Nick Train, investment manager of the Finsbury Growth and Income Trust, is doubling down on the need for patience. You can see why. Last year the FTSE 250 trust underperformed its benchmark for a second consecutive year.
A tentative revival in London-listed equities since then might tempt investors to be more forgiving of recent disappointments. So too, might a look at the trust’s record through previous economic upsets.
Attempting to neatly time the market by frequently trading in and out of companies is pointless. 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.
Finsbury invests in UK-listed heavyweights, the largest of which are the global drinks maker Diageo, and the European media company, Relx. They account for 23 per cent of the company’s assets.
What do they have in common? Quality income streams that have drawn investors into awarding a higher valuation to the stocks. For Diageo, the power lies in pricing that has outstripped inflation over several decades. In the case of Relx, it is a shift to higher margin data and analytics tools.
But not all holdings have shown the resilience investors would hope for. The investment platform Hargreaves Lansdown and Schroders had a “miserable” year. Being a mirror for plummeting markets is one thing, but the former can also blame a splurge on a tilt towards the robo-advice part of wealth management.
Last year the value of the trust’s assets slid 6.5 per cent, below the 0.3 per cent return of the FTSE All-Share Index. In the past decade the return from Finsbury’s assets stands at 179 per cent, against an 88 per cent gain delivered by the yardstick it attempts to beat, the most powerful indicator Train can point to as proof the approach might work.
He subscribes to the mantra of the billionaire investor and sage Warren Buffett: “Time is the friend of the wonderful company and the enemy of the mediocre company.”
The last part of that sentence gets to the heart of one of the chief risks of the Train approach — hanging on too long for a revival that does not materialise. Think Pearson, a company Train sold last year after holding for more than a decade. An aborted takeover bid might have reinvigorated the shares, but over the past decade, the return still stacks up to only 10 per cent. The All-Share totals 92 per cent.
Is the fancy tonic maker Fevertree the next lingering disappointment? The company was Train’s “biggest embarrassment” of last year, over which time the stock fell by about 60 per cent. Buyer’s remorse? For now, he is pinning his hopes on the beverage group’s ability to crack further into the US drinks market.
Train takes big bets. The benefit? If a company performs well, the gains banked by the trust are amplified. The drawback? Those that do not deliver will cause far greater injury to the trust’s net asset value.
Train holds 22 stocks in the trust, below an allowance of 30. Those include Manchester United, which is up for sale. Whether he decides to park any cash windfall in new stocks or existing positions will be watched.
Finsbury is not for investors looking to see fast returns. But if the aim is to deliver higher returns than the index over many years, then Train has demonstrated that he has the chops to deliver that. The shares have a total return of almost 165 per cent over the past decade, easily outpacing the 92 per cent return from the benchmark.
Another appeal for investors? The shares are priced at a 5 per cent discount to the value of the trust’s holdings.
ADVICE Buy
WHY Finsbury Growth and Income Trust shares could deliver higher compound returns over the long-term
Safestore
The self-storage giant Safestore has been cut down to size — but perhaps by not enough. Rising interest rates and squeezed consumer finances call into question how long the value of its estate can keep rising at the pace it has done over the past two years.
Analysts at investment bank Peel Hunt have forecast an adjusted net tangible asset value of 751p a share at the end of October this year, a fall on the 908p at the same point last year. Even after a decline of roughly 25 per cent over the past 12 months, that leaves the shares trading at a 33 per cent premium to asset value. Take a more bullish forecast, say the 930p a share net asset value from the US investment bank Citi, and the shares are priced 8 per cent higher.
Admittedly, past performance is appealing. Underlying revenue rose 11 per cent, led by a rise in the average store rate of roughly the same magnitude. The company’s net tangible asset value rose 30 per cent over the latest 12 months.
Self-storage companies are hardly in the same bracket as souped-up city offices or warehouses, which had become the hottest corner of the property market until the start of this year. So the rising cost of capital might not prove as damaging to property values.
But there are other barriers to recent rates of growth continuing. One, how willing are cash-strapped consumers, who account for roughly 60 per cent of space let, to fork out for storage? Two, a faltering housing market could stifle demand for space. Owner-occupiers contribute around 10 per cent of revenue, and renters switching homes account for roughly the same proportion again. Closing occupancy edged down to 83.1 per cent, from 85.2 per cent at the end of October 2021. For how much longer can rates do the heavy lifting?
The other question is whether Safestore gleans the same value from its development pipeline as it has in recent history, which would expand lettable space by 18 per cent by completion in about 2025. Cost inflation is still running at between 10 and 15 per cent for new builds and in the high single-digits for conversions. That is bearable if rates remain at similar levels to those of recent years, but less so if rents drop more than expected.
ADVICE Avoid
WHY The shares’ premium does not seem justified amid an economic downturn
