Searching the London market for growth places Finsbury Growth and Income Trust in a fuzzy middle ground. It’s not a backer of the value names that have had their moment in the sun as the huge slack in the financial system is finally tightened. But its portfolio also sits outside the racy stocks that have enjoyed a resurgence since the start of the year, as investors bet that central banks might be nearing the peak in raising interest rates.
After more than a decade of near-undisturbed gains, the FTSE 250 fund has endured a choppier ride since 2020, underperforming the FTSE All-Share, the benchmark it attempts to beat. Holdings in UK stocks priced for higher future earnings growth, like Experian or Sage, is one reason for the weakness. Others are more idiosyncratic, like the sell-off in the wealth management group Hargreaves Lansdown by investors prepared for a slower pace of flows to the platform.
There are tentative signs that the Finsbury trust could be on course to break its bad spell. The value of its assets has risen by 4.9 per cent in the first five months, better than the 1.6 per cent delivered by the benchmark. Can it last?
Investors may look at the fund’s largest holding, Relx, and wonder. The extraordinary rise of the ChatGPT bot and a subsequent sales warning from Chegg, the US-listed educational services specialist, have raised questions over whether artificial intelligence could upend the business models of information service providers such as Relx. The FTSE 100 constituent, which provides data analytics tools to the legal and medical professions among others, has said combining AI with its intellectual property is an opportunity but the fear of AI eating its lunch led the shares to fall last month.
If AI proves to be a driver of earnings growth, capitalising on the phenomenon will be trickier for UK investors like Nick Train, Finsbury’s manager, with the “paucity of substantive UK-listed tech winners”. That’s not to say the fund doesn’t have exposure to companies with the chance of using AI to improve their products or services — say, the credit-checking company Experian or the software provider Sage — but it might just be more tangential.
Then again, backing companies with durable track records has merit. Take Diageo, the drinks group behind Guinness and Johnnie Walker, or Cadbury’s owner Mondelez. Both have outpaced the FTSE All-Share over the past decade at least three times over.
It is hard to argue with the logic of Train’s investment approach. Prizing qualities such as high margins, low debt and consistent profitability are worthy measures for picking stocks that have a chance of delivering good compound returns in the long term. The Finsbury trust has outperformed its benchmark over the past ten years. The value of its assets has risen 141 per cent over that period, more than double the return delivered by the UK index.
There are two chief risks. One, that Train holds on too long in the hope of a turnaround — see his long-time holding in the education group Pearson. Two, concentration risk. The top three holdings, Relx, London Stock Exchange Group and Diageo, account for 34.1 per cent of assets. Then again, index hugging is a worse crime for active managers needing to prove their worth.
An improving UK economic picture aside, what else could lift returns? Management changes at Unilever, at the turn of the month, and a wholesale change at the top for Burberry last year could spur a rerating in two of Finsbury’s more inconsistent performers.
Take into account the shares’ 5 per cent discount to net asset value and the risk of shorter-term blips is worth stomaching.
ADVICE Buy
WHY The shares have a good chance of delivering solid compound returns
Crest Nicholson
Market capitalisation £587m | Half-year pre-tax profit £28.4m
Crest Nicholson is no stranger to drama. Its troubles predate the bond market chaos unleashed by last year’s mini-budget and rapid rise in mortgage borrowing costs.
The legacy of poorly performing sites, which the housebuilder has been working through, is weaker margins. That makes the group more vulnerable to the slide in house prices that has started to unfold across the market. First-half numbers disappointed analyst expectations as the volume of completions fell by almost a fifth and another £3.2 million in provisions were booked, which largely related to historical, lossmaking schemes.
And yet Peter Truscott, Crest’s boss, has stuck by adjusted pre-tax profits coming in at £73.7 million for the 12 months to the end of October, which would require a heavy build on the £20.9 million recorded in the first six months of the year.
Truscott is banking on house prices holding firm, some recovery in sales volumes and an easing in build cost inflation, which was in the high single digits in percentage terms over the first six months of the year.
But stubborn inflation has pushed mortgage costs up yet again in recent weeks and shaken buyer confidence. Meanwhile, average sales prices had already started to flatten towards the end of the first half.
For all the uncertainty, Crest doesn’t look that cheap. The shares trade at 11 times forward earnings, which might be down from a peak of about 16 amid the stamp duty break boom, but that still represents a premium to the long-running average.
Analysts have already put through heavy cuts to profit forecasts across the sector and the same goes for Crest. On the back of weaker half-year numbers, Peel Hunt cut its adjusted pre-tax profit forecasts for this year and the next by 16 per cent and 18 per cent respectively to £70 million and £74 million.
But as the investment bank Barclays points out, more persistent cost inflation means those numbers might not be conservative enough.
That is particularly the case if house prices start to sag more markedly, as some economists think. It would be wise to view Crest’s guidance with a dose of scepticism.
ADVICE Avoid
WHY Higher borrowing costs could cause completions and prices to weaken
