This week, we’ve had annual results Finsbury Growth and Income (FGT), which I thought presented an opportunity to have a look at how the trust is doing and reflect upon our previous observations of the manager’s style.
For most readers, FGT needs little introduction. It is a household name in the investment trust space, having been managed by industry veteran, Nick Train, in a Buffettesque-style since 2000. Nick has delivered some very strong returns for shareholders in that time, which has earned him a very loyal fan base. For many years the trust traded on a sensible premium and continually dripped out stock to willing investors. At times, it was almost as if they couldn’t print the share certificates fast enough, but I think this was the right thing to do. It kept the premium in check and stopped new investors from potentially paying over the odds for shares, which can be very painful for them down the line – while also benefiting existing shareholders, shares sales at premiums are NAV accretive. FGT’s liquidity strengthened, and its ongoing charges ratio fell as the trust’s fixed costs were spread over an ever-expanding asset base.
Precision focus on the long-term
FGT was able to grow ad infinitum because of the manager’s investment style. Nick is not investing in small illiquid idiosyncratic investments but rather large defensive names that should be able to navigate downturns. His focus is on companies that have strong brands and/or powerful market franchises but with a twist. Nick starts by looking for companies that he believes could be around for 100 years or more, which naturally excludes a lot of enterprises, and then buys them when he believes that they are good value. For example, this might typically be when they were depressed because of bad news but he has an expectation that they would win out and recover over the long-term.
This tried and tested, yet simple, formula seemed to have little or no bounds. Investors enjoyed the returns and took comfort from the fact that they were well aligned with the manager as the bulk of Nick’s personal investments was focused on the trust. Perhaps the biggest criticism that the trust drew was in regard to its dividend yield versus its UK equity income peer group – FGT typically yields half, or even a bit less, of the sector average – but investors didn’t seem mind when all the capital growth was coming through.
Turnover and costs are kept low – Nick almost never sells stocks (this might be a once in a decade event when a company has fundamentally changed its spots) and, instead, adds to his core holdings when they are cheap. Furthermore, the manager is focused on a small number of key stocks, and it is a rare event that a new name is added – FGT can go years between initiating new positions. Nick has been known to say that one of the hardest things about managing the portfolio is sitting on his hands and doing nothing.
Times change
Times have changed quite dramatically and, as FGT’s recent results show, the last couple of years have not been so rosy for the trust, at least not in relative terms. By way of illustration, when we wrote about it in June 2021 (click here to read our QD view – step off the train?), we observed that FGT’s once peer-group-topping- performance had undergone something of a volte face – over six months it was the second-worst performing of the then 17-strong UK Equity peer group.
In our closing remarks to that article, we commented that backing great businesses, with solid defensible business models, for the long term is a great strategy – something that we still believe. However, we did ask the question as to whether, in a post-pandemic world, some of the business models in Nick Train’s portfolio would be as solid as they had been previously? We think the jury is still out, although there might be some light at the end of the tunnel.
While good in absolute terms, the remainder of that financial year proved to be challenging for FGT. For the year ended 30 September 2021, FGT provided NAV and share price total returns of 10.6% and 6.3% respectively but, according to its annual report for that year, its All-Share index benchmark was massively ahead with a total return of 27.9%. What went wrong? The report for that year doesn’t point to any obvious missteps – Nick’s style, which has a value tilt, was simply out of favour. This was also reflected in the trust’s rating – FGT moved out to trading at a discount in May 2021 and there it has remained.
Board has been active in providing liquidity
However, thanks to its board stepping up and consistently buying back shares, FGT’s discount has remained in single digits and has mostly been sub-5%. We think this is commendable – it is disappointing when trusts that have previously enjoyed premiums, and have issued a significant amount of stock, move to a discount and boards are lacklustre in making repurchases. Although it doesn’t have to be perfectly symmetrical, providing liquidity to shareholders is important in both directions and, for a trust as big as FGT, this is little hardship.
A second-year of underperformance
FGT’s annual results for the year ended 30 September 2022 show that it had underperformed its All-Share benchmark for the second-year running – but the gap is much narrower – an NAV total return of -5.8% versus the benchmark’s -4.0% (neither is comforting in absolute terms, but not surprising given how tumultuous 2022 has proved to be). However, investors might take some comfort that the year was very much a game of two halves and there are signs that FGT’s style may be starting to work again – the portfolio actually outperformed the benchmark in the second half-of the financial year. The dividend has been increased by 5.8% to 18.1p and was fully covered by revenue earnings of 20.6p for the year. This puts FGT on a yield today of about 2.1%, still around half or a bit less of the yield available from most other funds in the UK equity income sector.
Sentiment driven opportunity?
Nick comments that performance during the year has been particularly frustrating, given that the business performance of most of FGT’s portfolio companies met or exceeded his expectations. He puts much of this down to market sentiment and, if he is right, this could be a source of outperformance in the future and perhaps the turning point is not so far away? Nick thinks that there is now a shift underway with the market moving back to favouring the sort of industries and companies that have always formed the backbone of FGT’s portfolio. If he is correct, shareholders might get an even greater benefit as FGT might enjoy a rerating too.