Despite strong gains, high-quality companies still have everything to play for, says Nick Train, manager of Finsbury Growth & Income Trust (FGT), an IC Top 100 Fund. He says he is "flabbergasted" by the extent of the trust's recent outperformance - its net asset value per share grew by 26.7 per cent, compared with 14.5 per cent from the FTSE All-Share index for the six months ended 31 March 2013.
However, he plans to stick to his strategy of investing in high-quality companies and argues that current valuations are far from excessive. Companies able to exploit digital technology will experience a bull market over the next decade, he concludes.
"As a generalisation, we claim that the company's portfolio comprises 'quality' companies," says Mr Train. "Of course, this is a subjective term; nonetheless, identifying 'quality' is the first and most important filter in our research effort. It is a defensible proposition then that the reason for our strong recent performance is because 'quality' companies have done well. Certainly, the big winners for the strategy over the period are fine businesses - Heineken, Unilever, Diageo, Daily Mail and Schroders - all long established and high profit margin companies.
"As to when 'quality' companies become overvalued, we say that when or if price to earnings ratios of over 30 times are accorded, there is a risk that even the most exceptional companies may have become strategically overvalued.
"So, while it is quite conceivable that some of the positions may 'have a rest' for a quarter or two, we dismiss the proposition that, for example, Diageo, on a PE or 19 times is dangerously overvalued.
"Indeed, we have found that there are always members of a portfolio 'resting' at any given point of time and, pertinently, Pearson (PSON) has been a dull share now for some quarters. We happily add to Pearson as its price drifts (on a lowly 13 times earnings, by the way, not 30 times), because it offers pure access to what we still regard as the most important thematic opportunity in the whole portfolio - namely companies with a credible strategy to grow and improve profitability by exploiting developments in digital technology. This remains the big bull market idea of the next decade, in our opinion, and Pearson and Daily Mail, Euromoney, Fidessa, Reed and Sage are probably participants."
