Finsbury Growth & Income to ask investors to vote on strategy

During the year, returns for Finsbury Growth & Income Ord (LSE:FGT) disappointed, marking another period of underperformance on a net asset value (NAV) and share price basis.

Over its financial year to 30 September 2024, a reasonable NAV return of 8.2% translated to a weak 3.4% share price return (10% less than the benchmark FTSE All-Share) marred by a widening discount.

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Finsbury Growth & Income’s well-known fund manager Nick Train, pictured above, is nothing but upfront over the fact that the large allocation to consumer brands - Burberry Group (LSE:BRBY), Diageo (LSE:DGE) and Unilever (LSE:ULVR) are named explicitly, and are brands to which the trust owes a lot of its prior outperformance - was “too high” in the past and has damaged recent relative performance in the post-Covid period.

Shareholders will have the opportunity to have their say, as it was announced that a continuation vote will take place, which is expected to be in early 2026 following the conclusion of its current financial year, which ends in September 2025. The continuation vote will give shareholders the option of voting on whether the trust should continue with its current strategy.  

The numbers in detail (for financial year to 30 September 2024)

NAV (Net Asset Value) Return: +8.2%
Share Price Return: +3.4%
Benchmark Return (FTSE All Share): +13.4%
Dividend: 19.6pvs 19p prior year)
Premium/Discount: -8.7%vs -4.4% prior year)
Gearing: 0.7% vs 0.8% in 2023

Outlook

Despite the portfolio’s underperformance since 2021, Nick Train remains more enthused about the prospects for the “world-class” holdings of FGT than ever. Train thinks that the consistent implementation of the same investment process that was proven over the past two decades will ultimately see the NAV and share price of the trust recover. This outlook will be put to the test now in the form of a continuation vote.

Continuation vote

While the long-term returns since Lindsell Train’s appointment as manager in 2000 remain strong, the past four financial years for the trust have seen NAV and price underperformance versus the UK’s FTSE All-Share index, serving new investors poorly.

Following board challenges on the manager’s stock selection and process, as well as consultation with institutional holders, the decision has been taken to hold a vote after the current financial year end (September 2025) to gauge investor support for the trust’s continuation under its current investment strategy.

Retail investors comprise a large share of FGT’s share register, and this will be an opportunity for holders to condone or condemn the differentiated investment process that Train has implemented since becoming manager. Likely this will take place in early 2026 at its annual general meeting.

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Discount

While buybacks provided some support to NAV, the discount weighed on returns to shareholders through the year. The discount opened from just over -4% at the end of the prior year to -8.7% at the end of September – remaining close to this level since. The trajectory of the discount since trading around NAV in 2020, has been one of decline to its current low level – an issue that has befallen more than just FGT in this peer group.

Dividend

Two interim dividends contributed towards a total dividend of 19.6p, representing a 3.2% increase on last year’s 19p. As was the case last year, payouts were covered by the revenue generated during the period.

Portfolio

While Train’s process of seeking high-quality companies with strong cash generation and franchises remains unaltered, the portfolio has seen some changes that buck its historic preference for consumer brands. Such companies comprised more than 50% of the portfolio in late 2020, but now account for roughly a third of it.

Train retains conviction in the long-held brands he backs, but notes that other themes now look appealing, namely the thematic exposure to data, software and tech, citing Experian (LSE:EXPN), London Stock Exchange Group (LSE:LSEG), RELX (LSE:REL), Rightmove (LSE:RMV) and Sage Group (The) (LSE:SGE), as examples. These “digital winners” demonstrate strong returns on equity above the wider market and are credited as being poised for AI success.

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While Train seldom adds to the portfolio, two new holdings, which are yet to be disclosed have been entered since year end.

While Consumer Staples (28.7%) and Discretionary (22.4%) remain overweight, the allocations have fallen from a combined 61% of the portfolio in 2023, while financials now comprise a quarter of the portfolio, and Tech and Industrials make up the balance.

The portfolio retains and even furthers its concentrated approach though, with the top 10 holdings now accounting for over 90% of the portfolio of 23 companies.

ii View:

Nick Train has overseen yet another year of underperformance for the out-of-favour Finsbury Growth & Income portfolio, which has been compounded by a widening discount beyond normal levels for the trust, but commensurate with peers.

While much of the UK market picked up, the high-conviction and differentiated portfolio has undershot its benchmark for a fourth consecutive financial year, dimming – but not extinguishing – an impressive long-term record prior to 2020. The trust underperforms its benchmark over five years on a NAV and price basis – virtually unheard of since Lindsell Train’s appointment as manager in 2000.

The proposed continuation vote will allow investors to pass judgement on the high-conviction and quality-first investment process that Train has patiently followed for more than two decades. The vote will likely be taken in early 2026, by which time FGT investors could have suffered a fifth year of underperformance, or may be enjoying an overdue recovery.

With the deciding vote on the horizon, the next year will be imperative in proving to investors the worth of the long-adhered to investment process in the context of a market environment that has not recently rewarded such a strategy.

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Train has proved a very capable manager in the past, but the recent underperformance of some of the trust’s long-held consumer positions, such as Burberry (which has seen some recovery since period end), Remy Cointreau (EURONEXT:RCO) and Diageo have dampened spirits towards the trust – as is reflected in part in the discount.

While Train retains conviction in his investment process, he has lately enacted changes in the portfolio that differ from his prior preference for consumer brands, and opened new positions; Experian, Fevertree Drinks (LSE:FEVR)and Rightmove since 2020 (the more recent of which are yet to be revealed), with some mixed success.

As a very long-term investor, Train will not uncommonly face periods where the decision to stay the course and continue backing a holding undergoing difficulty becomes a challenge. It is encouraging to see instances where other kinds of market participant, such as private equity investors, have entered the scene and validated his thesis that the public market was to some degree undervaluing the prospects of portfolio companies. Recent examples include Hargreaves Lansdown (LSE:HL.) and Rightmove.

While FGT’s holdings were generally not amply rewarded by the market in terms of valuation in the past year, earnings within the portfolio showed resilience, with an appreciable revenue return supporting dividend growth of over 3% through the year. The current yield on the portfolio is around 2.2%.

Train’s optimism regarding the trust and the unrealised value of the UK market is undeniable. FGT has reduced its ownership of overseas companies from near 16% in 2023 to just under 3% currently to reflect the value on offer across UK PLC, and Train’s personal buying of shares in FGT has further increased his own exposure (now 3.5% of the company).

The decision of the board to ask shareholders to express their continued support, or otherwise, in 2026 seems a prudent and well-timed opportunity to determine if investors feel the same way regarding the trust’s prospects.