Nick Train apologises for short-term underperformance

Train explains why performance has come off the boil and names three big ‘money-making’ opportunities. 

Nick Train has apologised to Finsbury Growth & Income’s (LSE:FGT) shareholders for a “frustrating” period of short-term performance, but will continue to stick to his guns and outlined three key areas he is seeking to profit from for the next decade.

The trust reported notable underperformance for the first six months of its financial year – from the end of September 2020 to the end of March 2021. FGT’s net asset value (NAV) return was 2.2% versus 18.5% for its benchmark, the FTSE All-Share Index. FGT’s share price total return was 3.7%, as over the period the trust moved from a small discount to a small premium.

Given the highly concentrated nature of FGT’s portfolio, which consists of 25 holdings that have strong brands or franchises, performance will inevitably be different from an index that contains around 600 companies.

Over the longer term, shareholders will have no complaints, with Train’s stock-picking skill leading to significant outperformance. On a five-year view, FGT’s share price is up 73.8% and its NAV return stands at 72.5%. Both comfortably outpace the AIC’s UK equity income investment trust sector and FTSE All-Share, up 46.9% and 45.2%.

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Since November’s Covid-19 vaccine breakthroughs, performance has come off the boil for FGIT and the open-ended Lindsell Train UK Equity.  Last month, Train asked investors in the Lindsell Train UK Equity fund to be patient following share price falls for some of his favourite holdings.

“I acknowledge and apologise for the disappointing return relative to our benchmark over that period,” says Train.

He adds: “In short, as you can tell, there has been a lot for me and other shareholders to feel frustrated about over the last six months. It is an uncomfortable feeling when parts of the market we are not invested in are doing well. Or when longstanding and previously successful holdings are hit by profit-taking or their shares simply tread water.”

There are many reasons why the trust has underperformed over the six-month period, says Train, but the most obvious is that a number of its holdings held up well during the first quarter of 2020 when markets were in freefall. Train points out that for 2020 as a whole the trust’s NAV total return was down 2% versus a 9.8% loss for the FTSE All-Share.

Train commented: “The company’s portfolio was ‘defensive’ and resilient during the worst of the crisis of 2020 - given the NAV outperformed a weak UK stock market over the year. Of course, we were pleased about this, because we have always looked for predictability, reliability and durability when we choose companies to invest in. They are the ones that should hold up well in a crisis.

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“When asked to describe our investment approach in a nutshell, I often say: ‘Big positions in intrinsically low-risk companies’. And when I look back on 2020 as a whole, I think that investment approach showed its worth.

“However, there is no getting away from the fact that once the vaccines were announced in November 2020 and citizens and investors began to see a path out of the lockdowns, your portfolio started to lag its benchmark and this underperformance continued through the first three months of 2021. There are a number of reasons, but the most obvious is this: because the portfolio did not fall as much during the difficult times, there was less scope for a bounce once confidence recovered.”

In addition, a number of stocks disappointed over the six-month period. London Stock Exchange (LSE:LSEG), for example, one of FGT’s biggest holdings, saw its share price decline by 20% in the first quarter as euphoria around LSE's $27 billion purchase of data giant Refinitiv was short-lived. “Heavy integration costs prompted what turned into a bout of profit-taking,” explains Train.

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Burberry (LSE:BRBY), RELX (LSE:REL), Sage (LSE:SGE) and Hargreaves Lansdown (LSE:HL.)were also highlighted by Train as examples of holdings that “are working through issues that have put a dampener on their share prices – temporary issues, we hope”.

Train, however, is not unnerved by the short-term performance numbers and is continuing to invest with a long-term mindset. On that front, he named digital products and services, luxury and premium consumer brands and trusted wealth management services as “three of the big money-making opportunities of the next decade and longer”.

He adds: “When I look at the company’s portfolio today, I believe most of it is made up of companies that offer access to those opportunities, from the LSE and RELX, via Burberry and Diageo (LSE:DGE), to Hargreaves Lansdown and Schroders (LSE:SDR). If that is right, then our recent period of disappointing performance should prove temporary.”