Due to the uncertainty surrounding the fixed income market, many investors have piled into supposedly safe and bond-proxy stocks in order to find yield. This has led many experts to believe that large UK dividend payers such as Unilever, GlaxoSmithKline and Diageo are now overpriced.
However Train, who manages the five crown-rated Finsbury Growth & Income Trust, says that although it is understandable to question a stock if it has performed well, investors would be foolish to sell top-quality businesses that have consistently grown their dividend. Train recently told FE Trustnet that he added to many of his holdings when the markets plunged last week. One of these was drinks company Diageo – a top-10 holding that already has a 9.1 per cent weighting in his fund.
He says investors who are avoiding Diageo because of its recent good performance are making a mistake and should pay more attention to its long-term "corporate power".
"As you know, we love Diageo and so we bought a bit more of that," he said.
"Diageo is a company we get asked about a lot by our clients as they have questioned whether or not I think it is overvalued. I know it may sound frustrating, but I have an 'on the one hand and on the other hand' sort of argument when it comes to answering it."
"On the one hand, Diageo is up around 30 per cent over the last year and has made a fantastic contribution to the portfolio."
"However, whatever the company, if the share price goes up that much in such a short period of time, then it is perfectly natural to think that there could be a period of consolidation where it moves sideways or even goes down."
"For me – and I know it might sound complacent – so what?"
"Do I think that Diageo’s share price is grossly overvalued for what the company is? Is it fundamentally and strategically overvalued? No. Even at the current share price of £20 – will you make money in five years’ time from buying Diageo now? Absolutely."
Our data shows Diageo has returned 411.22 per cent since it was first listed in December 1997, while the FTSE 100 index has returned 95.58 per cent. As the graph shows, the majority of these returns have come in recent years.
Performance of stock vs index since Dec 1997
Source: FE Analytics
Diageo owns a number of well-known alcoholic brands that are popular across the world, including Johnnie Walker, Smirnoff, Guinness, Baileys and Pimm’s.
The manager says that though there may be times when the stock underperforms, he says that would not make him sell his position in the company, as he feels the stock’s long-term numbers are repeatable.
"I am full of admiration for investors who can trade on the perception that a stock has been overbought, as it is very difficult to do," he said.
"Diageo has had low points at times, but over 15 years we have made 4x our money. And that excludes the amount you would get from being paid a growing dividend over that time," he said.
"Why would you want to trade an asset that can do that for you?"
"Well, that’s our perspective. If you hold a company like Diageo, there is still the chance that you can double, triple or even quadruple your money," he added.
Train is one of the most well-regarded managers in the UK equity space, and rightly so.
His Finsbury Growth & Income trust has beaten its benchmark – the FTSE All Share – over every year in the last decade, except for 2007.
It is the best performing portfolio in the IT UK Growth & Income sector over 10 years, with returns of 321.16 per cent, beating the index by 190 percentage points in the process.
Performance of trust vs index over 10yrs
Source: FE Analytics
His trust is now trading on a 0.92 per cent discount to its NAV. It is 6 per cent geared and has ongoing charges of 0.94 per cent.
John Baker, who manages the £144m JPM UK Dynamic fund, says that because he takes a value approach to investing, he is underweight Diageo. He says that Diageo and GlaxoSmithKline are quality companies, but contrary to Train’s belief, he thinks they are now too expensive.
Baker says that investors who want a bargain should look to UK housebuilders.
The sector has performed well recently, with the likes of Barratt Developments and Persimmon delivering more than 40 per cent returns year-to-date. Baker sees no reason why this cannot continue.
"One of the main reasons why we have bought UK hosuebuilders is because they are attractively valued," he said.
"Another reason is because they had struggled after the crisis and were forced to raise capital. That has fed through now and has meant that their balance sheets are now strong."
"However, the other reason for buying them is because during the credit crunch they were still buying land for development that was much, much cheaper than it had been in 2005 and 2006. Now they are building houses on that cheap land."
"Overall, the macroeconomic environment is very supportive for UK housebuilders, because the UK economy is recovering. There is also strong political encouragement for housing transactions from the Help to Buy scheme," he added.
