As star UK equities manager Nick Train once more bemoans the disappointing performance of his flagship Morningstar Bronze-Rated Finsbury Growth & Income Trust (FGT), it appears three stocks in particular are weighing on his portfolio: Burberry, Remy Cointreau and Schroders.
In the six months to March 31, 2024, the investment trust delivered a net asset value per share total return of 5.9% and a share price total return of 2.7%, underperforming the FTSE All Share Index, which saw a rise in its total return by 6.9% over that same period.
The strategy's net assets also dropped to over £1.7 billion as of March 31, 2024, from £1.8 billion, as of September 30 2023. Continuing a recent trend of apologies, Train once more said sorry to shareholders.
"As a career-long UK Equity manager, I am frustrated by the malaise gripping the UK Equity market," he said.
What's Causing Nick Train's Underperformance?
Over the last six months British luxury giant, Burberry (BRBY), has been the biggest detractor to the trust's performance.
The stock lost 52.9% over the one year to May 28 2024, tumbling from previous highs of £22.08 to its current price of £10.36. According to Morningstar analysts, the company is currently undervalued – its fair value estimate is £16.80 per share.
However, Morningstar has assigned Burberry a High Uncertainty Rating as the business grapples with lower profits after a slowdown in demand for its luxury goods in both Asia and the Americas.
In the middle of May, Burberry reported a pre-tax profit of £383 million for the year to March 30, a 40% fall on the £643 million it posted in the previous 12 months.
With 42% of the stock's revenue coming from Asia, it has been hit by the nosedive in sales from the continent, and in particular China, where sales dropped by around 19% for the final quarter of 2023. China sales have been particularly affected by the growth slowdown and crackdown on gifting luxury goods to public officials.
Key Morningstar Metrics For Burberry
• Fair Value Estimate: £16.80
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High
Remy Cointreau (RCO), meanwhile, the French family-owned distiller of Cognac and other spirits, has experienced a share price slump of 40.68% over the last year. Shares in the company dropped in value to €88.15 from €148.60, and are currently below Morningstar analysts' Fair Value Estimate of €117.06.
At the beginning of January the company reported €956.6 million in organic revenue, a drop of 22.7%. In particular, its world-renowned cognac division took a big hit amid "destocking" in China and declining demand in the US. Luxury stocks like Burberry and Remy Cointreau, which boomed in the pandemic, have succumbed to the same problems besetting the wider European consumer sector such as sluggish demand. High inflation has eaten into shoppers' disposable income and they are making much tougher choices about what to eat and drink.
Schroders (SDR), the British asset manager, has also caused a decline in FGT's performance, with the fund house's share price losing 14.28% over the one year period to May 28 2024. Its shares are currently trading at £3.94, a fair distance from Morningstar analysts' fair value estimate of £5.74.
Like many other active asset managers globally, Schroders has struggled to contend with the rise of cheaper passive investing, as well as a shift in investor appetite from public to private markets. It has also played witness to the impact of UK pension funds moving away from holding domestic shares.
The firm is currently trying to replace outgoing chief executive Peter Harrison, who is set to retire next year. Harrison has sought to reverse the decline of the company's traditional business model by diving into private markets, but his Schroders career has seen a fall in the firm's share price and profit margins.
What Else Did Nick Train Say?
In Nick Train's statement to shareholders, he also said that FGT's performance was hit by its lack of ownership of UK-listed oil and mining companies. Both have been bosted in the post-pandemic era after an energy crisis sent demand rocketing.
"The portfolio did not, with the benefit of hindsight, have enough exposure to companies with products and services likely to become more relevant and valuable to their customers as we proceed deeper in the 21st century," Train said.
"I also believe the portfolio needs exposure to consumer-serving companies whose products consumers aspire to purchase and enjoy (Luxury and premium consumer goods)."
However, despite the disappointing run, Train is still backing RELX (REL) and Sage (SGE) in the trust's portfolio. He believes both have "transformative profit potential ahead."
Among the mid- and smaller-cap names in the trust, he remains bullish on Fever-Tree (FEVR), Hargreaves Lansdown (HL) and Rightmove (RMV), arguing they all have plenty of opportunities in the years ahead. Investment platform Hargreaves has recently rejected a takeover bid, which sent its share price soaring.
Finsbury Trust Has a Bronze Medalist Rating
The Finsbury Growth & Income Trust has a Morningstar Medalist Rating of Bronze. Analyst Daniel Haydon says:
"Train’s philosophy is that a highly concentrated portfolio of high-quality, cash-generative, strong, and easily understood business franchises will outperform the market
"The manager takes a multidecade view; this is evident when looking at the portfolio, which contains many very long-term holdings.
"Nevertheless, we monitor the consistency of the manager's sell discipline and whether he is wedded to existing positions.
In terms of Train's underperformance, Haydon adds:
"While some of the underperformance is attributable to the quality growth style, there have also been some stock-specific disappointments. Its long-term record is still attractive, with the trust delivering attractive relative returns and strong risk-adjusted metrics ... over 10 years and over the manager's tenure ...
"Investors are encouraged to take a long-term view befitting the highly concentrated, buy-and-hold nature of the strategy, which can naturally lead to lumpy relative returns."
