Numis Securities has added its voice to those flagging up a potential buying opportunity in Nick Train's out-of-favour Finsbury Growth & Income (FGT). Shares in the GBP2bn UK equity income trust - the largest in its sector - have traded on a narrow discount since May and currently stand just over 4% below net asset value (NAV), a level the broker's analysts consider attractive. Before the pandemic last year, Finsbury shares typically stood at a small premium to NAV, reflecting the many years of strong performance Train had generated since taking on the trust in 2000.
However, as yesterday's half-year results from the Lindsell Train (LTI) trust highlighted, the market turmoil unleashed by the pandemic has been unkind to Train's buy-and-hold strategy focused on strong consumer brands such as Unilever, Heineken and London Stock Exchange. Although performance has not been disastrous, the 11.6% growth in NAV this year lags the 17.4% advance in the FTSE All-Share and the 18% average of rival UK equity income trusts. Last year, while not capturing the market's tech rally after the pandemic crash, the trust did at least hold up better than its peers with a 2% drop in NAV versus the sector's average 8% decline, according to Morningstar.
Train's problem this year has been investors switching to trusts with a value approach that have benefited from the sharp recovery in cyclical banking, industrial and retail stocks. With its shares slipping below NAV, shareholders have seen a total return including dividends of just 6% this year. The decline in relative performance has sapped its longer-term returns and knocked the trust off the top of the AIC UK Equity Income sector where Law Debenture Corporation (LWDB), Dunedin Income Growth (DIG) and Merchants (MRCH) have overtaken it over five years.
But with the trust's 10-year 249% record still well ahead of most rivals and the All-Share index, Numis is backing Finsbury Growth to recover. 'The fund has an exceptional long-term track record and is amongst the best-performing UK equity income investment companies over the last 10 years, despite facing recent headwinds to performance.' It added: 'We do not believe investors should be overly concerned with a short period of relative underperformance and note that often the best time to buy a manager is when their style/approach is out of favour.
'Furthermore, the share price downside should be limited by share buybacks,' Numis said. Mick Milligan of wealth manager Killik & Co agreed. Last month, he said Finsbury Growth's derating may have been justified by concerns of a rotation away from Train's 30-strong collection of quality growth stocks to formerly out-of-favour value stocks, as growth stocks tend to struggle in a period of rising interest rates.
'It is fair to say that the FGT NAV may not keep pace with the market against a backdrop of steeply increasing rates.
However, there is no certainty that rates will continue to rise in this manner.
'For those wishing to take a long-term view and add some FGT to their portfolio, at least they can expect ongoing support from the board to buy back stock around current levels and helps to ensure the discount does not drive much wider than 5%,' he added.