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Look to strength in uncertainty via Finsbury Growth & Income

Finsbury Growth & Income invests in large, financially strong companies
Look to strength in uncertainty via Finsbury Growth & Income
  • Finsbury Growth & Income invests in large, financially strong companies
  • The trust has a strong performance record and can fall less than markets in difficult years
  • But it can lag in market rallies
IC TIP: Buy at 850p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points

Strong longer-term returns

Focus on strong companies

Experienced manager

Reasonable ongoing charge

Bear points

Short term underperformance

Although vaccines to protect against Covid-19 are beginning to be rolled out, how soon and well the world recovers from the pandemic in economic terms is still unclear. So, in such times of economic and market uncertainty, investing in reliable assets via a safe pair of hands could pay off.

A good way to do this looks like Finsbury Growth & Income Trust (FGT), which has been run by highly regarded manager Nick Train since December 2000. The trust typically invests in large companies with strong brands and/or powerful market franchises, and at the end of 2020 around 90 per cent of its assets were in FTSE 100 companies or overseas equivalents. These include companies that have done well during the coronavirus pandemic and ones that, despite setbacks, have been strong enough to weather it and appear to have better prospects ahead, such as Diageo (DGE).

The trust’s assets are invested in equities which fall into four themes. Around 40 per cent is in companies that Mr Train and his colleagues believe have the potential to be digital winners such as data analytics and technology businesses RELX (REL) and Sage (SGE). Around 35 per cent is in companies that own popular consumer brands such as Diageo, Heineken (NET:HEIO), Mondelez International (US:MDLZ) and Unilever (ULVR). 

Mr Train recently said: “The way consumers have flocked to such brands in 2020, perhaps for reassurance, has certainly been reassuring for their investors.”

Around 15 per cent of the trust's assets are in companies that own luxury or premium brands such as Burberry (BRBY) and Remy Cointreau (FRA:RCO), with the rest in asset management companies that have growing private wealth franchises.

“We see the provision of private wealth advice as another service that has an opportunity to harness 21st century technology to improve customer experience and shareholder returns,” explains Mr Train.

Mr Train likes companies within these areas that can grow over the long term regardless of the economic cycle. He also likes them to have a high return on equity, low capital intensity and high cash flow generation that can support sustained dividend growth.

The trust doesn’t usually hold more than 30 stocks and at the end of December had 25. But no single holding can account for more than 15 per cent of its NAV at time of investment, mitigating concentration risk along with its focus on large, strong companies.

Most of the trust’s investments are listed in the UK, but it is not particularly exposed to the UK domestic economy, which faces problems due to the Covid-19 pandemic and leaving the European Union (EU). Finsbury Growth & Income typically holds multinationals that generate their revenues from across the world. But, because of their UK listing, some of their share prices have suffered due to concerns on the UK leaving the EU. 

However, Mel Jenner, investment trusts analyst at research firm Edison, comments:

“While there is considerable economic uncertainty as the UK suffers its third lockdown, domestic shares may be due for a period of catch-up now that Covid-19 vaccines are being rolled out, Brexit has passed, a trade deal with the EU has been finalised and as we get more clarity on the economic impact of Brexit. Although the UK market does not have broad exposure to some of the high-growth areas of the economy such as technology, there are high-quality firms available that have significant global exposure and long-term growth potential.”

The trust also had three holdings listed outside the UK at the end of last year - Mondelez, Heineken and Remy Cointreau. The latter two are family controlled alcoholic beverage businesses of which the eponymous brands, Heineken and Remy Martin, account for much of the value of the companies.

"We very much like investing in such situations, observing that many of the world’s most enduring family fortunes have been based on multi-decade or even multi-century ownership of iconic booze brands," says Mr Train. "Heineken had a difficult 2020. However, even at its depressed end of 2020 price, its shares were up 24-fold since 1990, for an annualised compound growth rate of 11 per cent. There is every reason the shares could do as well over the next few decades. Remy Cointreau, meanwhile, was our best performer in 2020, up 48 per cent, as drinkers around the world - especially in Asia - drowned their sorrows in premium cognac."

Finsbury Growth & Income typically trades at a slight premium to NAV because, since 2004, its board has repurchased shares when the discount exceeds 5 per cent and issued shares at a small premium when there are unfulfilled buy orders in the market. However, the trust had recently moved to a slightly wider discount to NAV than normal – 2 per cent as of 28 January – a slightly cheaper entry point.

The trust has an ongoing charge of 0.64 per cent, which is very reasonable in view of its strong performance and defensive profile in difficult market conditions. And as Mr Train tends to hold investments for the long-term portfolio turnover is low – 1.3 per cent in its last financial year – meaning that trading costs eat less into returns.

Finsbury Growth & Income has underperformed the FTSE All-Share index and UK equity income trusts’ average returns over three and six months – a possible reason for its wider than usual discount to NAV. Between 30 September and mid December, the trust’s NAV total return was 4.1 per cent compared with 13.5 per cent for the FTSE All-Share, according to Numis Securities.  

The trust typically has a low yield relative to other equity income funds – 2 per cent as of 28 January.

The reason for the underperformance is because companies that had been hit badly by the coronavirus pandemic bounced back during the final quarter of last year. These included more volatile, cyclical companies that the trust does not invest in, a reason why it can lag in strong market rallies. It has very different sector weightings to the FTSE All-Share, with an emphasis on areas such as consumer goods and financial services. But the trust's periods of underperformance are outweighed by strong performance at other times and over longer periods it has massively outperformed the FTSE All-Share and its peers. Over 10 years to 28 January 2021, it is the best-performing UK Equity Income sector trust, with an annual average total return of 13.5 per cent a year versus 5.7 per cent for the FTSE All-Share index, according to broker Numis Securities.

Although Finsbury Growth & Income has a lower yield, its board aims to increase or maintain its total dividend each year. In respect of its financial year ended 30 September 2020, it maintained its dividend at 16.6p per share and for a number of years before that it had increased the dividend.

Finsbury Growth & Income also has a substantial revenue reserve worth £45.44m, which could cover dividends worth 1.22 years of what it is paying in its current financial year. So it has the ability to maintain or increase the dividend in years when the income from its underlying holdings is not enough to do this. The trust's board, for example, took a small amount from the revenue reserve to maintain its level of dividend in respect of its last financial year.

So with outstanding long-term returns, a focus on strong companies and reliable income, Finsbury Growth & Income Trust still looks like a good way to add to or increase your portfolio’s weighting to less volatile investments that have a better chance of weathering a challenging environment. Buy.

 

Finsbury Growth & Income Trust (FGT)
Price850pGearing2%
AIC sectorUK Equity Income*NAV867.6p
Fund typeInvestment trust*Price discount to NAV2%
Market cap£1.9bnOngoing charge0.64%*
Set-up date15 January 1926*Yield 2%
Manager start dateDecember 2000**More details finsburygt.com
Number of holdings25**  
Source: Winterflood as at 29 January 2021, *AIC, **Frostrow Capital.

 

Performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
Finsbury Growth & Income Trust NAV-12370
Finsbury Growth & Income Trust share price-21965
FTSE All-Share index-8-237
UK equity income trust average NAV-9-132
UK equity income trust average share price-9-131
Source: Winterflood as at 29 January 2021.

 

Top 10 holdings (%)
London Stock Exchange11.0
Diageo10.0
RELX9.7
Unilever9.5
Mondelez International8.5
Schroders7.9
Burberry7.3
Hargreaves Lansdown6.0
Heineken5.2
Sage4.9

Source: Frostrow Capital as at 31 December 2020

Sector breakdown (%)
Consumer goods48.8
Financials26.9
Consumer services17.3
Technology4.9
Industrials2.1
Source: Frostrow Capital as at 31 December 2020