Participating in the growth of digital technology and the internet will be the key to success in the next generation of fund management, according to FE Alpha Manager Nick Train. Train (pictured), who heads up the popular Finsbury Growth & Income Trust, is avoiding the likes of Apple and Microsoft, instead preferring to back well-established companies that are responsible for developing digital content.
"The job of an investment trust manager is to participate in the industries that will lead the next bull market and I would be totally amazed if all of these aren’t driven by the advancement in digital technology," he said.
"We want companies that own and can develop the content, rather than the device-makers. Brands come and go, but it’s the content-providers who endure."
The manager stresses that he focuses on longstanding businesses that are evolving with the internet revolution, rather than unproven companies hoping to make a name for themselves.
"We don’t do young, untested companies, or speculate about start-ups. We acknowledge we might miss out on some fantastic investments, but we’ll also miss out on a lot of rubbish investments that will promise much and deliver nothing – or worse."
"We like established companies with long track records, which are either protected from the internet revolution or, preferably, that will participate in it."
Train claims the company that epitomises this so-called "sweet spot" is the Daily Mail Group.
"Admittedly, it’s yet to deliver the goods for us, but it’s a company I like very much for the long-term," he said.
"Traditionally it is associated with physical newspapers, but there is only one way that industry is going, and that’s not northwards."
"It’s self-evident that online news is exploding – the value of journalistic content on the internet is high and rising and the Mail Online is an excellent example of this."
"Within five years the group expects digital advertising to exceed print. [Mail Online] is a worldwide phenomenon already and I’d only expect it to expand further."
Pearson – a global publisher of education materials and a top-10 holding in Finsbury Growth & Income – is another company Train believes is moving with the times, as well as financial services firm Hargreaves Lansdown.
"Within five years none of Pearson’s products will be delivered by paper," he explained. "The company is aiming to revolutionise the industry and digitalise all content."
"Hargreaves is another – it has been so successful because of the depth of its relationship with its customers via the internet and this is only going to become a more prominent part of its business."
The manager points to the emergence of tablet computers as an indication of the pace of change occurring in the technology sector.
He commented: "In 2010, 19 million tablets were sold. In 2011, this grew to 67 million, and in the next 18 months it is expected that 150 million will be sold."
"All you’ve got to do is look at the person on the train going to work these days to see how fast the world is changing. This is why another big theme in the portfolio is entertainment."
Train has a stake in WWE [World Wrestling Entertainment], Nintendo and Celtic FC in his globally focused Lindsell Train investment trust.
His high-conviction long-term approach to investing has led the Finsbury Growth & Income portfolio to the top of its IT UK Growth & Income sector over the last decade, with returns of 159.66 per cent. The trust’s FTSE All Share benchmark has returned 66.82 per cent over this period.
Performance of trust vs sector and benchmark over 10-yrs
Source: FE Analytics
The £219m portfolio has also significantly beaten its benchmark over three- and five-year periods, with returns of 80.72 and 15.55 per cent respectively.
The £48.6m Lindsell Train investment trust is a top-three performer in the competitive IT Global sector over three-, five- and 10-year periods.
Both trusts are highly concentrated portfolios, made up of just 25 to 30 stocks. Train has an extremely low turnover, preferring to hold companies for the long-term even if they go through short- or even medium-term periods of underperformance.
"If a stock does badly because of a cyclical downturn, I tend to have a ‘so what?’ attitude," he explained. "I only get rid of a company if it’s going through a secular challenge."
"I don’t hold any retailers because there’s not only a cyclical downturn, but a secular downturn due to the emergence of online shopping. However, I wouldn’t say there is any threat to the pub industry, for example."
Train holds four brewers – Young’s, Fuller’s, Marston’s and Greene King – in the Finsbury Growth & Income trust.
"In my opinion, and not to tempt fate, I truly believe that visiting the pub will remain a part of our culture no matter what’s going on in the economy," he said. "I’d compare it to smoking cigarettes – it’s that ingrained in society."
"If you look at the sales performance of Greene King, you’d have no idea we were in a recession at the moment," he added.
The manager even claims these companies are themselves taking part in the internet revolution.
"I had a very interesting conversation with the chief executive of Marston's the other day, who explained how pubs are using social media sites to bring in punters," he said.
Train also heads up the FE five-crown rated CF Lindsell Train UK Equity fund, which is an open-ended vehicle that sits in the IMA UK All Companies sector. Again, this is a sector-leading vehicle, but unfortunately for retail investors, it has a minimum investment of £500,000.
Performance of fund vs sector and benchmark over 5-yrs
Source: FE Analytics
"We said from day one that the trusts would be geared towards retail investors, and the funds to the institutional investor," the manager said.
"The UK fund is pretty much a mirror image of Finsbury, but I personally would always go for an investment trust over a fund – indeed, all of my own money is in the trust."
"The issue of cost is a big reason, as are the time horizons and independence of the boards."
"If a portfolio is going through a tough time, which body is more likely to do something about it: the trust’s board, or the fund provider? I’ll leave that to you," he finished.