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Nick Train, Finsbury Growth & Income Trust – “I am not generally a great one for looking back”

The latest update from Nick Train and the team at Finsbury Growth and Income Trust reflects on its performance in March and looks at some of the trust’s underlying holdings:

Train’s commentary highlights: 

  • Our UK equity returns were resilient compared to benchmark in calendar 2020.
  • Your portfolio proved “defensive” in difficult circumstances. In hindsight, our UK strategy began to underperform around the time of the vaccine announcements in Q4 2020 and this has continued into 2021.
  • One useful way to illustrate what has happened is to consider the performance of Unilever’s share price – an important holding for FGT.
  • During Q1 we saw encouraging share price gains from long-term holdings – Burberry, Daily Mail, Diageo, Rathbones Sage, Schroders and Youngs. All these with the potential to deliver exciting business growth, we hope, as economies and stock markets, particularly the UK, do better.
  • The London Stock Exchange – FGT’s biggest position at the start of 2021, but has fallen nearly 30%, hitting your portfolio return by c2.0% over the full quarter.
  • As an investment team, we have written a note this month explaining what has happened to the LSE in 2021 and our hopes for the investment looking ahead. (see attached commentary)

Full commentary for investors: 

In March, the NAV was up 1.1% on a total return basis and the share price was up 2.6%, on a total return basis, while the index was up 4.0%.

I am not generally a great one for looking back; but reviewing how we fared in 2020 helps explain our performance for you in the first quarter of 2021. Our UK equity returns were resilient compared to benchmark in calendar 2020. However, the outperformance last year was generated during the period when markets were weakest and concerns about the pandemic at their gravest. In other words, your portfolio proved “defensive” in difficult circumstances. In hindsight, our UK strategy began to underperform around the time of the vaccine announcements in Q4 2020 and this has continued into 2021.

Simply stated – having held up during the worst of 2020, our returns have lagged as economic and investor confidence recovered.

One useful way to illustrate what has happened is to consider the performance of Unilever’s share price – an important holding for FGT. During 2020 Unilever’s business held up reasonably well – selling staple food and personal products all around the world. As a result, Unilever’s share price was something of a safe haven in the context of the UK stock market, actually delivering a modest capital gain in 2020. During the first quarter of 2021, though, Unilever’s share price has fallen 7%, while the UK stock market is up over 5%. Suddenly its “defensive” qualities seem unattractive, when there are “recovery” stories to chase, such as Banks and Oil. Looking at other drab performers in the portfolio in Q1 confirms this analysis. Heineken, Mondelez and even Fever-Tree all fell. Their booze and chocolate joining Unilever’s soap and ice-cream. These just do not seem exciting investment propositions – at least for now. Of course, a look at the longer-term share price performance of these companies is a useful reminder that the sort of steady, predictable growth they offer is very valuable for investors. All the holdings mentioned in this paragraph have done well for your portfolio over time and we hope will do so again.

I must be careful, too, not to give the impression that the whole portfolio is made up of what some might uncharitably dismiss as “steady plodders”, such as Unilever. During Q1 we saw encouraging share price gains from long-term holdings – Burberry, Daily Mail, Diageo, Rathbones Sage, Schroders and Youngs. All these with the potential to deliver exciting business growth, we hope, as economies and stock markets, particularly the UK, do better.

And then there is the London Stock Exchange. This was FGT’s biggest position at the start of 2021, having risen over 16% in 2020 and that gain on top of many previous years of strong returns. But since its peak share price on 16th February 2021, at over £99, LSE’s stock has fallen nearly 30%, hitting your portfolio return by c2.0% over the full quarter.

As an investment team, we have written a note this month explaining what has happened to the LSE in 2021 and our hopes for the investment looking ahead. I attach this below:

“Following the LSE’s announcement of its 2020 results in March the share price fell sharply, closing down 28% for the month.

With the results, the company outlined its initial plans for the integration of its acquisition of Refinitiv. It was investors’ disappointment over what were seen as the unexpectedly high costs of integration that prompted the initial share price fall. There is also no doubt that the fall was exacerbated by the euphoria earlier in February, as the deal to buy Refinitiv was sealed. Some reaction to that was understandable. What is more, the transaction involved the issue of new equity to Thomson Reuters and Blackstone, the sellers of Refinitiv, and already c£750m of those new shares have been placed. And placed at a time when investors were digesting the news about costs and after a very strong run in the LSE’s price. This combination made for a toxic set of circumstances for LSE shares – in the short term.

Turning to the deal itself, we must acknowledge it is on a different scale to others that the LSE has executed in the past. Refinitiv sales are more than double “old” LSE’s and it employs more than three times as many people. The scale of the integration unquestionably brings execution risk.

These concerns are understandable, but it is important not to lose sight of the strategic benefits of the deal. As a combination the group becomes the #2 aggregator of data and analytics to the global financial sector, delivered increasingly via data feeds and the cloud. This data is embedded in customers’ systems and generates subscription-based revenues – 80% of which are recurring. Demand for that data is rising at a mid-single digit rate, propelled by customers’ increased requirements, not least for ESG analysis. There are high barriers to entry here as amassing data takes time and requires patient investment. This division becomes c70% of total revenues. An even higher quality part of the group, according to management, is LCH Clearnet, the #1 provider of clearing services in interest rates and foreign exchange. The more cyclical Capital Markets division becomes smaller, at 17% revenues, combining LSE’s markets division with Refinitiv’s Foreign Exchange dealing platforms. In addition, the company owns more than 50% of Tradeweb Markets, an independent trading venue for interest rates, ETFs, equities and money markets, listed on NASDAQ. This is a very valuable asset, capitalised at over $17bn currently. In total, the LSE Group will have 70% recurring revenues and a realistic target to achieve 50% operating margins over the next few years. In the meantime, debt and leverage fall quickly after the imminent sale of the LSE’s holding in the Italian stock exchange.

In our recent meeting with LSE management, we asked about the early challenges of the integration. The answer was that their views on the merger are consistent with those when they first announced it back in 2019. They knew Refinitiv was a business that would need work. Part of the investment thesis was based on the knowledge that Thomson Reuters had underinvested in certain areas. Given the scale of the business and complexity, this was always going to require heavy lifting. As they have got to know Refinitiv’s business and people better, they feel as good, if not better about the long-term strategic opportunity. The timeframe and targets have not changed. The targets around revenue, synergies and operating margins are unchanged. They look forward to delivering all of these.

Based on these comments we remain supportive and encourage the company to grasp the opportunity by investing more and sooner if necessary, to ensure its long-term competitive position is enhanced.

We expect the combined group to occupy a vital role in the global financial sector and with its collection of unique data and market positions hope it can command a stock market rating and share price equal to or higher than that from which it has just recently fallen.”

No investment is risk-free and there certainly are risks to the LSE making a success of this merger. On the other hand, the rewards are apparent too. As is the rarity of such a globally significant data business in the context of the UK stock market. It remains a core holding in your portfolio.

Finsbury Growth & Income Trust PLC

  • AIC Sector: UK Equity Income
  • Launched: 1926
  • Date of Appointment of Lindsell Train: December 2000
  • Net Assets: £1,915.8m
  • Invests in the shares of predominantly UK-listed companies, with the objective of achieving capital and income growth
  • Concentrated portfolio of up to 30 stocks with a low turnover
  • Bottom-up stock picking approach
  • Looks to invest in a universe of excellent listed companies that appear mostly undervalued

 

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