The long period of poor performance by Nick Train’s £1.1bn UK equity income trust presents a challenge ahead of a shareholder continuation vote in January.
Finsbury Growth & Income (FGT) fund manager Nick Train has vowed to make no changes to his investment process after the investment trust fell to a loss for the year in September, putting it on track for a fifth consecutive year of underperformance.
A 3.4% decline in net asset value last month left the £1.1bn UK equity income trust down 5.8% over the third quarter and 3% lower during the first nine months of the year. At the end of August it was up just 0.4% for the year to date.
The year-to-30 September fall represents a huge 19.6% underperformance of the FTSE All-Share this year by Train’s portfolio of consumer brands and “digital winners“. The index returned 16.6% over three quarters as the UK’s stock market recovery has strengthened despite the turbulence over US tariffs.
This means that without a remarkable fourth quarter rally Train faces a fifth consecutive year in which Finsbury Growth’s investment returns from its concentrated 20-stock portfolio have lagged its benchmark.
It’s a truly awkward run ahead of the trust’s continuation vote in January when shareholders must decide if the then 100-year-old trust can regain its previously strong performance under the manager.
With the shares trading at a 7% discount below net asset value, shareholders have received a mere 11.7% total return over five years, the worst in its 19-strong UK Equity Income sector where the average return has been nearly 80%. Over 10 years it does better with an 84.6% total return though that is still below the 105% group average.
One has to go back to December 2000 when Train started as the trust’s manager to see how good he was. Total shareholder returns over the near quarter of a century to 30 September amounted to 733.5%, more than double the 302.6% from the FTSE All-Share.
“I know there is nothing I can write here to assuage your disappointment (and mine),” said Train who owns 4% of the trust’s shares.
He said, “we have no intention of making any changes to the investment approach, nor any major changes to the structure or constituents of the portfolio. To do so could crystallise absolute and/or relative losses from companies which we believe have the best years ahead of them.”
Secondly, he said he continued to find new ideas, pointing to his scooping up Autotrader and Games Workshop after their shares slumped when markets recoiled at the start of the year in anticipation of President Trump’s tariff announcement in April. He said these were the latest examples of finding London-listed companies with exceptional intellectual property and/or strong digital franchises.
Train, a high conviction investor, defended putting 87.5% of the trust into its 10 biggest holdings with Experian, the consumer credit rating group, its biggest position at 12.2% of assets.
The fund manager said it was important to recognise what he had concentrated investors’ money on. “The portfolio comprises substantive companies with world-class franchises and brands. By and large the portfolio companies are growing and we believe a meaningful proportion of them will grow more quickly in years to come.”
In his monthly commentary Train defended his decision to retain Diageo, the Johnnie Walker to Guinness drinks group that remains the sixth biggest holding at 9.3%, but whose shares have more than halved in the past three years, largely over falling spirit sales. He believes the company is correct in thinking its premium spirit brands will benefit from a trend of younger consumers to drink less, but better.
Train’s shareholders can only hope his distinctive approach returns to its former winning ways. Prior to the current long period of underperformance, the fund manager beat the FTSE All-Share for four years in a row.
Last year Finsbury Growth rose 7.7%, 1.8% behind its FTSE benchmark. In 2023 it gained 5.8% but was outpaced by the All-Share which notched up a 7.9% total return. In the previous year it fell 6.5% while the index edged 0.3% higher following a 2021 post-Covid recovery in which its 13% rally trailed the benchmark’s 18.3% return.
During the 2020 pandemic its collection of high quality growth companies proved resilient in a highly volatile stock market, dropping just 2% against the UK stock market’s 9.8% descent. At the time that marked the fourth consecutive year in which the trust did better than the FTSE All-Share under its high profile fund manager.
