Investors and fund managers tend to underestimate the value of “survivability” in the companies they invest in, star fund manager Nick Train has warned.
In the half year results for the Finsbury Growth and Income Trust, published yesterday (May 12), Mr Train said he was hopeful his own portfolio "really does comprise the sort of company that will get through the other side of all this”.
He added: “We have always thought other investors underestimate the value of survivability in a company. For us, it is the start point in our investment process.
“Is this business still going to be around in 10 years’ time? A surprising number won’t be — even in ‘normal’ economic conditions.”
It was therefore “not an accident” around 27 per cent of the Finsbury Growth and Income Trust was invested in companies with net cash on their balance sheets, Mr Train said.
He pointed to Hargreaves Lansdown, Rathbones and Schroders as companies with strong balance sheets, adding that the trust had “always been attracted to companies with conservative balance sheets”.
Another factor which made Mr Train hopeful the portfolio would pull through the coronavirus crisis was substantial holdings in companies with regular subscription type revenues. He said the asset managers in the portfolio fitted this mould, alongside RELX, Sage and the LSE.
As at March 31, the LSE made up about 12 per cent of the portfolio while RELX was the second biggest holding at 10.7 per cent.
Schroders and Hargreaves Lansdown also appeared in the top 10 holdings, accounting for 7.3 and 6.3 per cent of the portfolio respectively.
Mr Train described the first quarter of 2020 as “amongst the most turbulent” and “certainly the most distressing” of his 39-year career.
The coronavirus crisis shut down the economy and tumbled global markets in March, with many countries still in substantial lockdown and international and domestic travel limited to essential trips.
Figures out this morning showed the economy shrank at the fastest monthly rate on record in March as GDP fell 5.8 per cent, while over Q1 GDP dropped 2 per cent, the fastest rate since the financial crisis in 2008.
Mr Train said younger colleagues had looked to him and his partner, Michael Lindsell, for guidance and reassurance during this time but the pair just “had to shrug [their] shoulders” and admit they had “never seen anything like it”.
The results for the trust over the six months to March 31 showed the trust had lost 17.5 per cent in share price terms, compared to the UK All Companies sector which lost 25.5 per cent.
In terms of net asset value, the trust has been resilient, currently trading at a discount of 0.33 per cent.
Mr Train said he took “little pleasure” from this and was “no way complacent” about likely future challenges for the companies in the portfolio, adding there would be “unexpected challenges for sure”.
He added: "The boards of the companies facing these challenges must be encouraged and supported by shareholders to do the right thing.