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Nick Train: My biggest disappointments last year

23 January 2023

The Finsbury Growth & Income Trust manager names four stocks that weren’t necessarily the biggest detractors from performance in 2022, but left him feeling frustrated nonetheless.

By Anthony Luzio,

Editor, Trustnet Magazine

Nick Train thanked Finsbury Growth & Income shareholders at its AGM last week for being patient with him after the trust underperformed its IT UK Equity Income sector and FTSE All Share benchmark for the second year in a row in 2022.

However, in a recent Trustnet article, he said he hoped to turn his poor performance around by doing nothing – staying invested in his current holdings and waiting for their value to shine through.

Below, the FE fundinfo Alpha Manager explains why four portfolio holdings in particular left him feeling disappointed in one way or another last year – and why in most cases he is keeping faith with them.

 

Fever-Tree

Train (pictured) said he thought he was “being so clever” when he initiated a position in premium drinks brand Fever-Tree in 2020 after its shares had fallen 60%. However, he said it ended up being his biggest embarrassment last year when they fell another 60.5%.

The company issued a profit warning in its H1 results, which it blamed on higher costs of shipping and glass, which ate into margins.

However, Train responded by congratulating the management team on doing the right thing for the business.

“It would be quite wrong for the company to protect its profit margins by cutting marketing spend, by increasing prices and, particularly, by limiting supply to the US (even if the transportation costs are currently abnormally punitive),” he said.

“It would’ve been easy for the company to do any of these things and possibly to have been applauded for doing so. But investors like us in Fever-Tree want as many US consumers to experience and become converts to its superior products as possible. Because that is likely to drive most equity value over time.”

On the plus side, Train pointed to US sales growth which is expected to be confirmed at 25% for 2022, which would translate into a compound annual growth rate of 30% since 2015. The manager added to his position throughout the year.

 

Experian

Credit data provider Experian was the second-worst performer in Finsbury Growth & Income’s top-10 in 2022, falling 21.3% in total return terms. However, it seemed to sum up a trend that the manager alluded to throughout the year, where many stocks fell despite solid performance from the underlying business.

Last January, he wrote: “Experian’s Q3 update showed organic revenues up 11% (including acquisitions, sales were up 15%). This was enough to drive a modest earnings upgrade for the full year. The shares fell 15%.”

They fell a further 5% after the full year results were released in May, even though Train referred to them as “robust”, accompanied as they were by a 10% increase in the dividend.

Performance of stocks in 2022

Source: FE Analytics

The manager said one possible reason for the poor performance of Experian’s shares last year was that they had got ahead of themselves in 2021, adding that their fall at least gave him the chance to buy more at a lower level.

“There are not many companies quoted on the London stock market where one might realistically hope for sustained annual 10% growth in free cashflow,” he explained.

“But Experian is one of the few we know where such an outlook is not outlandish. We have been adding steadily to the Experian holding through 2021/22 and it is now a meaningful portfolio position. Let’s hope our buying has been conducted at prices that will look like bargains in five years’ time.”

 

Cazoo

Train said he can “think of few more mortifying and frustrating events of his career” than watching the shares of Cazoo fall 90% in the six months after it appeared in his portfolio.

If this doesn’t seem like the usual return profile of a Lindsell Train stock, there is a good reason for this: he inherited shares in Cazoo, an online used-car dealer, as part of the takeover of portfolio holding Daily Mail & General Trust. He couldn’t sell them for six months, by which point they had plummeted in value.

Performance of stock over 1yr

Source: Google Finance

“One trite thing I would say about Cazoo is that it’s the best performing share in the portfolio this year, up 60%,” he joked.

“And the reason for that is because [founder and chief executive] Alex Chesterman was at least smart enough to raise more capital last February by issuing convertible bonds, so it’s got net cash on the balance sheet – it’s not going to go bust.

“We shouldn’t own it because it's not a Lindsell Train stock, but we'd love to try to find a way to sell it that minimises the damage that it's done to the portfolio.

“It is lossmaking, but has significant cash resources and, in theory, an enormous opportunity. We are thinking hard.”

 

London Stock Exchange

Train’s stocks didn’t need to fall for him to be disappointed in them. Top-10 holding London Stock Exchange rose by 4.3% in 2022, yet Train felt it should have done much better, particularly as it is still down by more than 20% on its 2021 peak.

The shares fell on what were perceived as unexpectedly high costs of integration following the acquisition of Refinitiv in 2021.

But Train said there was “enormous strategic potential” in the deal, referring to an interview with London Stock Exchange chief executive David Schwimmer in which he said he couldn’t think of an acquisition as “transformational and value-creating”.

The manager was also excited by a joint venture with Microsoft, announced in December, which saw the US tech giant acquire a 4% stake in the company.

“The relationship is clearly intended to be more than a casual date,” Train continued. “One of our clients wrote me an email on the morning the story broke with a one-word heading: ‘Massive’. We agree. To us it is a massive endorsement of LSE’s strategy and the potential of its assets.

“But LSE's share price went down 10% on that news, so maybe we will buy some more.” 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.