Fund manager Nick Train has reported another disappointing six months for Finsbury Growth & Income (FGT ) but says the return on capital produced by his major holdings should convince investors of a bounce-back in performance.

The long-term outperformer has extended its run of underperformance, as the £1.8bn portfolio of defensive global consumer brands lagged the FTSE All-Share index for the third consecutive six-month period. Over the half-year to 31 March, the net asset value (NAV) total return of the UK equity income investment trust slid 2.2%, while the shares drifted 3% lower, against a 4.7% rise for the benchmark.

As of Monday, even with dividends included, the shares had fallen 10% over one year – one of the worst performances in its sector – against a 6% total return from the All-Share. Over 10 years, however, shareholders have received a total return of 193%, the second best in its sector after Law Debenture (LWDB), and ahead of the All-Share’s 109%.

Train, who also runs the £6.9bn Lindsell Train Global Equity fund, said many of the long-standing major holdings have failed to deliver ‘over what is now no trivial period’ but he was not proposing to change his investment strategy, which he said would be a ‘disservice to shareholders’.

In an effort to convince investors of the long-term prospects of the trust, Train said they should focus on the ‘return on capital’ (RoC) produced, which is the measure of a company’s net income as a percentage of the capital it deploys to run its business including the equity and debt, and which Train said is the ‘yardstick of what constitutes an outstanding company’.

He said great companies tend to sustain a RoC of a ‘least low double digits for long periods in the past and ideally into the future’.

‘It is too simplistic, but nonetheless a useful rule of thumb is to say that if a company earns a RoC of 10% every year for, say, the next 30 years, probably the average return earned by its shareholders over the three decades will work out at close to 10% per annum,’ he said.

‘That would be an excellent outcome, by the way, because few businesses sustain high returns decade after decade.’

The trust’s weighted average RoC of all the portfolio holdings above 1% of NAV is above 15%, with Hargreaves Lansdown (HL) boasting the highest Roc of 50%.

‘This reflects the exceptional profitability of the company and, as a technology-platform business, its low requirement for physical capital,’ Train said.

‘Now, Hargreaves Lansdown is a prime example of often poor short-term correlation between RoCs and share price returns because, despite having the highest RoC, its shares have been weak, notably over the past six months, falling 30% over that period.’

Train said the fall in share price must mean other investors believe the investment platform’s RoC is about to decline ‘probably precipitately’ but he disagrees and expects the company ‘to earn high returns’.

‘If we are right, at some stage the Hargreaves Lansdown share price will do well again,’ said Train.

Finsbury Growth says its stocks ROC

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Company	Percentage of portfolio	Return on Capital
Burberry (BRBY)	6%	17%
Fever-Tree (FEVR)		17%
London Stock Exchange (LSE)	10.1%	17%
Relx (RELX)	12.5%	17%
Diageo (DGE)	12.7%	15%
Experian (EXPN)	5.20%	15%
Schroders (SDR)	6.7%	15%
Unilever (ULVR)	8%	15%
Sage (SGE)	6%	13.5%
AG Barr (BAG)		11%
Heineken		11%
Rathbones (RAT)		11%
Remy Cointreau	5.7%	11%
Mondelez	9.9%	10%

Source: Finsbury Growth & Income

One company that reported a loss and a negative RoC last year was New York-listed football club Manchester United, which suffered as Covid-19 shut live sporting events down.

However, Train said the recent interest shown in acquiring Chelsea FC demonstrated ‘that sports franchises of this calibre and scarcity remain attractive to strategic investors… and we wonder what the implications will be for Manchester United, where the stock market value is notably below the confirmed levels of the offers for the London club’.

Train said, overall, the portfolio offers ‘an attractive overall RoC, delivered by companies with long histories of stable, high returns, and critically with good reason to think those returns will be maintained over time’.

Mick Gilligan, head of managed portfolio services at wealth manager Killik & Co, said the recent derating of FGT shares had been justified by stock-specific setbacks and a broader rotation from quality growth stocks into value names, leaving the shares trading at a discount of 7.7% below their NAV.

‘The FGT NAV may not keep pace with the market against a backdrop of steeply increasing rates,’ he said.

‘However, many of the holdings have experienced a material derating and are now starting to show better share price performance.’

He said the top five holdings – Diageo, Relx, Mondelez, London Stock Exchange and Unilever – have all outperformed the FTSE All Share over the past three months.

‘Those wishing to take a long-term view and add some FGT to their portfolio should find some reassurance in the underlying portfolio profitability and the ongoing support from the board to buy back stock around current levels,’ said Gilligan.

‘This buy-back support should help to limit further discount widening. The current discount looks extreme in the context of the last 10 years.’