Hello and welcome to the latest Moneymakers Investment Trust podcast with me, Jonathan Davis. A reminder that for regulatory reasons, nothing you hear today, however stimulating and insightful, should be regarded as constituting individual investment advice.
In this episode of the Moneymakers podcast, I have the chance to talk to Nick Train, who is the manager, among other things, of the Finsbury Growth and Income Trust, market capitalisation around one and a half billion, and it sits somewhat curiously, perhaps, in the UK Equity Income sector. But anyway, it's been a long time since we talked, actually, Nick. It's been two or three years, and I think I can recall the first time we talked was back in 2001, the very first year that you were in business at Lindsell Train. And it's fair to say that it's been a long period of success, but the most recent three or four years have not been as productive as some of the earlier years. That is fair. And it reminded me that I looked up this record, that actually the first two years of the trust were actually negative years. You outperformed the market, but they were negative years because 2001, 2002 was, as we know, the aftermath of the internet bubble, TMT bubble. So you couldn't really have started at a worse time. But I think you've only had five down years out of your total 24-year history. So if we look back over that period, how do you characterise what's happened in the last three to four years? You know, why has this underperformance been there?
Well, maybe as in all of these affairs, there is an element of fortune. The strong periods of performance, you look back at them and you see that luck played a part. And maybe over the last few years, there's been some bad luck. And I think it's important to state that because fundamentally all of us participating in financial markets were essentially dealing with speculative assets, were more or less speculative assets, but in the end we're dealing with the limits of knowledge. And really what drives prices is that which is unknown. And that is quite close to betting and speculation, and luck definitely plays a part in betting and speculation. So I table that as a factor for sure. I think, though, maybe more germane, there's no doubt that COVID acted as an accelerant to economic, social and industrial trends. And those economic and industrial trends, some of them have turned out to be hugely value creating for certain industries and companies, but also some of the ramifications of those COVID-accelerated trends have been malign for other industries and companies. And I look back over the last four or five years and wish that Finsbury had had higher exposure to businesses that appear to be beneficiaries of COVID-accelerated themes and less exposure to those that didn't. And we'll see, of course, we'll see. When I look back at the structure of Finsbury's portfolio in 2019, so just before COVID hit, and I have to say, perhaps not irrelevantly, 2019 was also the relative high for the performance of the strategy. When I look back at the structure of the portfolio in 2019 and compare it to today, actually there have been some really quite marked shifts in theme and company preferences, and I've got to hope that those shifts will lead to improved performance.
So there are a couple of things to unpick there, I think. So on the one hand, the first point you make is that there are good periods and bad periods, essentially. And, you know, your style was particularly in favour perhaps before 2019 and now has been less out of favour, and that's just part of the game. But you haven't changed your fundamental approach to investing, which is essentially to buy very good companies as you see them with growth potential and not many of them. And so you're sticking to that. But what I think you're saying is that you've changed the components of that portfolio perhaps more than some of your shareholders might have expected, because you're famous for low turnover as well.
I agree. Thank you for making it far more succinct than I did. Let me just put some numbers on those structural changes in Finsbury's portfolio, just to illustrate what's been going on. In 2019, roughly 40% of the portfolio was invested in data, analytics, software, technology-advantaged businesses. Today, the proportion of Finsbury's portfolio is more like 65 or 66%. So there's been a marked increase in the exposure to tech-advantaged businesses, let's put it that way. And in hindsight, I wish that in 2019 the exposure had been 65% then, because the portfolio would have done better, because by and large that allocation to those companies has worked out really quite well. We can talk about some names later, perhaps, but I'm just talking about the broad shape of the portfolio. The other thing that's changed is that in 2019, and this is partly as a result of, as you kindly remarked, many years, if not decades, of very strong returns from this type of business, nearly 50% of the portfolio was invested in consumer branded goods owners. They'd done so well. Let's say in parenthesis here that maybe the most difficult thing for investors to ever do is to recognise when something that's worked for them has worked too much for you, and that you need to respond to those periods of exceptional return. Anyway, so from nearly half the portfolio in consumer branded companies in 2019, today it's in the mid to high 30%. So not nothing. And I still think that there's a strong case for investing in the best global consumer brands, but within the whole of Finsbury's portfolio, the emphasis on those has declined quite rapidly. The other change in Finsbury's portfolio structure, which I think is worth highlighting, is that the exposure to non-UK companies, overseas companies, let's put it that way, has fallen from just under 20% of the portfolio to zero today. So Finsbury's portfolio is essentially a pure UK equity strategy.
Just because you mean UK-listed companies rather than companies that only operate in the UK, you don't mean that at all.
It's a useful distinction, and you're quite right. The UK stock market, clearly one of the merits of the UK stock market is that the history of UK industry has meant that it's an extremely global collection of companies make up the bigger constituents of the market. So, yeah, investing in the UK stock market is definitely not the same as investing in the UK economy.
And of course, one thing you haven't mentioned so far is the fact that the UK equity market is pretty much unloved internationally, maybe changing now, but is unloved internationally, and valuations are very low for comparable companies. Now, that's an advantage in the sense of you would hope to get better returns to them going forward, but there is perhaps some structural issues around the UK market which are also holding you back. So that might hold you back now that you've concentrated more on UK-listed companies or totally on UK-listed companies. Would that be fair?
I think it depends on what the major constraints have been on the UK stock market over the last decade or fifteen years. And to me, the problem hasn't been so much political or social, it's simply been for perhaps mysterious reasons the UK stock market hasn't hosted as many world-class growth businesses as other bourses around the world. Why is it that the UK economy, educational infrastructure hasn't created more world-class, truly substantive growth businesses? I don't know the answer to that rhetorical question, by the way, but I just observe that to me that explains much of the underperformance of the UK stock market, simply the lack of exposure to digital technology-advantaged growth businesses. I think that the heart of what I'm hoping to capture for Finsbury is observing and then wanting to convey to investors that over time the UK stock market has in fact gradually become more, to use an ugly word, growthy. When you look at the constituents of, let's say, the top ten companies in the UK stock market back in 2001, when you're right, we were appointed to run Finsbury. Yes, the market in 2001 was dominated by what have turned out to be twentieth-century business models without much secular growth opportunity, oils, banks, and so on. When you fast forward to the top ten companies in the UK stock market today, although oil is still there and HSBC is still a big index constituent, in fact, there has emerged a number of genuinely substantive, world-class growth companies that are London-listed, of which we own several. I mean, to me, perhaps the most interesting, because there's a symbolic aspect to this, is RELX, which is a world-class, truly substantive global data business. 2024 was a symbolic year, I think, for RELX and perhaps too for the UK stock market, because in 2024, for the first time in its history, RELX's market capitalisation exceeded that of British Petroleum. Now, BP has been a drag on the UK stock market, sadly, for most of this century. The shares today are still the best part of thirty percent down in capital terms on their share price in 2001. Meanwhile, RELX, which just look at the chart, has been a wonderful wealth creator for its owners so far this century, hugely outperformed the NASDAQ so far this century. RELX has moved from, I think in 2001 it was number sixty-seven in the All-Share to being the fifth biggest company in the market today. And as I say, one position ahead of BP. That's just one example of UK-listed growth companies whose success is beginning to become more important for the performance of the market. Does that make sense?
That makes sense to me, yeah, absolutely. So I think there's a question then about the valuations of these companies. One question I could have put to you would say, well, if the UK market is not as appreciated as some component companies should be, why don't you just go along to them and suggest they go list in New York? But in some of these cases, the valuations of your companies are already quite high on conventional terms, are they not? So what I'm trying to strip out is whether there is a UK market sentiment factor involved in there or not, in your opinion.
There are a number of things to analyse here. Listen, I want to be absolutely clear that I do not believe that the UK stock market as an entity is cheap because the dividend yield is so high and the price-earnings ratio is so low in comparison to other markets. Those ostensibly low valuations are simply confirming the lack of secular growth opportunities in many historic UK businesses. When you look at the valuations of the companies that make up the heart of Finsbury's portfolio, which are, we sincerely hope, world-class, twenty-first-century relevant growth businesses, we can access them, including RELX, at a moderate discount to comparable companies listed elsewhere, most obviously on NASDAQ. But again, that's not really the basis for the investment. I mean, it would be nice if there was a ten percent pop across the portfolio because that valuation gap just narrowed to nothing. I don't know if that's going to happen. It doesn't need to happen. What does need to happen, though, for us to make money for investors is for the companies that we're invested in, and let me just throw off some other names here in addition to RELX, London Stock Exchange Group, the world's number one provider of real-time data to global financial institutions, Experian, the world's biggest credit rating agency with more data on more individuals and more corporations than virtually any other entity in the world, to talk about a domestic business, Rightmove, with this extraordinary position that it has digitising the UK's real estate property market. What really matters is that these companies demonstrate the sorts of growth rates and returns on capital that the best US data and technology companies already exhibit. Because if those UK-listed companies are as profitable and do have as big growth opportunities as those US peers, then there's a lot of money to be made by being invested in them. That's what I'd say. It's not so much the valuation, it's the scale of the growth opportunity.
And you make the point, I think, in one of your recent reports that the return on equity across the portfolio is about as high as it's ever been. I think you said that last year, thirty percent or something like that, which is very handsome. So that would appear to validate your approach, provided, of course, that those return on equity can be sustained. And of course, that brings in the question of, in a digital age, whether the competition is increasing or decreasing. I don't know what your thoughts are on that, because that would be fundamental to whether or not these high-growth companies, which you are paying quite a significant price for in valuation terms, are capable of delivering the kind of returns you want.
I agree, I agree. You remarked earlier that the underlying investment approach hasn't changed. Perhaps some of the industries or individual companies that we've chosen to participate in that investment approach have changed, or we've changed weighting. But the fundamental proposition that a way to create value for investors is to own a small number of very, very high-quality, high-return businesses, that remains probably even more relevant for Finsbury today than at any point in its history. And by that I mean that the portfolio concentration of Finsbury, I think, is at an all-time high level of being concentrated. And perhaps it's right what I was saying earlier about COVID acting as an accelerant to beneficial, but also to some malign trends in industries. I think you could sustain the case that the mass adoption of digital devices and tools has enhanced the value of data, proprietary data. And I think the common denominator for almost all of the major holdings in Finsbury is that they are companies that own and accumulate large amounts of data that's unique to those businesses. I think that's the moat for those companies, and that's what's going to sustain the returns on equity, which you rightly say are necessary for the valuations to be merited. I think on the other hand, we can see increased pressures on mass-market consumer brands, private label, the emergence of the discount retailers is definitely leeching away brand equity from the owners of undifferentiated consumer brands. And I feel it even more incumbent on us than ever to be sure that those consumer companies that we're still invested in do have products that are at least sustaining, if not improving, their brand equity. We mentioned going to the pub just before this conversation started, and I rather flippantly pointed out that we're happy that people are willing to pay seven pounds a pint if it is seven pounds a pint for a pint of Guinness. And I think Guinness is an example of a storied brand, whatever it is, two hundred and sixty, two hundred and seventy years old, that is arguably still just coming into its own as a global brand. It has a unique taste and a unique proposition to consumers. And as a result, Diageo have been successful in growing Guinness's revenues at double-digit rates per annum for, well, since COVID. So I table Guinness as an example of a consumer brand that's becoming more valuable currently, and it'd be nice to own more such brands, even if the share price of the parent company has been disappointed recently.
Well, if becoming more valuable, the market doesn't seem to recognise it at the moment. I mean, Guinness is only one part of it, of course.
That's right. I mean, it's a non-trivial part of Diageo. It's probably sixteen or seventeen percent of the business. But you're right, and Diageo does have other more troublesome parts of his business currently.
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Well, you're right. The first instinct is always to buy more, which I just think is a constructive... You know, it's said that there are two types of investors. There are investors who cut losses quickly, or there are investors who are willing to average down. And I've always had respect for Bill Miller's proposition. You remember Bill Miller, the Legg Mason US growth manager who had a tremendous period of success and then a period of less success, but nonetheless is someone worth looking back on. Bill Miller said somewhere that he who has the lowest book cost wins. So looking for ways to reduce your average entry price, if you're accessing a business with enduring qualities, that's a sensible way to approach the investment challenge. And I've looked to discipline myself and my colleagues to do so.
