The 12 month period ended 30 September 2023 was not a great one for Finsbury Growth and Income. It is reporting an NAV return for the period of 7.2% and a share price return of 7.5% which compare to an All-Share return of 13.8%. This is now the third consecutive accounting period where the trust has lagged its benchmark and the statement says that over that period it ranks 22 of 23 funds in its peer group. [These figures are including additional share classes of some competing funds, we think the figures should say 19 of 20 funds]
The company’s dividend was increased from 18.1p to 19.0p. The dividend was covered by revenue earnings of 20.0p (down from 20.6p for the prior year). [The company is – by some distance – the lowest yielding in its UK equity income sector (2.3% currently, versus a sector median of just over 5.0% and an All-Share yield just shy of 4.0%). I would reiterate my belief that this trust should not be classified as an income trust. Were it classified as a UK All Companies Fund, currently it would rank 3 of 9 funds over three years.]
As at 30 September 2023 the discount was 4.4% compared with a closing discount at the last year end of 5.7%. During the year under review the trust bought back a total of 11,218,558 shares (5.5% of the shares in issue) into treasury at a cost of approximately £97.7m and at an average discount of 4.8%.
The board is proposing to increase the maximum aggregate amount potentially payable to directors by way of fees from £200,000 to £300,000 in any financial year. However, the proposed limit increase is not due to any unusual rises in directors’ fees, which are expected to be approximately £192,000 in the current financial year.
Extracts from the manager’s report
Three years is a meaningful period to review the performance of a portfolio manager, particularly one like Lindsell Train Limited (“Lindsell Train”) which takes greater investment risk than the typical manager and therefore should generate superior returns. It is, therefore, disappointing for me to report on the Company’s performance over the last three years, to 30 September 2023. This shows a net asset value (“NAV”) per share total return of 11.8% that is well adrift of the Company’s benchmark (the FTSE All-Share’s) gain of 39.8%. There have been three consecutive financial years of underperformance, with the most recent 12 months showing a NAV per share total return of 7.2%, compared with the benchmark 13.8%.
I assure you that at Lindsell Train we are not complacent about underperformance and have continued to think hard about all the holdings within the portfolio and to consider whether our previously successful investment approach remains relevant in the third decade of the 21st Century.
Below, I review reasons for the underperformance and then discuss aspects of the portfolio’s construction and composition that offer the possibility of better future returns.
UNDERPERFORMANCE
There are three main factors that combined explain the poor relative performance.
First, in the financial year ending 30 September 2020, not holding oils, metals and banks during the Covid-19 crisis had been a boost to relative performance; one that reinforced my longstanding aversion to investing in those sectors. Since then, however, it has been the economically sensitive, more cyclical sectors that have rallied most in the UK stock market. For example, the share price of the Company’s big holding in “defensive” Unilever is little changed over the last three years. Meanwhile on a total return basis Shell has risen by 203%, BP +173%, Glencore +255%, Rio Tinto +48% and HSBC +145%. These are all major FTSE All-Share constituents and it has hurt the Company not to own them. Indeed, we calculate that not owning those five companies has contributed to over two thirds of my underperformance over the past three years.
I am not saying I wish I had purchased a basket of commodity and bank shares in late 2020, because that would have run counter to Lindsell Train’s, I hope, clearly stated investment approach. But I do wish the portfolio had benefited more from the end-of-Covid-19 bounce.
Next, I must acknowledge that some of my highest conviction and longstanding holdings performed poorly over the period, exacerbating the impact of not participating in the cyclical upswing. London Stock Exchange Group (“LSEG”), Hargreaves Lansdown (“HL”) and even the more recently purchased Fever-Tree are examples.
Finally, and in my view even more significant than the above, at least for future performance, I underestimated the significance of technology change. There has been, obviously, a huge bull market in companies that are beneficiaries of technology change, and it is clear Covid-19 acted as an accelerant for industry, consumer and stock market trends that had already been gathering momentum in the second decade of the 21st Century. Finding UK-listed data, analytics and software companies that are beneficiaries of technology change has been and remains a priority for me and in RELX and Sage, for instance, there has been some success. In hindsight, at the start of the recent three-year period, I wish I had even more exposure to digital winners.
FGT : Third year of underperformance for Finsbury Income and Growth