Nick Train has told investors he is unconcerned by the underperformance of his Finsbury Growth & Income Trust in the recovery trade of 2021, as he is confident his preference for “dull plodders” will prove its worth over the long term.
The defensive characteristics of his holdings helped the trust outperform in the volatility of 2020, but the same qualities have held it back this year.
Performance of the trust year-to-date
Source: FE Analytics
However, the FE fundinfo Alpha Manager said he would never compromise his investment principles, even if it means experiencing uncomfortable periods like this from time to time.
“Under my stewardship of Finsbury, we've always had big holdings in big, reliable, steadily compounding companies,” he explained.
“That was quite a comfortable place to be during the bulk of 2020, but much less so right now, as other investors are looking either for recovery or more rapid-growth businesses.
“It may well be – at least temporarily – that our steady compounders are being today perceived as ‘dull plodders’,” he added. “I do think it's a bit unfair.”
Train acknowledged many of the companies within the portfolio such as RELX (9.8 per cent) and Heineken (5.3 per cent) have not kept up with the FTSE All Share.
But Train pointed towards Unilever, his fourth-largest holding at 9.2 per cent, an “archetypal dull plodder”, as the perfect example of the benefits these companies can bring to investors over the long term.
While the share price of the consumer goods giant is down in 2021, he is more concerned with the dividend history, dating back to 1962.
Source: Finsbury Growth & Income Trust
Train said: “Every time Unilever – as it is now – is going through a period of being out of favour with other investors, when these steady compounders are out of favour with other investors, I like to remind myself of just how formidable these companies can be by looking at this.”
He contrasted Unilever’s 16-fold total return since 1988 with that of the FTSE All Share index which is only up about four-fold.
“That is a huge differential, and really is testament to the sort of returns that successful steadily compounding companies can deliver for you,” he explained.
Discussing Unilever’s most recent first-quarter results, Train said: “Q1 to Q1, India was up 20 per cent. China up double digits. Cosmetics up 20 per cent. Ben & Jerry's ice cream up 30 per cent. Hellman's mayonnaise, Magnum ice cream, Horlicks nutrition drinks, all up double digits.
“E-commerce revenues up 60 per cent year over year – now 11 per cent of the total – and Unilever argues that e-commerce revenues are incrementally margin-improving for the company.”
This, he said, indicates some encouraging trends are forming within its “formidable business”.
Train also highlighted Unilever’s €3bn share-buyback programme in 2021, which he estimated to be worth 2.5 per cent of its current total market capitalisation. Combined with its 3.37 per cent dividend yield, this should result in an 8 to 9 per cent annual return from the company, even without a share price re-rating.
Elsewhere, Train highlighted American snack food and beverage company Mondelez, which makes up 8.3 per cent of the trust.
It is also in the process of a share buyback programme, which the manager estimated is worth roughly 4 per cent of its market capitalisation. Train said that, combined with its dividend growth, this should result in low double-digit and perhaps even mid-teen returns.
“Just to show that that's not complete pie in the sky, consider that last week Mondelez’s share price actually hit its all-time high, but the stock is up significantly more than 50 per cent since the start of 2019,” he added.
This, in his view, could be extrapolated to many other “steady compounders” within Finsbury Growth & Income Trust’s portfolio.
“We understand, and we know that you understand, that these companies are not Coinbase,” he said. “They don't have those characteristics.
“And yet, there still seems to be plenty of justification for the expectation that they can continue to grind out perfectly acceptable returns, as they've done for decades.”
Finsbury Growth & Income has delivered a total return of 68.39 per cent over the last five years, compared with 42.46 per cent from the average IT UK Equity Income peer, and 39.65 per cent from the FTSE All Share index.
Performance of the trust over 5 yrs
Source: FE Analytics
The trust is currently trading at a 0.7 per cent discount to NAV and is yielding 1.8 per cent. It has an ongoing charges figure of 0.64, according to the AIC.