Contenders: 28 trusts in the UK equity income and UK equity & bond income sectors.
Winner: Finsbury Growth & Income
The year to end January 2017 was disappointing for the UK equity income sector, with almost all its constituents failing to outperform not only the FTSE All-Share but also the FTSE High Yield index. Even Finsbury Growth & Income Trust (FGT) could not buck the trend, failing to outperform the All-Share for the first time in many years. But it held up better than many, and emerged with the best three-year net asset value returns in this sizeable sector.
Nick Train has managed FGT since 2000 and is justifiably proud that it boasts much the best 10-year returns of any UK equity trust bar a handful of smaller company specialists. He invests predominantly in large UK-quoted companies for capital and income growth, and though his trust's yield is low it has grown by at least 7 per cent a year in each of the past five years.
Train invests for the long term in a portfolio of 25 companies. He favours ‘durable, cash-flow businesses’, initiating holdings when they look undervalued, topping up on what he deems to be temporary setbacks, and only selling if he loses confidence in future growth potential. His recent loyalty to Pearson fits with his description of himself as a ‘stubborn investor’.
The latest addition to FGT’s portfolio was Remy Cointreau in 2015, and before that Heineken in 2011. Both comply with the trust's remit to invest up to 20 per cent in shares quoted on overseas markets. They reflect Train’s penchant for exceptionally well-established, family-owned businesses that share his long-term outlook, and also his liking for consumer goods companies, alongside other holdings such as Burberry and Diageo. Other themes are innovative technology (Sage, Hargreaves Lansdown and Pearson) and financial services (HL again, London Stock Exchange and Schroders).
Train was frustrated that FGT lagged its benchmark in 2016, but his holdings have been growing their dividends much faster than inflation. ‘I can’t recall another period when inflation-adjusted dividend growth from my holdings has been so strong, and I expect that trend to continue,’ he declares.
Highly commended: Edinburgh investment trust
Edinburgh Investment Trust (EDIN) also had a tough time in 2016, but still achieved the second-best three-year net asset value total returns in this sector. It is concentrated for its size, with only 52 holdings, but that has not deterred manager Mark Barnett from investing a quarter of the portfolio in medium to smaller companies. EDIN’s gearing is usually above average, ongoing charges are low, and the board is committed to growing dividends faster than UK inflation.
Barnett was disappointed with last year’s performance, but says: ‘Being an active, high-conviction investor means sometimes you are at odds with the wider market. However uncomfortable that feels, you have to have the discipline to stick to what you think works longer term and not try to chase performance.’ In his case sticking to his guns means continuing to focus on companies with growing levels of profit and cash flow, which should translate into growing dividends over time.
‘They do not need to be great companies – they can be companies which are transforming or changing themselves,’ he says. ‘But I like them to exhibit sustainability of revenues and pricing power, and I am looking for companies that are not necessarily at the whim of the economic cycle.’
This rules out mining companies from the portfolio, which is one reason EDIN suffered comparatively in 2016. Another problem was weakness in pharmaceuticals and biotechs, which Barnett attributes largely to political attacks on the sector in the US. However he thinks pharmaceuticals now offer good value.
He also expects his large, long-term exposure to tobacco to continue to do well thanks to rising prices, efficient management, and a new suite of products for activities such as vaping.