With a sense of anticipation Shares scurried along to Finsbury Growth & Income Trust’s (FGT) latest AGM (annual general meeting) at London’s Guildhall on a wet and windy day (28 January), where shareholders turned up in droves and one or two left the assembled board members squirming in their seats.

While the total return-focused trust’s long-run record under star manager Nick Train remains impressive, results for the year ended 30 September 2024 showed an NAV (net asset value) total return of 8.2%, behind the benchmark FTSE All-Share’s 13.4% haul, and as of 31 December 2024, the trust had underperformed the index over one, three and five years on a discrete basis.

Seated in front of the gathered throng of long-term shareholders and a smattering of analysts and journalists, the board faced tough questions over its decision to offer a continuation vote after the current financial year ends in September 2025.

This was deemed ‘completely unnecessary’ by one otherwise happy long-term holder who accused the board of ‘hyperventilating’ over a temporary period of lacklustre performance. The same shareholder also blasted the strategy of buying back shares to try and narrow the persistent NAV discount on a day which saw Simon Hayes agree to disagree on the merits of buybacks as he retired as a director and handed the chair’s baton to Pars Purewal.

But the board did receive supportive utterances from others in the hall, plenty of shareholders expressing their confidence in the stock picking abilities of Train, who manages the £1.4 billion cap trust with deputy manager Madeline Wright.

NO TIME FOR ‘FUZZY NOSTALGIA’

Once the company’s formal business concluded with all resolutions duly passed, Train paced up and down the floor to issue another mea culpa for five years of frustrating underperformance from this concentrated, low turnover portfolio that aims to beat the FTSE All Share’s total return.

Since Lindsell Train’s December 2000 appointment as manager, the trust’s NAV has risen by the best part of 700%, handily beating the rough 250% index return. ‘I do not find myself in the mood for fuzzy nostalgia or self-congratulation,’ commented Train, who has steered the trust for 24 years with a strategy of long-term investment in high quality companies with durable and cash generative franchises.

‘Calendar 2024 was yet another year that Finsbury Growth & Income Trust underperformed its benchmark. NAV per share was up 7.7% but the FTSE All-Share was up 9.5% and that is disappointing for you, for me and for Madeline. I sort of feel I’m running out of ways to say sorry, but sincerely I apologise for this persistent underperformance,’ said Train.

But this respected ‘buy-and-hold’ investor is keeping his nerve and sticking to his investment principles. He remains convinced the best way to get the NAV and share price moving up again is to continue running a concentrated portfolio built around exceptional UK companies.

‘In the first half of 2024 we suffered painful drawdowns from our investments in Diageo (DGE), Fevertree (FEVR:AIM) and Burberry (BRBY),’ recalled Train. ‘Thank goodness we didn’t sell Burberry at the bottom, it has nearly doubled since the low. But what a torrid 12 months that company has been through.’

Train, whose investment style is hinged on being patient, then pointed out that Finsbury Growth & Income’s NAV has made some progress of late. ‘Today, the net asset value is over £10 a share for the first time in the company’s history. We hope that the NAV and the share price will make further gains during 2025.’

SPIRITED SUPPORT FOR DIAGEO

While rival manager Terry Smith has ejected Diageo from his flagship Fundsmith Equity (B41YBW7) fund, Train remains thirsty for the growth ahead of the Johnnie Walker whisky-to-Casamigos tequila maker, which he hopes will retain the Guinness brand.

‘The concern is changes in consumer behaviour, particularly in the consumer’s willingness to use quite powerful drugs in order to change their body shape and behaviour, will be a drag on the whole beverage industry worldwide,’ remarked Train. ‘What we think is so important to note is that actually, for at least 30 years, per capita consumption of alcohol has been declining in the developed world. People have been drinking less alcohol per person per year than they used to 40, 50 years ago. But that hasn’t mattered, until the last 18 months arguably, to the industry, because consumers have instead have chosen to drink better quality, premium brands and alcoholic experiences and that has more than offset the reduction in volumes. I think one would welcome the fact that consumers around the world are drinking less alcohol to excess, but are willing to treat themselves to a bottle of Johnnie Walker blue label once every six months.’

He continued: ‘The other thing to say about Diageo is that it is the biggest one of its type in the world, and yet it only speaks for 4% of global alcoholic beverage, so even if the other 96% is under pressure or isn’t particularly growing, that doesn’t mean that Diageo doesn’t still have a huge opportunity to grow its brands. People say, “young people aren’t drinking anymore”, but they are drinking a lot more tequila and Diageo has the best tequila brands in the world. They are drinking a lot more Guinness, and Diageo is the company that owns Guinness. That’s why we still own Diageo and have added to it when we can.’ 

DIGITAL WINNERS

Train and Wright have responded to this period of underperformance by tilting the trust’s exposure towards London-listed data, software and technology platform companies, which has reduced the exposure to consumer brands.

They continue to believe that Johnnie Walker-to-Smirnoff vodka maker Diageo, British luxury fashion house Burberry and premium mixer company Fevertree are full of potential. The latter’s share price spike on news (30 January) of a transformational strategic tie-up with beer maker Molson Coors (TAP:NYSE) shows they may be on to something. However, they generally prefer other types of company more.

Specifically, ‘London-listed, UK companies with world-class data, data analytics, software or technology platform assets’, according to Train. ‘I can assure you that the London stock market does provide plenty of companies of that type. Since 2019, the exposure to digital winners has increased to nearly two thirds of the portfolio,’ he added. Relevant holdings include proprietary data curators such as Experian (EXPN), LSEG (LSEG) and RELX (REL).

Train has responded to the UK stock market’s disappointing performance by buying more of it, funding purchases through sales of non-UK holdings. ‘We believe we can invest in world class UK growth companies at a marked discount to the valuations that pertain for similar companies elsewhere and that the right thing is to buy more of them. Today, 100% of the portfolio is invested in UK equities.’

A NEW MAGNIFICENT 7?

‘The UK stock market itself has been gradually changing for the better in recent years and today, is considerably more “growthy” than it has been in the past,’ observed Train. Holdings that have materially outperformed the Nasdaq over the course of the 21st century include data and publishing giant RELX, Finsbury Growth & Income’s single biggest holding whose market cap exceeded that of BP (BP.) for the first time in 2024, as well as global financial and information firm LSEG, Dove soap-to-Marmite maker Unilever (ULVR) and beverage alcohol behemoth Diageo (DGE).

‘When you look below the surface of the UK stock market you find businesses that have grown and as a result of their growth, have outperformed Nasdaq over long periods of time and have the prospect of continuing to do so. And that’s going to help the UK stock market, which is closer to mustering a “Magnificent 7” of world-class growth businesses than its current dowdy reputation would suggest,’ continued Train.

To date this century, the two new additions to the portfolio have also outperformed Nasdaq, namely global shipbroking leader Clarkson (CKN), and Intertek (ITRK), the globe’s biggest assurance and testing company. Train and Wright believe Clarkson is more of a data business than its valuation implies, and are hopeful the fund will benefit from exposure to the growth of global trade but also a rerating, as data/platform revenues grow as a proportion of the whole, while Wright described Intertek at the AGM as ‘another true toll-booth company’, one well placed to benefit from the ever-increasing burden of global regulation and end user demand for demonstrable quality and compliance. ‘Both have good returns on equity, which implies there is something unique about their business models,’ she explained.

POTENTIAL TO OUTPERFORM

In his closing remarks, Train tackled the thorny issue of concentration. At the turn of the year, the top 10 holdings accounted for over 90% of Finsbury Growth & Income’s portfolio by value. ‘Concentration cuts both ways,’ commented Train. ‘The reason why the performance has not been as I’ve aspired it to be is because some of the big holdings haven’t worked over the last 18 months. But when I look back over the sweep of Finsbury Growth & Income’s long-term track record, I know that the returns have been generated by building concentrated portfolios concentrated on exceptional businesses. The structure of this portfolio today gives it the potential to perform very differently, and lets hope that here on in, it is going to be very much better.’

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