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'Complacent' Train sticks with consumer stocks

'Complacent' Train sticks with consumer stocks

Even though the share prices of well-known consumer staples reached new highs in 2016, Finsbury Growth & Income (FGT) manager Nick Train believes they have even further to go.

If this means he is complacent then so be it, he said. In the trust’s results for the year to October, he noted that consumer brands had contributed to the fund’s stellar performance, with Diageo (DGE), Heineken (HEIN.AS) and Unilever (ULVR) hitting all-time highs in 2016.

‘And I ask myself – are we paranoid enough about our winners? Have we become complacent? Well, on this issue – mark us down as complacent. We are not sellers of our consumer shares at current valuations,’ he noted.

Consumer staples stocks have come under pressure in recent weeks, spurred by the shock election of Donald Trump as US president and the inflationary forces this could unleash. Higher inflation and resulting interest rate hikes could eat into the dividends for which 'expensive defensive' stocks are prized.

Citywire AA-rated Train said investors should expect periods where the so-called ‘bond proxies’ lag in performance. Nevertheless, he is optimistic that companies like Unilever, which owns brands such as Ben & Jerry's and Marmite, can continue to deliver for shareholders.

‘We do not believe Diageo, Heineken and Unilever have become strategically overvalued. Or put another way – we are sure that patient investors in these companies will earn very attractive returns from current share price levels over time,’ he concluded.

On the other side of the coin, Train says the rise and rise of technology is feeding his paranoia. At the end of July, the top five biggest companies in the world as measured by their market capitalisation were all US technology or digital businesses. This is the first time that this has been the case (see table below).

‘This clean sweep of the top five in mid-2016 feels significant. To us it emphasises just how important technology has become in driving economies and stock markets. In fact we don’t think much else really matters.

‘And it’s a reasonable prognosis to expect world stock markets to be meaningfully higher in 10 years’ time – the good news – but those gains to be delivered by companies and even industries that one is today barely aware of – the less good news,’ Train explained.

The top five global companies

July 2016 2006 2000
Apple Exxon Microsoft
Alphabet General Electric Cisco
Microsoft Microsoft General Electric
Amazon Gazprom Intel
Facebook Citibank Vodafone

Source: Lindsell Train

Bringing home Train’s paranoia concerning the ‘swings and roundabouts of tech’, he noted that technology was currently guiding both the contributors and laggards to FGT's performance. He cited education company Pearson (PSON) as a detractor.

‘That company still has a real opportunity to stake its claim as a global leader in the land rush to dominate digital education services. According to the company, it already has more paid for subscribers to its digital learning products than all its competitors put together. On the other hand, the technology-driven challenge to Pearson’s traditional business is evidently intense,’ he explained.

Meanwhile, positive contributor Sage Group (SGE), which provides accountancy software, has the opportunity to bring its services to 80% of small companies in the geographies where it operates. However, this hangs on Sage’s success in transitioning its business to a ‘cloud’ model.

Train feels more excited about the outlook for global and UK equities than ever, but says there’s still scope to feel paranoid.

‘Almost every company we meet can see an opportunity for unprecedented growth or efficiency gains or both. Investors by and large are far too pessimistic about the outlook. And yet the pace of technology change – even as this creates the opportunities – means more and more potentially ruinous surprises for individual companies. No wonder we’re paranoid,’ he concluded.

Skin in the game

FGT’s chairman Anthony Townsend used the investment company's annual results to explain why the trust continues to hold a stake in the Lindsell Train investment trust (LTI), which is also run by Train and has a 25% stake in asset manager Lindsell Train Limited. Over the 15 years that FGT has held LTI, it has grown from a £1 million investment to £8.2 million.

Townsend was also keen to highlight the strong alignment of interest between FGT and its manager, Train. At the end of September, he held worth around £4.8 million.

‘I have consent from Nick Train to tell shareholders that his holding represents the whole of his personal investment in UK equity and is a significant portion of his total assets,’ Townsend added.

FGT paid two dividends totalling 13.1p over the year to October, representing an 8.3% increase in comparison to 2015. The trust’s historic yield of 2.1% is amongst the lowest than the average yield of 3.6% in the UK Equity Income sector.

Over the year to October, Unilever, Sage and RELX (REL), formerly Reed Elsevier, were the biggest contributors to performance. Pub company Fuller Smith & Turner (FSTA), wealth manager Rathbone Brothers (RAT) and Pearson were the biggest detractors.

On 13 December, FGT was trading at 632p, which represents a 0.4% premium to the underlying value of the trust’s assets, known as its net asset value (NAV). Over the past year, its share price has risen by 14.9%, which compares to 7.7% by the average trust in the UK Equity Income sector. Over the same period, it has returned 15.2% in NAV terms, outpacing an average gain of 10.9% by the sector.

Over three years, its share price was up 36.4% versus 18.8% by the sector average. Meanwhile, FGT has returned 37% in NAV terms, which compares to 24.2% by the average UK equity income trust.

The board’s trust buy back shares if the discount reaches 5% or more. However, due to FGT’s strong performance in recent years, the board also aims to stop the premium from getting too high by issuing shares at a small premium to NAV. During the 12 months to October, the company issued 21.4 million shares, raising £128.1 million. This represents 14% of share capital.

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Nick Train
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