Investor's Chronicle, hello and welcome back to the IC Interviews podcast. I'm Dave Baxter, I'm the funds editor on the Investor's Chronicle, and today I'm joined by Nick Train, the renowned UK equity investor. Nick, thanks very much for joining. How are you getting on today?
I'm well, thank you very much. I don't know about renowned — let's hope it's not infamous — but I have been doing it a long time, and yeah, I think there are things to be said about UK equities, and let's hope in the course of this conversation we can touch on some of those important things.
Yeah, okay, so let's first go into the renowned versus infamous debate. You of course in recent times again have kind of apologized for kind of underperformance versus the market. The likes of Finsbury Growth & Income have kind of lagged somewhat, but what do you think could kind of end the spell of underperformance? What are the kind of bright spots that we might see?
Okay, listen, I am the first to acknowledge that it's been a disappointing few years for our efforts to make money for investors out of UK equities, and to do better than the index. And you know, I'm disappointed. I'm disappointed as an investor in the strategy myself. I think though I'm allowed to notice, and I suppose I'm going to say it, but I don't really want to make a big deal about this, but I think I'm allowed to notice that performance has improved somewhat over a short-term period, like over the last three, four, five months. Performance, particularly of Finsbury, has improved, and you know, performance has to start picking up sometime, of course. And let's hope, let's sincerely, sincerely hope that, you know, six months ago was the nadir for this strategy. Of course, I don't know, it's just a hope. But if our strategy is to continue recovering, I think it's most likely to be as a result of this. I mean, what's helped over the last few months has been the strong business performance of a number of big holdings in our UK strategy, and these are big holdings in what I would call substantive, globally oriented growth companies. And actually, such substantive global growth businesses, you can find them on the London Stock Market. It's been so frustrating for a number of years that good or even better than good business performance by such companies hasn't been rewarded by share price performance. Perhaps over the last six months that's begun to reverse, and if these companies can continue to show good, particularly better than expected growth, I would expect investment performance to continue.
And do you have any, I suppose, kind of bright spots there? Equally, are there any parts of the portfolio where you're still harboring doubts, concerns?
To me, a central proposition, which is being tested or has been tested, but a central proposition is that contrary to common perceptions, in fact the UK stock market does offer access to global growth themes, and investing in those companies that offer access to those global growth themes can be and should be very rewarding. So for instance, we are believers in the likely commercial implications of the application of artificial intelligence tools to digital businesses and services. Shorthand, we think AI is for real. And of course, when people think of AI, they think understandably of Nvidia or Meta or whatever, and one's not denying that those companies are also big beneficiaries of artificial intelligence. But a company like RELX, for instance, which is a major holding for us and has become a very significant company in the UK stock market, I think you could argue that RELX offers just as certain and rewarding exposure to artificial intelligence technology as some of the US giants. Genuinely, you know, that's true. And you know, maybe that's enough to make RELX an interesting investment. In fact, I'm sure it is. Maybe it's enough to make RELX and some other businesses listed in London really, really interesting investments, because arguably global capital providers haven't identified them yet. Does that make sense?
Yes, yeah. And you've spoken a lot about kind of AI and I suppose perhaps making the portfolio a bit more suited to kind of this digital world and so on. How much of the portfolio do you now think qualifies as perhaps targeting, you know, either the AI trend or more broadly sort of just tapping into those digital trends? And would you expect to kind of go even further in trying to focus on the area?
It's certainly been a significant shift in the structure of our UK strategy over the last five years. I mean, we've owned RELX, for instance, since 2002. You know, look at the share price chart, you know, it's been amazing. Arguably, it's only just getting started, and I'm serious. We've always had an exposure to these data-stroke-digital businesses listed in London, but I will acknowledge that through and after COVID, which clearly has acted as an accelerant for both businesses and consumers around the world engaging even more with digital products and services, we've looked to increase the exposure to such companies, either by building the holdings further or in some instances adding new names. And I think for Finsbury, for instance, the exposure to such digital businesses is now about two-thirds of portfolio value, and that's up from less than 40%, for instance, back in 2019. So I would say that that's a significant shift in the portfolio, and let's hope it's going to pay off.
And you mentioned RELX, that's clearly like a very large holding in the trust, nearly 13% last time I looked. Experian is on a similar weighting, London Stock Exchange, and Sage Group also pretty hefty in there. At the last annual general meeting, I believe you've kind of taken some questions about concentration in the portfolio. Some people are getting a bit concerned about whether there needs to be a change of tack in order to address some of those performance issues. What is your current response to that?
Well, listen, after really quite a prolonged period of underperformance, you'd expect and indeed welcome scrutiny of the portfolio and the investment approach that we work with. And it's absolutely undeniable that portfolio concentration cuts both ways. When you have a concentrated portfolio and you've got a lot of winners amongst your holdings, then your returns can be remarkably good. And this is totally my fault for sure. Over the last two to three years, we've had a number — I've perpetrated a number of long-term big holdings that at least temporarily have fallen, and that's been a big retardant on our overall return. What I'd say though to frame this is that passive and index-type offerings are, I mean, they're valid for investors. It's valid that investors should have the opportunity to invest in a passive, index-oriented strategy at a low cost and just capture the performance of the index, and that's not going to go away, and nor should it go away as a potential investment option for savers.
What can or should active managers do in those circumstances?
Well, I think the answer is the same answer that it's always been, is that active managers need to take some kind of risk over and above the risk that is intrinsic to the index in order to try and beat it. And all I know is that when I look back at what was your adjective — mine was infamous, renowned, I don't know, whatever — when I look back over multiple decades, you hope those multiple decades have relevance for the future, but you don't know. You know, I'm still in the business because there has been a decent long-term track record. Let's hope we can make it continue. But that long-term track record has come from this very specific type of risk that we take still today, which is big positions, concentrated positions, but concentrated on substantive, predominantly substantive big-cap, globally oriented companies. So I think that the individual risk of being invested in a London Stock Exchange Group or a Diageo, even to pick one that's hurt us recently, or a RELX, I don't think that the risk is that high because the companies have market positions and brands and cash flow that make them intrinsically really quite predictable investments. So yeah, other people take risk by trading, other people take risk by investing in small speculative companies. I'm not saying there's anything wrong with that. We're trying to add value by taking a very specific type of risk — concentration. But concentration in, you know, I'm not asking you to do it, I'm not asking your listeners to do it, but look at the top 10 holdings, let's say, in Finsbury Growth & Income Trust. They are pretty much, you know, household names. You know, it's not difficult to understand, I don't think, why we might be attracted to those sorts of businesses.
Dave, is that fair enough? That makes sense. Yeah, but let's turn then to kind of individual holdings. I suppose your funds are kind of perhaps easier for people to make a call on given they are pretty concentrated. But you mentioned Diageo, that's perhaps been one of your more kind of troubled holdings as of late. There have been inventory issues in Latin America, you've had concerns about the slowdown or even reversal of the premiumization trends, and just generally various uncertainties. For example, in the era of Trump, we don't know what's going to go on there with things like their manufacturing in Mexico. What is your kind of outlook for the stock now? Are you kind of moderating your conviction? What is your kind of bull case there?
Okay, so the short answer is that we've been adding to the holding as and when we can. Sometimes we can't because the position is a big position and we do have portfolio construction rules, and you know, we can't add more in certain cases. But where we can, we have been adding to Diageo. What I'd say about Diageo again at a very, very generic level is that Warren Buffett says somewhere that even great companies sometimes can see their share prices halve. It's not unusual, even for an outstanding business such as I believe Diageo is, for its share price — you know, no one wants it to happen, but it can happen. I think that Diageo's share price today is, I mean, let's pick a time span, I mean it's an arbitrary time span, it's a once-in-a-decade opportunity to access the equity of what evidently a world-class growth business at a trivially low valuation. That's the way I would see it. I would see that because I believe that the drivers that have made Diageo actually such a successful investment over the last 20 or 30 years — it has been, even having fallen recently, it has been a very successful business and share price — I think that the growth drivers remain intact, and arguably the growth drivers are getting stronger over time. I think that premiumization perhaps has slowed somewhat, but it definitely hasn't gone into reverse. We have the advantage of having seen Diageo's presentation at the Cagney conference at the back end of last week, where the company was able to point to, I think, some very, very reassuring data showing that premium spirits continue to take share both of customers' overall wallet, but also even more so share of customer expenditure on alcohol. So premium spirits continue to take share during a difficult period for consumer confidence. I think that the most likely thing is that perhaps as a result of Trump's economic policies, I think that consumer confidence, particularly in the United States, is likely to improve over the next couple of years, and that when it does, there will be a marked acceleration in the consumption of Diageo's premium brands, and that will lead to a big, big re-rating of the shares. Now you might say that sounds like wishful thinking, and I don't deny we would very much like that to happen, but I would ask skeptics to note, even through this more difficult period for all consumer companies, look at the performance of Guinness and look at the performance of Don Julio Tequila, which is Diageo's — that is the number one tequila brand in the world and Diageo's biggest tequila brand in the United States. Those brands are booming, and they're booming because particularly younger consumers, who are purportedly not interested in drinking, actually, you know, love Guinness, they love the heritage of Guinness, and they love tequila, and they love Don Julio Tequila. So I think that the pessimism is just way too intense.
So do you not share the same concerns then that have some managers who worry about, I suppose, a general trend away from drinking alcohol? And even, you know, there are theories, for example, that the weight-loss drugs will kind of again shrink that demand?
