When is it right to take a profit? The temptation to cash in lest the share price reverses is strong, but it conflicts with the age-old maxim of running your winners and cutting your losers.
Advisers and wealth managers often encourage profit-taking, as clients will hate the thought of profits disappearing much more than they relish the prospect of further gains. If the price goes on rising, the adviser was just being cautious; if it falls, they will look foolish and could be fired.
It pays to be patient
The best professional managers, however, do not trim successful holdings unless the share price becomes wildly overvalued or they foresee a change in the company’s fortunes. They regard focusing on the laggards and losers as a more productive use of their time than worrying about the winners.
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The arch-exponent of this strategy is Nick Train, the manager of Finsbury Growth & Income Trust (LSE: FGT) for the last 20 years. The portfolio turnover of FGT last financial year was just 1.3%, and has on occasion been lower. Train quotes Peter Lynch, the great Fidelity investor, who said that “often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years but, in the long term, there is a 100% correlation. It pays to be patient and to own successful companies.”
That patience is shown by the long term returns of some of FGT’s holdings. “Since 1988 Unilever’s share price is up 17 times, Diageo’s 16 times and the Daily Mail’s eight times, while the All Share index has little more than trebled,” notes Train.
Since 2001, the London Stock Exchange has risen by a factor of 22 while Fever-Tree is up 12.5-fold since 2014. Though Train wasn’t appointed till late 2000, these and other stocks have been held by FGT almost continuously since 1988. With just 25 holdings overall, some of these investments have grown large; the top five account for almost half the portfolio. The disadvantage of the very low portfolio turnover is that there is little cash available for new ideas. But Train’s criteria for investment are so tight that the field is limited anyhow. Train admits to kicking himself for missing some opportunities, such as Games Workshop. Still, Experian, the global credit-rating agency, Rémy Cointreau, Manchester United, and PZ Cussons have been added in recent years.
Train’s focus is on companies with longevity, strong brands and market positions, long-term growth, sustainable margins and cash generation. “If a company’s products taste good, buy the shares,” he says. About 80% of the portfolio is UK-listed, with Heineken, Rémy Cointreau and Mondelez, the owner of Cadbury’s, accounting for the rest. Two thirds is invested in consumer goods and services and 25% in financials (but not banks or insurance companies) such as the London Stock Exchange, Hargreaves Lansdown and Schroders. Sage, the dominant force in small-business accounting, is the only technology stock.
A Brexit bargain
Train is disappointed that FGT’s net asset value fell in 2020, ascribing it to the valuation of UK companies, such as Diageo (down 10%) falling behind those of comparable companies listed elsewhere, such as Rémy Cointreau (up 48%).
“I have a strong sense that the uncertainty surrounding the UK’s protracted divorce from Europe has discouraged global investors,” he says, “but a big uncertainty has now been removed.”
Furthermore, “underlying strategic progress has made almost all the companies in our portfolio more valuable today than they were at the start of 2020”, he reckons, “even if their share prices have not yet reflected that value”.
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