I am an huge fan of Nick Train and Terry Smith.
MSN posted an article yesterday: “Nick Train vows to back 'world-class' British businesses after apologising for a dismal performance.”
Finsbury’s results showed that it was boosted by the performance of holdings in publisher RELX, credit scoring firm Experian and software business Sage.
The main detractors were fashion group Burberry, drinks maker Remy Cointreau and asset manager Schroders.
I took a look at the top 10 holdings of LTI (Lindsell Train Investment Trust). Of them, 5 were UK shares (I’m ignoring his holding of WS Lindesell Train North American Equity). Those 5 holdings are, together with the P/FCF: LSEG 25.9, RELX 32.2, DGE 25.4, ULVR 16.2, BAG 22.4. (LSEG: London Stock Exchange, RELX: Relx, DGE: Diageo, ULVR: Unilever, BAG: AG Barr).
I’m borrowing an idea from Terry Smith about the minimum FCFY (Free cashflow Yield, which is the inverse of P/FCF) that he would prepared to pay for an investment. That yield is inflation + 1%. So, as of today, that’s 3%+1%, or 4%. This equates to a P/FCF of 20.
As you can see, all the holdings above are above this threshold (implying that one would not make a purchase at those price levels) with the exception of ULVR.
Although the UK stock market is at a reasonable valuation (Stockopedia a trailing PE ratio of 14.6 for the ASX, All-Share Index), the kind of quality stocks that Nick holds are at a substantial premium.
Over the last 5 years, the compound annual growth rate in net profits have been as follows: LSEG 9.7%, RELX 4.6%, DGE 2.0%, ULVR -7.1% (but 3.6%pa over the last 4 years. 2018 seemed exceptional), BAG 1.5%.
The London Stock Exchange is the only one that has done well in terms of increasing their profits. The others have been distinctly lacklustre. I also note that LSEG has an average ROCE of 7.3% over the last 6 years, which is low for a company considered to be of high quality. Stockopedia gives it a Q (Quality) score of 50 which is, again, pretty mediocre. It has averaged an operating margin of 24%, which is good. Interestingly, the operating margins were around 30% in the years 2018-2020, slipping to around 17% for 2021-2023. So their operating margins seemed to have slipped of late. I have no sage thoughts as to whether or not they’ll recover, but there does seem to have been a degradation in their performance as of late. Profit margins seems to be around 86%, though, which is stratospheric by any standards.
So what we have here is a picture of companies that are highly-valued, but their actual performance the last 6 years has been anemic. It seems unlikely that companies such as DGE, ULVR and BAG can deliver double-digit earnings returns over the medium-term or longer. The same goes, perhaps to slightly lesser extent, for the other two.
It seems unlikely to me that we will get a great performance on the LTI over the next few years. I don’t the companies stack up.
Let’s turn to Nick’s other popular trust: FGT (Finsbury Growth & Income Trust). The top 10 holdings in the trust which are in the UK are: RELX. LSEG, EXPN (Experian), SGE (Sage), DGE, ULVR, BRBY (Burberry), SDR (Schroders), HL(Hargreaves Lansdown). The holding that I’ve excluded is Mondelez, because it’s not a UK company.
The coresponding P/FCF are: EXPN 38.5, SGE 27.8, BRBY 12.3, HL 16.9. HL is currently invovled in a takeover situation, which I predict will be rejected (good!).
Only BRBY and HL pass the valuation test. Both have negative sentiment at the moment, so you could make a case for a contrarian investment. HL seems a good opportunity to me (assuming we can get the potential acquirer off out back), whereas BRBY has been having problems selling goods.
BRBY has a lot of sales in China. China has been having economic woes of late, although they do seem to have abated recently. Nick is a long-term thinker, and seems to view this as a buying opportunity rather than cause for concern.
The returns on capital for the companies are great, so I don’t have trouble classifying them as quality businesses, which is Nick’s hunting ground.
Let’s take a look at the CAGR of net profits over the last 5 years. EXPN 11.5%, SGE -6.5%, BRBY -4.5%, HL 6.5%.
EXPN has obviously had an outstanding performance, the others, um, less so.
SGE. Nick has pointed out that the transition to a service model has caused it some problems. He seems to be confident that the transition should boost returns in future. Revenue growth over the last 6 years has been about 3.4%pa compound. Hardly great. Analysts are expecting revenu growth of a little under 10% for 2024 and 2025, so perhaps Nick has got a point. EPS forecasts anticipate growths over 10%. Still, the share’s rating is high (PE of 27), so there’s a lot to prove.
BRBY. Stockopedia gives it a momentum score of 4, which I usually take to be a red flag that there’s more bad news to come. I suspect that it doesn’t concern Nick and is eager to buy at these levels. I, personally, am more circumspect. It’s not a company for which I am champing at the bit to buy, let’s put it this way.
HL is perhaps the most interesting to me. Share price is reasonable (although we need to get rid of the bidder first), and growth has been OK. The sector is in a funk at the moment due to concerns about fairness of terms to investors (particularly with regards to interest payments) and the stodgy performance of the stock market itself. The contrarian in me thinks that sentiment, and returns, should improve over time.
So, make of that what you will. FGT seems a little better bet in terms of valuation that LTI, with perhaps some contratianism in it. I’m far from enthused by the prospects of either, though, as the portfolio valuations seem fairly high, and their prospects only so-so. We shall see.
FGT has a share price of 831p, LTI is £806, and the ASX is 4491.