‘’The UK stock market is home to some exceptional companies by global standards and owning a collection of them can help long-term savers achieve their investment goals’’. Nick Train shares his commentary as Finsbury Growth and Income Trust reports Interim results to 31 March 2023 as follows:
I know how trite the following sentence reads. Our basic economic assumption is that things for the world (including the UK) will keep gradually getting better. We expect technology will deliver productivity gains and drive steady GDP growth everywhere and the fruits of that growth will be spent by consumers on products and services that improve their quality of life. The assumption may indeed be trite, but at least it provides an uncomplicated backdrop to investment decision-making. And that usefully discourages us from excessive trading of your portfolio, based on guesses about the ups and downs of economic life.
Much more importantly, if you work with our assumption then the business performance of the companies in your portfolio and their share prices in the first half of the Company’s financial year are not a surprise, but they are encouraging. Things really do seem to be gradually getting better.
For instance, big holdings Burberry and RELX both hit all-time share price highs in the period. The well-received first show from Burberry’s new creative director, Daniel Lee, in February 2023, reminded investors that actually this is an iconic, global, luxury brand, well-positioned to benefit from wealth being created, notably in Asia and the Americas. RELX reported a stronger-than-expected set of final results, that demonstrate how increasingly entrenched its data products and software services are in the day-to-day work of scientists, lawyers and risk-professionals around the world. Burberry’s shares are up nearly 10-fold since 2003, while RELX is up 4.5 times Both have handsomely outperformed the FTSE All-Share Index. Despite hitting all-time highs recently, why shouldn’t their share prices continue to do well?
Another longstanding holding that hit an all-time high in early 2023 was Mondelez, owner of global confectionery and biscuit brands such as Oreo, Milka, Toblerone, Belvita (nine billion Belvita biscuits are baked each year – I can’t resist sharing that statistic with you!) and Cadbury. We inherited the holding via our investment in Cadbury at the time of its takeover in 2010. Ten years ago, Mondelez was trading at $30, today it is above $70. The world loves chocolate. It is interesting to note Mondelez has now outperformed the NASDAQ over the five years to the end of March 2023; a period that contained both a big bull market for tech shares and a subsequent sell-off. My point? Although finding tech-winners is a worthwhile exercise, it is also risky and that holding a predictable business like Mondelez makes sense for part of a portfolio too.
The share price of the London Stock Exchange Group (“LSEG”) – one of the biggest holdings in the portfolio – has picked up over the last six months, though remains below the levels reached in 2021. With each successive set of results the wisdom of the LSEG’s acquisition of Refinitiv (which closed in 2021, at that share price peak) looks more apparent and its recently announced joint venture with Microsoft is a further endorsement. LSEG’s position providing data, clearing and liquidity to global financial market participants also makes it a nice proxy for the wealth created by the advancement in technology.
Sage shares rose over 12% in the period, as it confirmed accelerating growth in its recurring software revenues to 12% year-on-year. Sage’s opportunity to sell productivity-boosting software services to companies around the world is also consistent with our optimism about technology gradually creating efficiencies and growth for businesses and consumers.
By the way, it is important to remember that Sage’s biggest and most rapidly growing market is the US. This UK technology company is doing well Stateside, and it is no surprise to see its share register increasingly populated by US investment houses.
Diageo reported record interim results in early 2023, with its revenues driven by record sales of its premium and super-premium brands. Wealthier consumers are drinking less, but better. Diageo is your second biggest portfolio holding, behind RELX. The results were apparently already in the price because Diageo’s shares closed the period down by circa 4%. Never mind; the company can take advantage of the temporarily flat price by retiring more stock via its newly announced share buyback. Shrinking its share count at this valuation is exceptionally accretive for long-term investors like us, we expect.
By contrast, Fever-Tree was one of the best performers over the period, with shares up over 50%. The growth of Diageo’s premium brands tallies with the strong revenue growth reported by Fever-Tree: more premium mixers are being sold to serve with high-end spirits. Both Diageo and Fever-Tree remain justifiably optimistic about the long-term prospects for their brands, we think.
That optimism is also shared by another drinks company in your portfolio, Heineken. Its shares have done well recently, not just because of the recovery from COVID, but because its premium brands, including the eponymous one, continue to deliver secular volume growth and exhibit pricing power that protects from inflation. It must have helped too that Bill Gates (or the Gates Foundation) made a new investment in the shares of Heineken in 2023, to the tune of nearly $1bn. This despite Bill Gates reportedly protesting he “is not much of a beer-drinker”. We assume he gets to see and act on any number of new technology investment opportunities.
But we also assume it makes sense for him and his foundation to ensure some of his wealth is committed to a business as enduring as Heineken, with 159 years of history already and the possibility of decades – or even centuries – of prosperity to come.
Elsewhere, it has been a difficult few years for the shares (and in some cases, businesses) of quoted UK asset management companies. Your portfolio has been affected, with Hargreaves Lansdown shares down another 6% over the last six months, despite the company reporting record results and client numbers. By contrast, we were encouraged to see Schroders’ shares return 22% over the half year; although by any historic standard they remain very lowly valued. Schroders has been busy in recent years building and acquiring new investment capabilities that should keep it relevant for both institutional and private clients. The growth in assets in Schroder’s private wealth and private equity divisions through 2022, a difficult year for markets, is encouraging for investors in the parent.
Schroders is a bank, albeit one without the risky bits. The risks in that sector resurfaced during the first quarter of 2023, with shocking failures (notably Credit Suisse, of course). We are not invested in any mainstream banks, but these events are not irrelevant for your portfolio. One detractor to our half-yearly performance was Experian, whose shares were unchanged over the period. As a credit bureau there is certainly a correlation between banks’ use of Experian’s services and their ability to extend credit (which would be compromised if problems in the bank sector are deep-seated). Economic history is littered with brief panics associated with bank runs, most of which are localised and soon forgotten. We hope this is a similar episode and have added to Experian through this price weakness. When it last updated the market, in January 2023, Experian reaffirmed its expectation for 8-10% revenue growth, which will be ahead of the circa 6% per annum growth it has delivered since listing on the UK stock market in 2006.
Meanwhile, Experian’s earnings have compounded at nearly 9% per annum since 2007 and we hope there is much more to come over the next 16 years and beyond. Evidently, as the biggest credit bureau in the world, including the biggest in the US, Experian is another attractive UK-listed play on long-term global growth.
During this report I have highlighted the names that constitute over 80% by value of your portfolio, including every share that made a notable positive or negative contribution over the period. The exception is Manchester United, whose shares are up 50%, but where the outcome of the sale of the company is unresolved as I write. I hope I have created two impressions.
First, that the portfolio is made up of strong companies that are performing well as businesses and, increasingly, as share prices too. In addition, that the UK stock market is home to some exceptional companies by global standards and owning a collection of them can help long-term savers achieve their investment goals.
