James Carthew: Finsbury Growth share buyback keeps Saba away

I promised to discuss Finsbury Growth & Income Trust’s (FGT ) annual general meeting this week. Citywire’s Jeremy Gordon has already written up the highlights of the meeting, but I would like to expand on a couple of topics.

First, while I was pleased to see a decent turnout in the room, the percentage of FGT’s shares that were voted was just 38%, which is really not good enough. This week, I was really pleased to see the AIC push for change on this front. It has launched a new campaign ‘my share, my vote’, which is aimed at making it easier for investors who hold their shares through platforms to exercise their right to vote.

The AIC wants a change in company law that would fix this problem and force platforms to pass on information from companies to investors. While the odd platform may grumble about the extra admin that this would entail, the reality is that all of this can be done digitally at relatively little expense.

Some platforms are already far advanced down this route. Naturally, this would apply to shareholdings in all types of companies, not just investment companies.

The next step in this process would be galvanising investors into exercising their rights. Although, as I suggested last week, the simplest solution might be to give standing instructions to vote with the board’s recommendation unless the investor instructs otherwise.

Back to FGT’s general meeting. There was some debate in the room about the merits of share buybacks and the board’s proposal for a continuation vote. FGT has bought back stock aggressively since its discount opened up in 2021. The number of shares in issue peaked in 2021 at almost 225m. Since then, 75.3m shares have been bought back, taking about £712m off the market cap. However, that just takes the trust back to the size it was (in terms of numbers of shares) in 2016.

In my view, FGT was not shy to issue stock in the good times and so it is only right that it buys that stock back now. It helps that both the issuance and repurchases have been beneficial to FGT’s net asset value (NAV) performance.

Potential Saba target

The discount touched 10% in October last year, which I think was overly wide for a portfolio as liquid as FGT’s, and clearly at odds with its policy of trying to keep the discount no wider than 5%.

However, it has narrowed since, helped by some improvement in relative returns. Nevertheless, it seems likely to me that, had it not been buying back shares as aggressively as it has, FGT would have been on Saba’s target list.

As fund manager Nick Train emphasised in the meeting, FGT’s investment approach, with its very concentrated portfolio (92% in the top 10 positions at the end December 2024), would not work in an open-ended structure. Nevertheless, the liquid portfolio permits the use of a discount control mechanism – and I think it is the right thing to do.

I am less convinced of the merits of introducing a continuation vote to be held at next year’s AGM. I do not think it will make a difference to demand for the stock. However, it will be vital that the voting issues I discussed above are addressed by then, so the outcome cannot be skewed by a handful of professional investors.

DeepSeek shake-out

Then there is the issue of the concentrated portfolio. This goes far beyond the low number of stocks, as the reality is that the number of investment themes within the portfolio is very limited – restricted to ‘digital winners’ (companies that can exploit proprietary datasets) and consumer companies.

It is this that creates the conditions where FGT can swing dramatically from doing very well relative to the wider market to experiencing an extended period of poor performance, as was the case until fairly recently.

To my mind, there is nothing wrong with this, but investors need to factor it into their decision making when deciding how large a position FGT should be in their portfolio.

Given the other major investment news this week, I feel that I should point out that we have had a similar overconcentration problem with US and global indices. We have all been talking about the so-called ‘Magnificent Seven’ stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – since 2023.

Excitement around advances in artificial intelligence (AI) was the main driver of this success. Now, the possibility that a Chinese firm DeepSeek might be a credible competitor has unnerved investors in Nvidia. It also threatens to call into question the wisdom of other Magnificent Seven companies pouring so much money into developing AI models.

This might turn out to be a storm in a teacup, but I am hoping that it triggers the end of investors’ narrow focus on a handful of stocks, which in turn might mean that they take a more rational look at the undervaluation of the UK market.

Nick Train might be feeling the same way. He has sold off his overseas stocks and is now focused solely on the UK, where he feels that valuations are attractive. He argues that the UK listed market is evolving to have a greater growth focus, and this is not being recognised.

It certainly is true that the London-listed global businesses he is backing trade on lower multiples than US peers. It would be good if they rerated rather than end up seeking a US listing or surrender to a bid.

James Carthew is head of investment company research at QuotedData.

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances.