FE Alpha Manager Train has managed Finsbury Growth & Income since December 2000.
According to FE Analytics, over that time the closed-ended fund has returned close to 280 per cent, beating the FTSE All Share by almost 200 percentage points.
Performance of trust vs index since Dec 2000
Source: FE Analytics
It has also more than doubled the returns of its benchmark over one, three, five and 10 years and has beaten the index in every discrete calendar year over the past decade, except in 2007.
However, Train (pictured) says that for current shareholders or anyone who is considering buying in to his trust, it is unlikely that he will be able to consistently deliver that sort of outperformance. “I am going to offer a friendly warning relating to the performance and I am also going to exaggerate a bit here,” he said.
“This company has delivered dazzling outperformance. In terms of NAV total return, the company has delivered a 10 per cent annual return, which is double the amount of the benchmark.”
“Any single year where a strategy beats its benchmark by 500 basis points is noteworthy, but over a 13-year period, that is a staggering return.”
“The last five years have been instrumental to those returns. This strategy has outperformed year-on-year, which continued again with a jaw-dropping 14 per cent outperformance in 2013.”
“Surely you can deduce that Lindsell Train is full of investment geniuses. However, we assure you that we are not.”
“That quantum of outperformance, although good to have, does raise some questions.”
Train says that the major questions investors should raise are whether or not this performance can be replicated or what he can do from here to ensure that it doesn’t drop off.
“These are pertinent questions to ask. If someone were to ask me if this sort of performance was sustainable, I would say 'maybe, but probably not',” Train continued.
However, the manager says he has two observations for anyone wondering if now is the time to take profits from the Finsbury Growth & Income trust.
“Firstly, I want you to know absolutely and unequivocally that we have no intention of changing the shape of this portfolio. I would not be at all surprised if the current top holdings are exactly the same this time next year,” he said.
“The second point is that I have bought some more shares myself and for my standard, it is not a trivial amount either. I have also added some shares to my wife’s account, which believe me, is not a decision to be taken lightly.”
“I think there is still plenty of strategic value left in the company,” he added.
Train says that the major reason why he thinks there is still strategic value left in the trust, and why he has been buying more shares for himself and his wife, is because it gives him access to his and Michael Lindsell’s best global money-making ideas.
One such idea is the FTSE 100 listed consumer goods company Unilever, which makes up 8.5 per cent of his trust. It has performed poorly recently with many analysts voicing concerns about growth in the company’s emerging markets assets.
Performance of stock since 1995
Source: FE Analytics
“If you were to look at the performance of Unilever over the past 20 years, such periods are not unprecedented. Crucially, however, those have had little or no relevance to the upward march of the share price.”
Train sees Unilever as one of the most exciting long-term holdings available to UK investors, as he told FE Trustnet last year.
Unilever’s exposure to the emerging market consumer is the major reason why Train is and will continue to be bullish on Unilever. Those assets account for 9 per cent of the company’s sales growth, a figure which Train expects to grow over the coming years.
“We have had all these collywobbles about emerging markets which have hit Unilever’s share price. We are absolutely at one with Unilever’s board as we know the emerging markets story still has plenty of legs,” Train said.
The manager adds that he has constantly been adding to his exposure to Unilever and Pearson, another one of his largest holdings at 7.8 per cent of his trust, as both stocks have tumbled recently.
“We had a thoroughly unpleasant day last Thursday as one of our biggest holdings, Pearson, fell by 8 per cent.”
“The reason for this is that it warned the market that its profit margins would be lower than first thought. This was because the company was investing large amounts into the digitalisation of its products, in particular its education materials.”
“Don’t get me wrong, I don’t like it if shares fall, but our take is that every other media and software services company we are invested in is doing exactly the same thing as Pearson is doing.”
“Pearson is the world leader at what it does and I feel very strongly that it gives me the opportunity to take part in the rally in technological innovation,” he added.
Performance of index over 2yrs
Source: FE Analytics
Market sceptics point to the fact that the rally in equities has been largely driven by re-ratings instead of underlying earnings growth, so many of them, such as Barclays Wealth’s Kevin Gardiner, think that a correction is long overdue.
When asked if he was concerned about whether or not he thought the UK market was looking expensive, Train was sanguine about the issue.
The manager says that when it comes to judging the top or bottom of the market it is up to his shareholders as he is always going to run the trust in the same way, not matter how well or badly the market has performed.
“There is a more or less fruitful debate to be had about valuations,” he said.
“I gave up that argument 20 years ago and though I am not denying that some people are very good at forecasting the market, Michael Lindsell and I aren’t. We are not experts and it doesn’t help us to add value.”
“All I can give you is a friendly warning about our recent performance. I wouldn’t want to build up a cash position; I always want to be fully invested, so I am leaving that decision up to you, the investor, in a sense.”
“History has demonstrated that valuations of exceptional companies can go far higher than the market. I’m not bearish, but then I am never bearish,” he added.
Train’s final piece of advice for investors is that equity markets require patience and so the chances of success are far higher if you take a long-term approach instead of acting like too much of a trader.
“In terms of the shape and timing of risk assets, I’ve spent 30 years trying to articulate how UK equities are likely to perform,” he explained.
“It’s problematic: you can have all sorts of scientific explanations to how returns will come and when they will come. But the best explanation I have come across is from the pen of comic versifier Ogden Nash, who wrote: 'Shake and shake the ketchup bottle, first none’ll come, then a lot’ll'.”
“That’s a brilliant analogy for equity investment. I’ve been buying shares in Finsbury and I think the returns will be 'a lot’ll',” he added.
Finsbury Growth & Income is currently trading at a slight premium to NAV, but the board uses a discount control mechanism if the discount widens past 5 per cent. It has a yield of 2.06 per cent and is geared at 5 per cent. Ongoing charges are 0.85 per cent.
