In search of digital leaders

"We are increasingly of the view that digital is changing the world," he says. "In virtually every industry there are implications - and some pretty malign. And it is only going to get more radical over the next five to 10 years. So the challenge is to identify the beneficiaries of digital change."

His interest in Burberry was piqued by the transcript of an investment seminar that he read in late 2013. "One analyst put a question to the then chief executive officer Angela Ahrendts asking which is Burberry's flagship store? And Angela Ahrendts is reported to have claimed that: 'Burberry.com is our flagship store'," he says.

"When I read that it was a revelatory moment and prompted me and colleagues to visit the website and go and see the company. We discussed their digital strategy for the next 10 to 15 years."

Since then Ms Ahrendts has left Burberry, which Mr Train says is "not optimal". "But current chief executive Christopher Bailey and two before him created billions in value for shareholders. He at least deserves a chance and absolutely continues to focus on digital," he says.

Mr Train has asked Burberry management if the success of its digital strategy means the company will have to open fewer expensive, physical stores as a result, and the answer is yes. "This is an example of how digital technology can help a company create a brand in a way that TV and newspapers never would have," he says. "This is a lot better than seeing a print advertisement.

Burberry accounted for around 5.6 per cent of assets at the end of January, up from around 2 per cent at the start of 2014.

"The internet has proven to be very disruptive but also creates opportunities for growth and value creation. We forget how new this is and are only now beginning to see the implications," says Mr Train. "When we meet a company we ask them: What does the internet mean for you and are you investing enough in your own digital services or products?"

But he admits that the effect of the internet is not completely ubiquitous, and with certain products and services it is hard to imagine internet disintermediation, for example, drinks companies, as "no one gets digitally drunk".

Mr Train believes high street retailers have business models that are most vulnerable to being harmed by the internet. "Stores people go to because they have to, rather than because they derive pleasure from it, will have problems," he says.

He cites Tesco (TSCO), which he has never invested in, as an example. "This is a company that has a lot of work to do to mitigate the impact of digital shopping on its real estate-intense business. It you are one of the biggest landlords in the UK it is a concern, and online grocery shopping is growing quickly."

He believes the banks are at threat from upstarts, noting that top 10 portfolio holding Hargreaves Lansdown (HL.) has recently announced plans to launch a peer-to-peer lending service.

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"The internet may disintermediate the more profitable parts of the banks," he says.

Meanwhile, Mr Train thinks companies that own global brands might benefit from the fall in the oil price. Examples include portfolio holdings Heineken (HEIO: AEX), Unilever (ULVR) and Diageo (DGE) which have hefty running, operating, raw material and transportation costs. He adds that billions of consumers across the planet will also have more money to spend because of energy price falls and may spend more on small items that could improve their quality of life, such as these companies provide. "And that attractive decline in costs is not reflected in their valuations," he adds.

Mr Train said that during 2014 he topped up on many of Finsbury Growth & Income Trust's holdings but didn't sell or reduce any holdings. He has not added any new companies to the portfolio since August 2011 because he has "not had any new ideas".

Finsbury Growth & Income yields less than 2 per cent, lower than some of its UK Equity Income investment trust peers. A reason for this is its share price performance has been strong, pushing down the dividend yield. However, Mr Train adds that they have a collection of companies that are growing their dividends quite rapidly. The trust has a progressive dividend policy, and in its last financial year paid out 11.3p, a 7.6 per cent increase on 2013.

"We could increase the yield by selling half the portfolio and investing in lower-quality companies, but this would not be in the best interests of our shareholders," says Mr Train. "Why own those?"

Source: Morningstar & *Frostrow Capital

Performance

Source: Morningstar, as at 12 February 2015

Top 10 holdings

As at 31 January 2015

Sector breakdown