Finsbury Growth & Income Trust: September 2021 update

How it fits in a portfolio

Finsbury Growth & Income Trust aims to deliver long-term growth in capital and income by investing in a small number of high-quality UK companies. It could work well as part of a diversified investment portfolio, either to complement trusts or funds investing in unloved companies, or alongside those investing overseas. The income goal isn’t to provide a high yield, but rather to grow dividends steadily over time. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV.

Manager

The trust is managed by Nick Train, one of the founding partners of Lindsell Train. He’s a veteran investor with over three decades of experience under his belt. Train was previously Head of Global Equities at M&G Investment Management, where he’d worked since 1998. Before that he spent 17 years at GT Management in various senior roles including investment director and Chief Investment Officer for Pan-Europe.

Train also manages the Lindsell Train UK Equity fund and the Lindsell Train Investment Trust, and co-manages the Lindsell Train Global Equity fund alongside Michael Lindsell and James Bullock. This trust is run using the same approach applied to all Lindsell Train portfolios, and there is a fair amount of cross over between them, so we think Train can devote enough time to each.

Process

Train seeks out a small number of high-quality UK companies that he believes can deliver good long-term total returns – growth in both capital and income. Most of the trust is made up of large, well-established businesses, and nearly half is currently invested in the consumer staples sector. Snack maker Mondelez, household goods company Unilever, and alcoholic drinks company Diageo are examples.

Although the trust aims to deliver a growing income over time, investors shouldn’t expect high yields. Train believes the consistency of long-term dividend growth is more important than a high but potentially unreliable yield. He’s therefore willing to accept lower yields if he believes dividends can carry on growing in the long run.

Train invests in companies for the long term and lets the power of compound growth get to work. Over the past 12 months he’s not sold a single company from the trust, and only made one new investment – global credit bureau and data analytics business Experian.

The manager thinks it’s a world-class technology business. It has built a large database of unique customer credit data that is critical to the decision-making processes of its customers. It would be very difficult for new entrants to the market to compile similar data. New regulation would add to the difficulty, meaning the firm has significant barriers to entry from competition. The company is also transitioning from selling data, to selling data enhanced by decision tools, which increases the usefulness of the data to the firm’s customers. Train thinks the company’s transition to decision tools will drive substantial growth over the next decade.

Investing in a relatively small number of companies means each holding can have a meaningful impact on overall returns, but it’s also higher risk. Train can use gearing (borrowing to invest), which could help boost gains, but also increases losses so it adds further risk. Investors should refer to the latest annual reports and accounts and Key Investor Information for details of the risks and charging structure.

Please note the trust currently holds shares in Hargreaves Lansdown PLC.

Culture

Train is a founder and one of the major owners of the Lindsell Train business. We view this positively as ownership of the business aligns his long-term incentives with the interests of investors. The distinct investment philosophy that he and Michael Lindsell have created runs strongly through all their funds and trusts, and the entire business is geared towards running the portfolios the ‘Lindsell Train way’. Our due diligence recently highlighted some areas for improvement in the firm’s corporate governance processes, which improved quickly following our engagement.

Train and his team spend all their time reading, learning and compiling information on companies they own shares in and those on their watch list. They’ve created a truly unique environment for staff, which includes a library within the office. They have tended not to recruit experienced people, preferring to train and develop graduates who can be moulded into the Lindsell Train way of thinking.

The Lindsell Train investment philosophy involves investing in companies with the potential to thrive for decades, or even centuries, so it’s important they have high governance standards, and manage their environmental and social impacts well. Analysis of environmental, social and governance (ESG) factors is therefore a natural part of Train’s investment process.

His focus on high-quality companies means he doesn’t invest in industries that require large amounts of capital, such as energy, commodities and mining. He also avoids industries he thinks are detrimental to society and, as a result, potentially exposed to regulation or litigation, including tobacco, gambling and arms manufacturers.

Cost

The trust has an annual ongoing charge of 0.64%. We think this is good value for access to a manager with such a long and strong track record. Part of the trust’s annual charge is taken from capital, which can increase the yield but reduces the potential for capital growth.

If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

Performance

Since Train took over the trust in December 2000, he’s delivered excellent long-term returns for investors. During his tenure the trust’s gained 668.8%* compared with the FTSE All Share index’s 173.8% rise. This is no guarantee of future returns though. All investments and any income they produce can fall as well as rise in value so you may get back less than you originally invested.

Recent performance has been mixed though. The trust helped shelter investors well during the Covid-induced market panic which began in March 2020. But it hasn’t done as well as the market since the announcement of several Covid vaccines in November 2020. Following the vaccine announcement, a new wave of optimism coursed through markets, and the rally was led by companies that had been through difficulties and were perceived to be undervalued. The trust doesn’t invest much in this area of the market, and this held back returns.

The trust’s discount to net asset value (NAV) also widened over the period. At the time of writing, the trust sits on a discount of 3.2%.

The trust’s yield is 1.8%, which is significantly less than the UK stock market’s yield. This reflects Train’s focus on the sustainability of dividends over time. But remember, yields are variable, not guaranteed, and are not a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2021.

Find out more about Finsbury Growth & Income Trust including charges

Finsbury Growth & Income Trust Key Investor Information