intend to invest all that cash, most likely into existing holdings. Schroders on a dividend yield of nearly 4 per cent and net cash on its balance sheet looks very attractive to us. 

The LSE too, where we can see that politicians across Europe and the UK may be keen to allow the merger to go through in order to demonstrate continuing goodwill.

I bought a few more Finsbury Growth & Income shares for myself on Friday.

 

Nick Train is manager of the Finsbury Growth & Income trust among other equity portfolios. All the views expressed above are his own and shouldn’t be taken as investment advice.
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