Bill Jamieson: Standing by convictions comes with risks

A key attraction of collective management groups for investors is diversification of risk.
Bill Jamieson asks whether fund managers should cling on in the hope of recovery, or cut their losses. Picture: Daniel Leal-Olivas/AFP/Getty ImagesBill Jamieson asks whether fund managers should cling on in the hope of recovery, or cut their losses. Picture: Daniel Leal-Olivas/AFP/Getty Images
Bill Jamieson asks whether fund managers should cling on in the hope of recovery, or cut their losses. Picture: Daniel Leal-Olivas/AFP/Getty Images

Your money is spread across a wide range of companies. Thus, losses on one particular share are cushioned by the better performance of other shares in the portfolio.

But what happens when a large holding in the trust goes wrong – and performance is affected? Should fund managers cling on in the hope of recovery, or cut their losses? Many investment trusts, managed by “conviction” analysts, can have a large percentage concentrated in just a handful of shares. Chosen well, these shares will enable the trust to outperform and deliver high rewards for investors. But conviction management can run into troubles.

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Take the £966 million Finsbury Growth and Income Trust managed by the highly regarded Nick Train. Portfolio management services are provided by Lindsell Train. The principals, Michael Lindsell and Nick Train, run a concentrated portfolio of about 30 stocks with the intention of holding them for the medium to long term.

Over the five years to mid-January, the trust has performed well, with a gain of 114 per cent, well above the UK equity income trust average of 71 per cent and putting Finsbury Growth and Income in the top quartile of similar trusts ranked by performance.

But of late the gilt has come off and the trust has been lagging both the sector and the FTSE All Share. The reason is the trust’s chunky holding in educational publishing company Pearson.

Back in July last year shares in Pearson fell more than 9 per cent after it missed analysts’ expectations on revenues in the first half. Then in October it blamed a “temporary” fall in demand for textbooks on US college campuses for a larger-than-expected decline in revenues in the three months to end September.

Now comes another shock. Earlier this month Pearson shares fell heavily after it warned of a big fall in sales in its US education business. Even before this share plunge Finsbury’s holding in Pearson was showing a £12.7 million fall from its 2015 “fair value”. All told, the trust is showing a 60 per cent slide in the value of its Pearson holding since inception.

What’s a good fund manager do? Nick Train has apologised to shareholders for Pearson’s “horrendous start to the year” but says he is feeling torn about what action he should take: cling on in the hope that all the bad news is out and that the company is past the worst, or sell out and invest elsewhere?

His apology to the Finsbury annual meeting echoed that given at last year’s AGM. In an email to the Pearson board reiterating Lindsell Train’s long-term investment approach – once they have committed money to a business, they intend to stick with them through the good times and the bad.

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He waxed philosophical about having to take the rough with the smooth but added that “we are also equally serious about our ambition to protect the value of every single penny of precious capital that is entrusted to us.” But Pearson is not the only holding that has dragged Finsbury’s performance.

The trust has a £54.7m holding of shares in online stockbroker Hargreaves Lansdown. But shares in HG are down some 17 per cent over the past year. Yet this is the sixth most profitable company in the FTSE 100, as measured by its profit margins and Finsbury has added “quite heavily” into the shares over the last three to four months.

And high conviction has also come at a cost for investors in Independent Investment Trust. Fund manager Max Ward has criticised investment banks for scaremongering over the impact Brexit would have on UK housebuilders, whose downturn helped wipe out returns from the trust in its last financial year.

The trust generated a net asset value total return of just 5 per cent in the year to 30 November, trailing the 9.8 per cent from the FTSE All Share and well behind the 25.6 per cent surge in the FTSE World. The discount at which the shares stand to net asset value has widened from 6.9 per cent to 11.2 per cent.

Now TrustNet reports that ex-Baillie Gifford fund manager Ward says the trust’s large stake in housebuilders – accounting for 23 per cent of assets at end November – played a big part in the performance slump. He pointed the finger at investment banks for their continued negative stance on housebuilders despite their being hardly any adverse effects since the Brexit vote last June.

Conviction can bring big rewards. But it also comes with risks that other shares in the trust can’t disguise.

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