Minimal dealing, max performance

A decade ago Nick Train turned his back on big activity in stocks for small returns. His fund, Finsbury Growth & Income, has not only delivered, but some years has had nil turnover of stocks

Terry Smith, the chief executive of Tullett Prebon, last week promised to revolutionise investing with a concentrated portfolio of about 20 stocks in a low-cost fund following the principles of Warren Buffett. Sorry, Terry, it’s what Nick Train did 10 years ago.

The good news is that it works, most of the time at least. Train’s Finsbury Growth & Income Trust had a bad time in 2007, and 2008 was pretty dreadful for everybody, but overall the low-turnover, buy-and-hold strategy of 20-25 high quality stocks has paid off.

The trust is up 31% over the past year, compared with the 19.5% gain in the FTSE All-Share. Over five years it is up 41% against the All-Share’s 33%. (article continues below)

Not that benchmarks count too much when you have so few shares in the portfolio. The top three stocks account for nearly 30% of the fund and all are consumer goods companies: AG Barr, Diageo and Unilever.

“The quickest way to appraise what we do is that we are trying to copy Warren Buffett,” says Train. “He has long favoured branded goods companies, famously Coca-Cola. We are looking to replicate his sort of ideas in the UK market.”

But you don’t just buy companies that sell lots of little things to consumers every day. That leads you into Woolworths. Train adds: “I occasionally quote big numbers, such as the fact that Unilever sells 150m items every day around the world. That’s a nice statistic. But it’s the brand that’s more important. A company can sell 100m tea bags without actually making money. Does a company have the brands that will allow it to make money, and over the longer term as well?”

Turnover is spectacularly low. Smith is promising turn­over of 4-5%. In some years, Finsbury Growth & Income has had zero turnover. That’s right, not buying or selling a thing.

Train’s long experience in fund management – he was for 18 years manager of GT Income and has run this fund for nearly a decade – tells him that big ideas and big activity sounds terrific, but just doesn’t pay off.

“There is extraordinary institutionalised pressure on investment managers to be seen to be doing clever things regularly,” says Train. “In the milieu I know best – of 30 to 40 smart people in an investment team, the way you excel in the short term is by generating what appear to be clever ideas day in, day out, and to be seen to be decisive and active. But in aggregate, if you look back over the performance of the industry over the last 10 years, an extraordinary proportion of these ideas are worthless. You just add additional costs.”

It was in part to rid himself of that sort of culture that he partnered Michael Lindsell, another GT manager, in creating Lindsell Train. “One of the purposes of Lindsell Train was to create an environment where the pressures to be dealing and doing smart things every day would be minimised.”

But neither does Train arrogantly suggest that he has unlocked the secret of investment management. “I don’t want to overstate this. Beating markets is tough, and we’re not saying our approach is inherently better. But 10 years later, our low-turnover, focused approach has delivered returns. We look at the portfolio as a collection of fabulous brands or franchises with unassailable market positions.”

Train has found many of the best opportunities among the brewers and regional pub companies – “We love well-established soft drinks and beverage franchises.” Stocks include Marston’s and Fuller’s, but AG Barr is by far the biggest holding. It’s best known for Irn-Bru but its portfolio also includes Tizer and Strathmore mineral water, and it has the British licence for making and selling Orangina.

Train’s blind spot is mining, mainly because he says he is not ­prepared to second-guess commodity prices. Yet being out of mining stocks hurt the fund in 2007, when Chinese demand sent stocks soaring. To this day he remains out of mining. “I’m not proud of the fact that we have never owned the damned things, but we have an investment approach that takes us away from them.”

Talk of recent acquisitions is never going to be much of a conversation with a fund manager who has kept 15 of his initial 25 positions for an entire decade. But he does, somewhat hesitantly, tell me of a buy he is keen on: the Daily Mail. Its politics don’t interest him, but its website does. I can only marvel at the rise of the Mail’s website, whose user numbers have eclipsed those of every other paper.

Train reckons that the Mail group may find itself, in as little as five years’ time, with a website that is valued at more than the print paper itself. He can see it doing advertising deals with all the major retailers to deliver middle England volumes that no other online provider will be able to match.

Pearson is another media stock he owns for its internet potential – and the value of the FT brand. “Ten years ago there were two dominant brands in this market – the Wall Street Journal and the FT. They are still the dominant brands. The strategic value is why [Rupert] Murdoch paid such a high premium for the WSJ.” Train is also impressed by the pace at which Pearson is digitising its entire educational business.

Looking forward, he is concerned at loose monetary policy, although his long experience in fund management has taught him not to make macro pronouncements. But he says: “Look, I’m a crusty old monetarist. I feel there is something immoral about creating money at the press of a button. It’s just bullshit, and it runs the risk of destabilising the world trading system.” But he reckons that catastrophe will probably be averted, and the world economy will muddle through.

The discount on the trust is just 2%, a beneficiary of a strict buyback control mechanism that has kept it from going below 5%. Gearing can be as high as 15% but is currently 6%.

Train is a smart, sensible manager whose long experience belies his relative youthfulness, although I wonder if that head-and-shoulders shot on the fund factsheet is as old as my byline picture in the Guardian.

If you want all the values that Terry Smith is espousing, but with a long-track record, then ­Finsbury Growth & Income must be an attractive home.