Morningstar® CEF Report™

Finsbury Growth & Income Trust Plc FGT

Morningstar Analyst Report Fund Report for F0GBR053PE Finsbury Growth and Income

by Szymon Idzikowski, 10/09/12

Author can be reached at
Analyst Feedback

Morningstar's Take FGT

Morningstar Analyst Rating™

Last Price

477.50

Current Discount

0.31%

Last Actual NAV

476.02

Latest NAV Date

16/05/2013

Gross Gearing

105

Net Gearing

105

1 Year Z Stat.

-0.23

Ongoing Charge (2012)

0.94%

Average Daily Shares Traded (1 Yr)

0.12m

Role in Portfolio

Core. The fund can serve as a core holding for UK equities.

Executive Summary

Process: The manager focuses on bottom-up selection of quality companies, combined with a long-term investment horizon.
NAV Performance: Returns here have been excellent and Train has demonstrated his ability to add value through a range of market cycles, without taking excessive risk.
People: Nick Train is a talented fund manager with a strong temperament and broad experience.
Parent: Lindsell Train sticks to its specialties: the management of UK, Japanese, and global equities.
Board: The board brings extensive experience gained through a variety of careers in financial markets.

Morningstar Opinion

We think Finsbury Growth & Income is a standout.

For one, it features an experienced, talented, and pragmatic manager. Nick Train draws on his three decades of expertise, which covers a number of market cycles. Having started his career as an investment manager at GT Management in 1981, he was appointed to run Finsbury Growth and Income in Dec 2000, just a few months after founding Lindsell Train, together with Michael Lindsell. That was a leap of faith on the part of the board, in that the newly formed firm was launched at a difficult time in markets, following the TMT-led crash, but it’s a move that has paid off.

Train’s process is thorough and well-proven over a number of market cycles—another reason for our conviction. It’s an approach that’s been applied consistently and results in a concentrated list of stocks. Train selects companies from the bottom up and looks for unique and strong franchises that can prosper through a number of business cycles. He sells a stock only if he no longer considers it of sufficient quality, or when its growth in value causes it to become too large a proportion of the portfolio, at which point he will trim it.

This process has led to excellent returns. The fund has comfortably outperformed its Morningstar UK Flex-Cap Equity category peers since Train’s appointment in Dec 2000. Given his emphasis on quality companies, he has also kept risk well in check. The fund’s standard deviation, a statistical measure of risk, is significantly lower than its category average over the short, mid-, and long term, and that’s despite the use of gearing.

We also like the board’s approach to managing the fund’s discount. They operate a strict discount control mechanism that keeps the fund’s discount below 5%. Conversely, they have been very proactive at issuing shares when the fund has traded at a premium. We like the clear guidance and follow-through on their approach. Further, the board members share a wealth of investment experience and all six members are shareholders in the fund. There are some long-serving directors in situ and we wouldn’t be surprised to see some succession-planning take place in the near future.

One slight hesitation is that, in addition to his responsibilities as a portfolio manager, Train also has duties as a founding partner. However, the firm has thus far stuck to only its core competencies and not tried to gather assets. While there’s a conflict in his role as partner and investment manager, we think this is well-managed and isn’t a cause for major concern. Indeed, we commend the firm for its transparent approach regarding the investment in the firm’s shares in its other listed fund.

All told, we think there is much to like here: an experienced manager, a tried-and-tested process that has delivered excellent returns, and a competitive fee structure. The fund receives our Gold rating.

Portfolio Process Approach

The manager follows a bottom-up process that results in a concentrated, high-conviction portfolio of companies that he perceives to be high-quality in nature. Train looks for rare, strong franchises that can compound their earnings over time; he selects business that can prosper through a number of business cycles and avoids those which need to invest heavily to generate higher earnings. He also prefers companies that produce steady earnings over those with rapid short-term growth as he takes a very long-term view when investing. Train believes in market inefficiencies, and as a result he aims to buy stocks that are priced below his estimate of the company’s true worth and then holds them, regardless of any short-term volatility. He only sells a stock if he no longer considers it of sufficient quality, or when its growth in value causes it to become too large a proportion of the portfolio, at which point he will trim it. He’s not a believer in top-slicing his winners as he prefers to run positions. Indeed, this is borne out in the fund’s turnover, which is one of the lowest we’ve seen; in four of the last five years, turnover has been less than 10% and, under Train’s tenure, it has averaged just 6%. Train spends much of his time understanding industries and their dynamics, to reinforce the investment case for his picks and flag up any potential concerns that might be on the horizon.

Portfolio Positioning

The manager believes in three key themes that drive the economy and stock markets and these themes define his portfolio. The first is emerging markets as a long-term driver of growth, which he plays through branded consumer goods and services companies such as Diageo, Unilever, Kraft, and Burberry. The second is the Internet and digital technology, an example being Pearson for its dominant position as the world’s largest education publisher. The third is financial services, where his holdings include Schroders, Hargreaves Lansdown, and the London Stock Exchange; he expects them to help people with their personal wealth ambitions and drive markets as a consequence. This approach results in a very high-conviction, concentrated, and unconstrained portfolio. At 31 March 2012 the fund was overweight consumer cyclicals and consumer defensives by over 18% and 34%, respectively, compared with its average Morningstar UK Flex-Cap Equity category peer; conversely it had zero in industrials and energy.

Dividends

The fund’s objective is to achieve capital and income growth and for its total return to beat the FTSE All-Share index. The board is supportive of a long-term progressive dividend policy and, broadly, it has managed to achieve this. However, there have been a handful of years where the dividend has been maintained or cut in response to market conditions, the most recent of which was 2010. That said, the dividend is covered, at its current level, for almost 10 months following a rebuild of the revenue reserve account.

Discount

The board operates a strict discount control mechanism, which aims to keep the fund’s discount at no more than 5% and they will buy back shares in the market to achieve this. That said, they have not had to take such action for some time as the fund’s three-year average discount just exceeds 1%. The board has been proactively issuing shares when the fund has been trading at a premium to stop this from becoming too large. They have managed this situation to good effect. Indeed, they have given shareholders very clear guidance on how they will manage both the discount and premium and have stuck to their intentions.

NAV Performance Analysis

The fund has comfortably outperformed its Morningstar UK Flex-Cap Equity category peers since Train’s appointment in Dec 2000. To 31 Aug, the fund has gained 7.2% annualised, compared with its average category fund’s gain of 4.4%. It has also outperformed its peers by a healthy margin over one, three, five, and 10 years. Given Train’s emphasis on quality companies, the fund tends to lose less in down market, as measured by its downside capture ratio. For example, in 2011 it gained almost 4%, compared with its average category peer's loss of over 9%. The fund held up well because of strong performance from its holdings in Barr, Pearson, Fidessa, Burberry Group, and Diageo.

Risk & Return

We think Train has used risk well and rewarded his shareholders amply. The fund’s 10-year annualized Morningstar Risk-Adjusted Return is 5.36%, compared with its category average of sub-1%. Its Morningstar Risk rating overall is below average and its Morningstar Return rating overall is high. The fund’s standard deviation, a statistical measure of risk, is significantly lower than its category average over one, three, five, and 10 years and that’s despite the use of gearing, albeit modest. The portfolio is concentrated with approximately 25 holdings and some 65% assets invested in the top-10 holdings; that puts pressure on Train's stock-picking skills; this is, however, mitigated a little by the high quality of the companies held and the low turnover.

Fees

Lindsell Train receives an investment management fee of 0.45% of the fund's market cap. The firm is also entitled to 85% of a performance fee if the fund's annual increase in the market cap per share exceeds a hurdle rate; that rate is the sum of the increase in the Retail Price Index that year and a fixed return of 6%. Any performance fee exceeding this cap can be carried forward; likewise, any underperformance has to be made good, before the performance fee kicks in. As administrator to and marketer of the fund, Frostrow is also entitled to share in the performance fee, to the tune of 15% of the fund's market cap. Total fees are capped at 1.25% of the fund's market cap. Frostrow receives a further 0.15% of the company’s market cap plus a fixed fee of GBP 70,000 for administrative and secretarial services. That results in an ongoing charges figure of 0.98%, compared with its category median of 1.53%.

Gearing

The manager is permitted by the board to have net exposure that ranges from 90% (in other words, to hold up to 10% in cash) and 125%. In practice, since Train has been the investment manager it has been rare to see net exposure exceed 110%, particularly since the financial crisis in 2008. Train doesn’t try and use gearing tactically; instead he prefers to make strategic long-term decisions on the view a modest level of gearing should add value over the long term. The fund has a GBP 25 million multicurrency credit facility with Scotiabank Europe, but at 31 Aug only GBP 15 million was drawn down.

People

The fund is run by a talented investment manager in Nick Train, who brings three decades of investment experience. Train began his career as an investment manager at GT Management in 1981, where he first met Michael Lindsell. Train left the company some 17 years later following its acquisition by Invesco, which, at the time, was owned by Amvescap. He joined M&G Investment Management in 1998 and in mid-1999 became the head of global equities. He left the firm in April 2000 to co-found Lindsell Train Limited. He replaced Mark Tyndall from Artemis at the helm of Finsbury Growth and Income in Dec 2000, when Lindsell Train was appointed as the fund’s adviser. In addition to this offering, Train runs the open-ended CF Lindsell Train UK Equity fund using the same process; he also comanages two global equity funds. In late 2010 they hired an analyst to help with their global equity coverage but his input at this fund is minimal. Train also has responsibilities as a founding partner of Lindsell Train. However, the board has appointed Frostrow Capital to manage the fund's non-investment functions, enabling Train to focus almost exclusively on fund management. The lack of research support, however, is a potential concern when it comes to succession planning for Train’s funds.

Parent

Lindsell Train is a boutique established in 2000 by Michael Lindsell and Nick Train. These two managers specialise in the management of UK, Japanese, and global equity funds for institutional clients. They won the contract to manage Finsbury Growth and Income shortly after founding the company, and this was their first fund mandate. Since then they have launched four other funds, including a UK fund, a Japan fund, and two global equity funds. These encompass their areas of expertise and there are no plans to launch new offerings or diversify the business. Train manages the UK mandates, Lindsell the Japanese fund, and they both comanage the two global offerings. For the latter, they have been supported by an analyst since late 2010. Both managers bring vast experience and share the same philosophy, which focuses on bottom-up selection of quality companies, combined with long-term investment. Both fund managers are also the main shareholders in the company with each holding 36.5% of the share capital; although that could incentivise them to launch new funds to gather assets and thus grow the business, our concern is muted by the fact they have not expanded their fund range outside of their areas of expertise. A further 2% of shares is owned by staff and the remaining 25% is held in the Lindsell Train Investment Trust, which acquired a fixed stake in the business at its launch.

Board Of Directors

The board comprises six non-executive directors with an average tenure of nearly 11 years. The most recent appointment was made a few years back in Jan 2008; individual tenures range from almost 24 years right down to four and a half, with three exceeding 10 years. While that’s not a great concern for us, we expect some clear guidance from the board regarding their succession planning in due course. Chairman Anthony Townsend rejoined the board in Feb 2005, having served as a non-executive director between 1998 and 2004. He took on his current role of chairman in Jan 2008. Townsend brings a lengthy career in financial services—he was chairman of the Association of Investment Companies from 2001 to 2003—and he currently sits on boards of five other listed investment companies; indeed, he chairs four of these. His fellow directors bring a range of skills to the fund and, while all five have had careers in financial services, their experience differs. For example, Neil Collins’ background is in financial journalism. Two of the directors also sit on the boards of other listed investment trusts. All six directors are shareholders in the fund, which we like to see; we think it aligns their interests with those of their shareholders, as well as being an endorsement of their investment manager. The board meets at least quarterly and at other times as necessary; in 2011, for example, they met formally six times.

Analyst Disclaimer Notes

Welcome to Morningstar.co.uk!

For more information: