Finsbury Growth & Income (FGT) plans to hike dividends by 50% from October and to fully gear up in order to boost shareholder returns after Nick Train’s underperforming investment trust suffered a 14.4% fall in the six months to 31 March after several of his key holdings slumped on fears of the competitive threat from low-cost artificial intelligence (AI) tools.
Responding to the “disappointing” performance in its half-year results, which contrasted with a 8.9% rise in the FTSE All-Share index, chair Pars Purewal said the £792m UK equity income trust would move to quarterly dividends from semi-annual payments in line with most of its rivals.
Drawing on revenue and capital, the dividend would be “enhanced” in the next financial year with the distribution rising to 30p per share up from 20p currently. This would lift its yield from 2.6% to 3.9%, which is the average of funds in the AIC UK Equity Income sector.
The company is also abandoning its long-standing policy of using only modest gearing to boost shareholder returns to offset the risk of fund manager Train’s concentrated 20-stock portfolio. In future, FGT will fully use it £100m borrowing facilities of which just £29.2m is currently drawn.
Cuts to the annual management fee paid to Train’s firm Lindsell Train announced in December had saved shareholders £129,000 in the first quarter, said Purewal as he outlined the three steps that he said would “better utilise the investment trust structure and enhance shareholder returns”.
Despite the slump in data and software stocks such as Experian, Sage and London Stock Exchange over artificial intelligence fears, the chairman expressed support for Train, who has managed the trust since 2000, pointing to the more than 97% support FGT received in its first shareholder continuation vote in January.
However, he held out the prospect of a further continuation vote if performance and market conditions continued to be challenging, saying the board would do “whatever it takes” to improve shareholder returns.
While FGT has significantly outperformed the FTSE All-Share during Train’s tenure, over the last five years it has lost shareholders 6% with dividends included, making it the second worst performer in its sector.
“While recent performance has been disappointing, we are seeing early signs of stabilisation and remain firmly committed to the portfolio manager’s disciplined, long-term approach focused on high quality businesses with resilient franchises and hard-to-replicate data assets, where we believe AI will prove an enhancer of value rather than a threat.
“Against a backdrop of compelling UK valuations, our confidence in the company’s prospects is growing, and the board remains committed to doing whatever it takes to improve shareholder outcomes through disciplined investing, active balance sheet management, an enhanced dividend policy and careful discount management,” Purewal said.
Train said writing the report had reinforced his conviction that FGT held a “collection of outstanding, in most cases world-class, UK-listed companies that have, for a variety of reasons, fallen out of favour with investors.”
He added: “In particular, we believe that the sell-off in London-listed data, software and platform companies could offer a once-in-a decade opportunity to access exceptional growth assets at fundamentally the wrong price.
“This really should be an opportunity to utilise the special powers of an investment trust to create additional value for its shareholders,” he said.
Our view
Matthew Read, senior analyst at QuotedData, said: “It is no secret that Finsbury Growth & Income has endured an extended period of weak performance and these interim results demanded a response. The board and manager are now taking decisive action. The rebased dividend lifts FGT’s yield to around 4%, bringing the trust into line with its UK equity income peers. One long-running niggle we had was that FGT’s yield was not really high enough for the UK equity income sector; this fixes that.
“The planned uplift in gearing is the clearest statement of intent. Rather than changing course at a point when the strategy is deeply out of favour, the board and manager are doubling down to exploit what they see as a valuation opportunity in the aftermath of the ‘SaaSpocalypse’.
“Finsbury remains heavily exposed to data, software and platform businesses that have been marked down on concerns that AI could eviscerate their business models. Nick argues the opposite: that proprietary, constantly refreshed data should become more valuable in an AI world. If he is right, current valuations could prove anomalously cheap. If he is wrong, gearing into the same portfolio could compound the pain.”
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