UK stocks have picked up in recent years, but investors still have to hark back to the lockdown era to see the biggest ‘star’ manager of that domain, Nick Train, beat the market.
Train’s two UK portfolios, Finsbury Growth & Income (FGT) and Lindsell Train UK Equity (GB00B18B9X76) suffered less badly than the FTSE All Share in 2020 but have struggled ever since, at times losing money even when the market rose.
By now, investors are keenly aware that active managers often struggle to beat the market. AJ Bell’s last Man versus Machine report, published in December, showed that just 14 per cent of active funds in the Investment Association’s Global sector had outperformed the average passive alternative over five years, with only 26 per cent of active North America funds doing so. The figure for UK funds also came to 26 per cent.
As such, Train’s travails, and his apologies for underperformance in recent years, should come as no surprise. But it’s interesting to note that two other underperforming ‘star’ funds, Fundsmith Equity (GB00B41YBW71) and Scottish Mortgage (SMT), commonly crop up on bestsellers on the retail investment platforms, while Train’s vehicles are conspicuously absent.
Are investors wrong not to pile in? Finsbury Growth & Income shares trade on a 6 per cent discount and there might be some hope of a recovery. In an IC Interviews podcast episode recorded in late February, Train acknowledged problems for prominent holdings such as Diageo (DGE) but argued that his companies of choice had enjoyed strong fundamental performance, something yet to be acknowledged in valuations.
He also voiced a tentative hope that a strong run of performance for Finsbury Growth & Income over the past six months could indicate that things are finally turning around. “Performance has to start picking up some time, of course,” he said. “Let’s hope that was the nadir for this strategy.”
With returns looking weak for so long, investors could be forgiven for turning elsewhere, be that to other UK stockpickers, to a tracker fund such as the iShares Core FTSE 100 ETF (ISF), or simply to other markets, be it the US, Asia or Europe.
But Train’s portfolios are so concentrated that they are at least fairly easy to understand. For those on the fence on whether to back UK stockpicking’s best-known ‘star’, it’s worth looking at how the portfolios have evolved. Finsbury Growth & Income, a vehicle that allows Train the most flexibility to build his ideal portfolio, is a good lens for that.
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The fund’s evolution
Train is known for taking very big bets on quality large-cap shares with well-known brands, a strong market position and good cash flow. He has tended to favour companies with known premium or luxury offerings or consumer staples and discretionary shares. One of the notable shifts in recent years, at least in Train’s words, is from consumer brands to what he dubs ‘digital winners’.
As he put it in the last set of annual results for Finsbury Growth & Income: “The peak of our relative performance was in 2020. What drove the strong performance for much of the preceding decade were the strong returns [from] consumer branded goods owners such as Burberry (BRBY), Diageo and Unilever (ULVR), among others. As a result of that success, the combined weight of the holdings in consumer brands was 50 per cent of the whole portfolio at year end September 2020. In hindsight, this was too high.”
Train notes that Covid-19 and the following bout of inflation were harmful for many consumer companies, hurting his portfolio returns. The team’s response has been to tilt towards data, software and technology companies. It points out that ‘digital winners’ (names such as Relx (RELX), London Stock Exchange (LSEG), Experian (EXPN), Sage (SGE), Hargreaves Lansdown (HL.) and Rightmove (RMV)) made up 60 per cent of the portfolio at the end of September 2024, compared with just 32 per cent four years earlier. By contrast, consumer companies have dropped from 50 per cent to 35 per cent in the same period.
While Hargreaves is set to disappear from the portfolio via a buyout, Train recently added shipbroker Clarkson (CKN) and testing and assurance business Intertek (ITRK), which he argues both, in their own ways, “have either data or intellectual property that is world class”.
Train argued in the podcast that digital winners offer the slow and steady wins once associated with consumer shares, and they actually have the potential for high returns.
All consuming
The presence of steady names such as Relx, which might benefit from the rise of artificial intelligence (AI), does give the portfolio more appeal but Train maintains substantial exposure to consumer stocks, as the chart shows, and exhibits a high level of bullishness on them. Take Diageo, which has run into a swath of issues from inventory issues in Latin America to concerns about trade war effects on its manufacturing operations in Mexico, and the slowing of the premiumisation trend.
He has nevertheless been adding to Diageo where portfolio construction rules allow it, and argues it’s a “once in a decade opportunity” to “buy a world class growth business at a trivially low valuation”. The drivers of Diageo’s success over the past 20 or 30 years remain intact, he says, and are perhaps strengthening.
This includes a belief that premiumisation has slowed but not reversed, with Train pointing to recent Diageo data showing that premium spirits are taking more share of customers’ expenditure on alcohol. Diageo brands such as Guinness and Don Julio tequila are booming particularly due to demand from younger consumers, despite the assumption this demographic has little interest in drinking alcohol.
Nonetheless, such exposure should give investors pause for thought. Rob Morgan, chief analyst at Charles Stanley, notes that consumer stocks could “benefit somewhat from any receding concerns about inflation”, but they still lack the exciting narrative of other industries and remain lowly valued.
A weaker economic outlook in an era of trade wars could also hurt such names, as could idiosyncratic issues. Take Unilever (ULVR), which recently ousted chief executive Hein Schumacher after just 18 months it continues turnaround efforts.
Bets that grow bigger
The fact that Train’s positions are so big – and he tends to hold companies for a very long time – does make funds such as FGT simpler to assess than rivals. However the sheer concentration means the level of stock-specific risk is high, and it’s on the rise. The top 10 holdings accounted for a whopping 89 per cent of the fund in September 2024, and this rose to nearly 92 per cent at the end of January 2025.
At the end of September 2024, Experian was 13.5 per cent of the portfolio, with LSEG at 13 per cent, Relx at 11.7 per cent and Unilever and Diageo on 10.9 per cent apiece.
Train has attracted criticism for this concentrated approach and acknowledged on the IC Interviews podcast that this can “cut both ways”. Price moves can certainly be volatile. To demonstrate this in a time period highlighted by Train himself, Burberry (BRBY) shares made a total return of 65 per cent in the six months to 7 March but lost nearly 17 per cent in the year to that date. Experian made just 0.2 per cent over the six months while Relx made 4.8 per cent, London Stock Exchange made 6.8 per cent, Sage made 26 per cent and Unilever lost 6.1 per cent.
It seems this concentration is not going away, with Train telling us: “Active managers need to take some kind of risk over and above the index in order to try and beat it.” He argues that concentration is a specific type of risk, but that it should be offset by the likes of LSEG, Diageo and Relx strengths and brands that make them “predictable investments”.
Working from home
Another shift worth noting is that Train has called time on non-UK holdings in the portfolio, dropping Heineken (NL:HEIA), Mondelez (US:MDLZ) and Rémy Cointreau (FR:RCO), based on value. UK stocks made up 97 per cent of the portfolio at the end of September 2024, up from 79 per cent four years earlier.
That reduces any asset allocation headaches investors might get from UK funds that use an overseas allowance but also means Finsbury Growth & Income is very much a bet on the idea that UK shares have more room for recovery. Investors should acknowledge how big a bet this is, and size their position accordingly.
