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Finsbury Growth and Income reports on second year of underperformance

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Finsbury Growth and Income lagged the return on its All-Share index benchmark over the 12 months ended 30 September 2022, returning -5.8% to the index’s -4.0%. The return to shareholders was -5.6%. This follows on from more significant underperformance in the prior accounting year. £76m worth of shares were bought back in an effort to control the discount.

The dividend has been increased by 5.8% to 18.1p and this was covered by revenue of 20.6p. That puts it on a yield today of about 2.1% – half to a third of the yield available from most other funds in the UK equity income sector.

Extract from the manager’s report

It is disappointing to me to have to report on a second consecutive year of my underperformance of your Company’s benchmark. It has been particularly frustrating, given that the business performance of most of the companies in the portfolio has met or exceeded my expectations. Sometimes this happens. Other investors’ attention is turned to different areas of the stock market, or they disagree with my enthusiasm about the prospects for certain companies – leaving our investments for you becalmed, or worse.

Nowhere was this more apparent than in the shares of domestic UK wealth management companies: your holdings in Hargreaves Lansdown and Schroders have suffered a miserable year in terms of their share prices (along with others in this sector), even though their businesses have grown, as measured by increases in customer numbers or assets under management. I can only hope investor sentiment will improve towards the UK wealth management industry and, indeed, for the whole UK stock market.

For the benefit of my ego and, I hope, to cheer up readers of this report, can I nonetheless note that my investment performance improved in the second half of your Company’s financial year and outperformed – admittedly only by dint of falling less than the weak UK stock market. I sincerely hope this recent trend continues.

While there are some stock specific factors that help explain this improvement in relative investment performance, I believe it is more helpful to analyse it as resulting from a shift in investor preference – a shift back to favouring the sort of industries and companies that have always formed the backbone of your Company’s investment portfolio.

First, as 2022 has progressed, confidence in the sustainability of high valuations for young technology companies has waned – most obviously reflected in the just under 30% calendar year to date fall in the NASDAQ Index, but also in the falls of technology shares in many other jurisdictions.

Now, your portfolio does own some technology companies, or businesses that utilise technology to enhance their services, – for instance, Experian, Hargreaves Lansdown, London Stock Exchange, RELX and Sage. But these are very different businesses, coming from very different (lower) valuations than the latest generation of NASDAQ tech darlings, and our holdings have not, therefore, suffered from their share prices being hit so hard in recent months.

I would venture more and hope that these tech-advantaged UK companies have a chance to continue to do well as businesses (as they all have) and to do better as share prices. As a foretaste of that possibility, note, at the end of the Company’s year-end, London Stock Exchange shares were up 10% in calendar 2022. Meanwhile RELX shares, although down, are on track to outperform the FTSE All-Share Index for the 12th consecutive year (testament to the unheralded, but consistent way that RELX has succeeded in exceeding investors’ expectations for its business, year-in year-out).

Meanwhile, the alarming macro-economic disturbance afflicting many nations has also weakened investors’ confidence in the earnings power of cyclical businesses. As a result, we observe investors turning for their equity exposure to the shares of durable, conservatively-financed and steadily compounding companies – on the expectation their business operations are likely to be less adversely affected than the average. We own a lot of this type of company – deliberately so.

A review of our best performing portfolio constituents in the second half of your Company’s financial year endorses this analysis, with notable relative contributions from Diageo, Heineken, Mondelez and Sage, for instance. All of these are companies with, well-merited, reputations for predictable cash flows generated from brands or business franchises that their customers are likely to continue patronising in all but the most adverse economic circumstances.

In passing, it is noteworthy that there were also helpful share price gains in two big portfolio holdings where changes in senior management were announced during the last six months – namely Burberry and Unilever. No doubt those management changes have alerted investors to the possibility of change in business strategy (or even, perhaps, in ownership) and their share prices have risen accordingly. Certainly, we analyse the strategic value of Burberry and Unilever to be meaningfully higher than the value currently accorded either in the stock market.

FGT : Finsbury Growth and Income reports on second year of underperformance

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