Nick Train, Finsbury Growth & Income trust manager, has been round the block a few times in a 39-year investing career
‘We know enough to know that we don’t know.’
Anyone tempted to try to predict the stock market’s next move in the coronavirus crisis would do well to heed those words from Finsbury Growth & Income investment trust manager Nick Train.
As one of the leading lights among British fund managers, Train has been round the block a few times in a 39-year investing career, but says the past six months have been the most distressing he has experienced.
His thoughts came in his latest letter to shareholders, alongside the trust’s half-year report, and are well worth weighing up for investors in this time of crisis.
Because while shares may have been more stable in recent weeks – and the market has bounced off its March lows – I doubt we are out of the woods yet.
A measure of that arrived this week with the extension of Britain’s furlough scheme until the end of October and the revelation that 7.5million people are having 80% of their wages, limited to £30,000 a year, picked up by the state.
The economic picture doesn’t look much friendlier in most of the rest of the world. And while economies and share prices don’t always move together, the prospects of a large chunk of companies have been severely dented.
Despite that, Train says Finsbury Growth & Income – a trust holding a tight portfolio of 24 companies he considers to be Britain’s best – is fully invested.
Why?
‘We have no appetite to take extra risk with the balance sheet,’ says Train. ‘But being fully invested means the portfolio will participate in any eventual rally and recovery.
‘A lesson from previous episodes of stock market panic is that it is impossible to identify the bottom and almost as difficult to get money invested after the market has turned – because prices rally so quickly.’
Train’s investment philosophy is based on what he describes as ‘the identification of excellent companies’.
While many might question some choices, the fund manager has robustly stuck to his investment plan over the years – and always been happy to explain why he feels companies pass the test.
Sticking to his knitting is a trait he shares with another big British investing beast, Terry Smith.
Arguably, this marks both out from their fellow big-name fund manager, Neil Woodford, who came unstuck just under a year ago, after going off-piste with his investments.
A key hallmark of those excellent companies, argues Train, is that they can survive a crisis, or even just business as usual through the cycle.
He says: ‘We have always thought that other investors underestimate the value of “survivability” in a company. For us it is the start point in our investment process.
‘Is this business still going to be around in 10 years’ time? A surprising number won’t be – even in “normal” economic conditions’
Train outlines that for him this means not just a robust business model, or Warren Buffet-style moat making it hard for rivals to compete, but also strong finances and preferably ‘positive cash balances’.
You’ll struggle to get a pint of Guiness right now, but you can all but guarantee in a decade’s time people will still be drinking Diageo’s prized brand
Regular revenues, especially some form of subscription-style income, are also helpful for ‘survivability’ says Train.
As is having a prized product that people will continue to buy come what may, whether that is Diageo, Heineken and Remi Cointreau’s booze brands, Unilever and PZ Cussons consumer goods, or Mondelez’s Cadbury chocolate.
That philosophy is shared by the previously-mentioned Terry Smith, who has just bought Nike shares at a coronavirus knockdown price for his hugely popular Fundsmith fund.
Many of Finsbury’s businesses will suffer in the crisis; a lot will cut their prized dividends; and there are, of course, those that have been hit even harder by the consumer economy pause, including brewers Fuller’s and Young’s and football clubs Celtic and Man Utd.
They will all probably survive though and interestingly Train does brave one prediction in his note, saying: ‘We expect a burst of hedonism on the other side of the crisis, as the world and especially the young celebrate deliverance.’
The note ends on a further message of hope, at a time when in the darker moments it can feel the world has been permanently damaged by coronavirus, we have lost some of the brightness of our future, and that we and our children’s generation will be left paying the bill for many years to come.
Train quotes 19th century philosopher, John Stuart Mill, who wrote: ‘What has so often excited wonder is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time of all traces of mischief done by earthquakes, floods, hurricanes and the ravages of war.
‘An enemy lays waste to a country by fire and sword and destroys or carries away nearly all moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.’
The quote is apt. Today’s enemy is coronavirus and it has laid waste to a way of life we thought was unshakeable, but it will be beaten, we will bounce back and return to a world that probably doesn’t look that different to how it did at the end of last year.
So, if you invest in good companies, at cheap prices, which can survive, you’ll probably do alright in the end.
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