Pent up global demand and an explosion of joy might trigger a boom when lockdown ends for good.
Nick Train has revealed how a portfolio built on the excellence and “survivability” of companies including London Stock Exchange (LSE:LSE), Diageo (LSE:DGE) and Schroders (LSE:SDR) had proved its worth during the “most distressing period” of his 39-year career.
The half-year report for UK-focused Finsbury Growth & Income (LSE:FGT), which is managed by Train and business partner Mike Lindsell, shows that its net asset value (NAV) per share fell by 18.7% compared with a 22% fall for the benchmark FTSE All Share Index. Train summed up the portfolio's performance as “robust but not impervious”.
Source: TradingView. Past performance is not a guide to future performance.
His review of the six months to 31 March makes for colourful reading, with Train admitting there was little the pair could say to younger colleagues looking for guidance or reassurance during the Covid-19 market turmoil in March. “The six months on which I report have been amongst the most turbulent and certainly the most distressing of my career,” he wrote.
What has helped the relative performance of the £1.6 billion trust has been the dominance of companies with conservative balance sheets. About 27% of the portfolio by value are firms with net cash, including asset managers Hargreaves Lansdown, Rathbones and Schroders.
The report added: “We have always thought that other investors underestimate the value of 'survivability' in a company. For us it is the start point in our investment process. Is this business still going to be around in 10 years’ time? A surprising number won’t be – even in 'normal' economic conditions.”
You can watch our three video interviews with Nick Train, filmed just as the coronavirus pandemic was taking hold:
- Nick Train interview: Three big ideas
- Nick Train interview: One of the clearest bull markets in the world today
- Nick Train: Your questions answered
The trust, which was created in 1926, also has big holdings in companies offering regular, subscription revenues. For example, analytics firm RELX (LSE:REL), software specialist Sage Group (LSE:SGE) and important parts of the London Stock Exchange all benefit from being able to charge their customers at regular intervals for continuing services they need to stay in business.
Train said this business model contrasted with those companies whose sales have effectively been suspended in the current crisis, such as high street retailers or airlines. There is very little exposure of this kind, apart from small shareholdings in football clubs Celtic (LSE:CCP) (0.2% of the trust’s portfolio) and Manchester United (NYSE:MANU) (1.7%) and two London pub companies, Fuller Smith & Turner (LSE:FSTA) and Young & Co's (LSE:YNGA).
The rest of the portfolio is made up of companies that own “beloved” or essential consumer brands, ranging from Irn-Bru firm AG Barr (LSE:BAG) and Carex hand wash business PZ Cussons (LSE:PZC) to multi-nationals such as Diageo (LSE:DGE), Unilever (LSE:ULVR), Heineken (EURONEXT:HEIA) and Cadbury maker Mondelez (NASDAQ:MDLZ).
Train also feels it has been important to maintain the size of the holdings in luxury product companies, including Burberry (LSE:BRBY) or Remy Cointreau (EURONEXT:RCO), where current sales are declining and share prices have been weak. This is because these companies have that survivability, given Burberry's net cash and Remy's low debt.
“More important, though, we expect a burst of hedonism on the other side of the virus, as the world and especially the young celebrate deliverance. That will be some party. I look forward to downing several bottles of Louis XIII with you all. And I might even buy myself a Burberry trench.”
Several stocks in the portfolio have suspended dividends, including AG Barr, Euromoney (LSE:ERM) and Fullers, but Train said it was important that these and other companies are encouraged and supported by shareholders to do the right thing.
Train ends his commentary with the words of 19th-century philosopher John Stuart Mill:
“What has so often excited wonder is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time of all traces of mischief done by earthquakes, floods, hurricanes and the ravages of war. An enemy lays waste to a country by fire and sword and destroys or carries away nearly all moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.”
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