“If you want different investment performance you must invest differently.”
The late Sir John Templeton’s investment philosophy is simple, but often forgotten. Nick Train, manager of the Finsbury Growth & Income Trust, recently reminded me of the quote. In other words, to achieve different performance – or, preferably, better performance – you must be agnostic of the relevant benchmark.
Few active fund managers truly ignore their benchmark. Some are positioned too similarly, meaning outperformance is harder to achieve. Much of the reason for the herd instinct in active management is due to career or business risk. Deviating too far from the benchmark can be costly to your career, particularly if you make the wrong calls. There is far too much onus on short-term performance from investment groups, the media, and investors. By and large, to find good active managers you need to seek those with experience on their side and, in some cases, those who own their own business, such as Nick Train.
Mr Train’s investment trust exemplifies an active approach. It is a highly concentrated portfolio, comprising what the manager believes to be a collection of exceptional brands and franchises. He seeks firms supplying global consumer brands, so the portfolio has a hefty allocation to consumer businesses.
The sector has had a remarkably good run since 2008, so you might question whether you have missed the buying opportunity. In our recent meeting, Mr Train produced a slide showing price/earnings (P/E) ratios of many of the companies he held in 1993 and, subsequently, what those P/Es were in 2013.
Interestingly, the average P/E ratio in 1993 was 17x compared with 17.8x in 2013. This excludes dividends which have also provided a meaningful contribution to returns. According to the manager, this tells you that company earnings have grown significantly more than investors expected 20 years ago, while investors have also underestimated the inflation-proofing these companies can offer.
Individual companies, such as Coca-Cola, are now cheaper than in 1993. Of course, others are more expensive, but even Unilever, with a P/E of 11x in 1993 and 17x now, has delivered a share price gain of 3½ times.
Many of the consumer brands held in the portfolio have international exposure and have benefited from exposure to emerging markets growth. Some investors view the trust’s strategy as rather one-dimensional. However, given 80 per cent of the global population are located in the developing world, it is not hard to see why these companies could do well.
Over the longer term, companies such as Unilever have been hugely successful – 60 per cent of sales are derived from emerging countries, compared with 40-45 per cent for similar companies. The region’s middle classes are likely to expand appreciably over the coming decades and these businesses are set to take advantage of rising consumption. A recent takeover bid for Heineken (a 6 per cent position in the portfolio) from SABMiller confirms how valuable consumer brands remain.
Some of the trust’s companies have struggled more recently, such as Pearson, the media and education company (though it has performed very well throughout the trust’s holding period). Its transition to online services has been somewhat slower than expected, however Mr Train is keen to remain exposed to companies he feels are being smart with technology.
Another example is Burberry, which has faced difficulties partly due to its exposure to Asia and slowing growth in China. That said, the luxury retailer has built a successful digital model and has prospered in digital marketing over the last few years. It is a great example of a business investing heavily in an online presence to establish a deeper relationship with customers.
Another point I find interesting is that 45 per cent of companies in the portfolio are family-owned, with costs more tightly controlled and enthusiasm for dividend growth.
Performance of the Finsbury Growth & Income Trust has been impressive over the past few years and it is trading around its Net Asset Value (NAV). This is the type of fund I feel you should tuck away in the bottom drawer, and let some of the UK’s most valuable brands work at growing your wealth over the long term.Reuse content