Most investment trusts normally trade at a discount to their underlying Net Asset Value (NAV), but there are one or two where the manager is so highly regarded that the shares generally change hands at a premium. A prime example is the £860m Finsbury Growth & Income Trust (LON:FGT), which is managed by Lindsell Train.
FGT has recently released its financial statements for the year to the end of September. Over the 12-month accounting period the fund delivered a Net Asset Value per share total return of 20.6%, which was well ahead of the 16.8% achieved by its FTSE All-Share benchmark.
The fund aims to generate capital and income growth from a portfolio that mainly consists of UK listed companies. Since the management was handed to Lindsell Train in December 2000, it has established a remarkable performance record. Over the ten years to the end of September investors enjoyed a NAV per share total return of 186.7%, whereas its benchmark only managed an increase of 75.6%.
As you would expect, the strong performance has resulted in a steady demand from investors, and in order to manage this the Board issued 21,353,000 new shares during the financial year. This has become an established trend with the number of new shares being issued having increased consistently during each of the last six years.
New shares are issued whenever there are unsatisfied buying orders in the market and in each case they are priced at a small premium to avoid any asset dilution for existing shareholders. The proceeds raised an additional £128.1m of capital during the last financial year and helped to keep the average premium to NAV to less than 0.5%.
Nick Train, the fund manager, invests in companies with strong brands and dominant market positions. He takes a long-term view, which keeps the portfolio turnover down to very low levels and minimises the transaction costs.
The fund provides exposure to a concentrated portfolio that at the end of September consisted of 25 separate holdings. Of these the top 10 accounted for 72.4% of the assets. They were: Diageo, Unilever, RELX (previously Reed Elsevier), London Stock Exchange, Sage Group, Heineken, Burberry Group, Schroders, Hargreaves Lansdown and the Daily Mail & General Trust.
Five of these shares – Unilever, Sage, RELX, Diageo and Heineken − all contributed more than 10 pence per share of gains during the financial year, while the only significant loss came from the education company Pearson, which cost 8.3 pence per share.
Despite the strong returns Train does not believe that they have become complacent about their winners…
There are three main investment themes in the portfolio: consumer brands, comprising the likes of Diageo, Heineken and Unilever; software via companies such as Sage; and stock market proxies including London Stock Exchange and Hargreaves Lansdown.
In his Strategic Report published in the annual accounts, Train accepts that they have ‘enjoyed a surprisingly sustained period of outperformance’ and that all ‘three investment themes and a good number of the holdings that offer participation to those themes have delivered strong multi-year returns and pushed prices of the best performers to levels where we know some of our shareholders – although not us – have begun to worry.’
Despite the strong returns Train does not believe that they have become complacent about their winners and that the likes of Diageo, Heineken and Unilever will continue to reward patient investors with attractive returns from the current share price levels over time. This is because of the excellence and reliability of the brands and their proven durability and rarity.
Train also emphasizes the importance of technology and how essential it is that companies embrace the internet and what it means for the future of their business. As he says, ‘The companies doing interesting things with digital – whether they are Tech companies or far removed – are the ones making progress. While the cost of ignoring Tech, despite the risks associated, looks to be irrelevance.’
Some investors think that the sorts of stocks that he invests in are bond proxies and have warned that they will sell-off when interest rates start to rise, but Train sees them as growth companies and points out that they are growing their dividends much faster than inflation.
He concludes with one of the most bullish assessments that I have seen:
‘I am more excited about the outlook for global and UK equities – and hence for the shares of your Company – than I have ever been. Almost every company we meet can see an opportunity for unprecedented growth or efficiency gains or both. Investors by and large are far too pessimistic about the outlook. And yet the pace of technology change – even as this creates the opportunities – means more and more potentially ruinous surprises for individual companies.’
Skin in the game
It is always reassuring when you know that the fund manager has a strong vested interest to act on behalf of his investors and this is certainly the case with FGT.
When Lindsell Train took over the fund management of the investment trust in December 2000 the Board thought that it was important that they took a ‘meaningful participation in their business’ so as to ‘align their commercial interests and to bind them to the future prosperity of the company’.
They did this by investing £1m in shares of the Lindsell Train investment trust (LTI), which owns a 25% stake in the Lindsell Train fund management business (the balance is held by the founding directors). It has proved to be a mutually beneficial arrangement as the LTI shares have risen from the initial price of £100 and now trade just above £900.
…the Board thought that it was important that they took a ‘meaningful participation in their business’ so as to align their commercial interests…
The Board also adopted a similar strategy with Frostrow, which provides their corporate admin, secretarial, investor relations and marketing services. In 2007 they took a 10% interest in the unlisted company for £150,000, of which half has since been repaid. This holding is now valued at £1m and has generated almost £1.5m in distributions to the fund over the intervening 9 years.
It is even more encouraging to note that Nick Train owns 762,662 shares in FGT. These are worth almost £5m and represent the whole of his personal investment in UK equity and a significant proportion of his total assets.
FGT shares are currently trading at a 0.58% premium to NAV and yielding 2%. If you want an actively managed exposure to the UK stock market it is hard not to believe that this is one of the best ways to achieve it.