Finsbury Growth & Income Trust plc (LON:FGT) Portfolio Manager Nick caught up with DirectorsTalk to discuss investment principles, the characteristics of companies held in the portfolio, AI and data businesses, consumer brands, and the valuation gap between UK and US-listed companies.
Q1: Nick, can you just tell us a little bit about your background, your investment philosophy, and how you came to set up Lindsell Train Limited?
A1: Our business was established about a quarter of a century ago, slightly longer, based on a simple, but I think potent investment set of principles, I don’t like the word philosophy, which actually, by and large, we copied line for line from Warren Buffett.
That was what we were, at the outset, seeking to establish when we set up our own company. Could we take the lessons that Buffett has taught so generously? Could we take those lessons and make a success of them ourselves?
I guess the fact we’re still in business a quarter of a century later, something worked. We haven’t done as well as Berkshire Hathaway has done over the last 25 years but then again, we’re not Warren Buffett.
Q2: Now, just turning to the Finsbury Growth and Income Trust. What characteristics do you look for in companies? What do the businesses held in the trust portfolio have in common?
A2: Well, I guess like most long-term investors, and we really are long-term investors, many, many assets in Finsbury’s portfolio today we’ve owned for 20 years or longer and have no intention of selling even today after 20 years.
I think for most truly long-term investors like us, what you’re looking for is a business that has a franchise or a brand or a selection/collection of brands that are more or less unique and that you can, although no one totally knows what the future is going to bring, where you have confidence that those brands or franchises are likely to endure for very, very long periods of time.
I think the core lesson that Buffett taught is that novelty can be very exciting in stock markets, but novelty can also be very, very risky. Actually, durability, sustainability, predictability is highly valuable, but sometimes not so highly valued.
Just to give some examples, if I may, companies we’ve held in Finsbury for 20 years or longer. London Stock Exchange Group, we’ve owned for a very, very long time and OK, the business has changed quite a lot over the 20 plus years that we’ve owned it. At the core of the business, there are franchises like the London Stock Exchange itself or the London Clearing House or its position as the world’s number one provider of real-time financial data. These are unique positions that LSEG owns, that nobody else owns, that are likely to remain relevant for as far ahead as you could possibly imagine and that seems to be of great intrinsic value. LSEG has done quite well for us over the 20 years or more.
Actually, a company that has done OK over the last 20 years, but the last few years have taken the shine off it, but we’ve owned Diageo for a long, long period of time. Even after Diageo’s recent problems, when you look at its core brands, the brands that really drive value and growth for the company, Guinness, Johnnie Walker, the tequila brands, Tanqueray, these are kind of eternal brands. Actually, most of them are still growing, not as quickly as they were a few years ago, but they’re still growing and that’s comforting to us.
I want to make the further point here. I’ve been looking at the UK stock market and Finsbury is a UK equity vehicle, let’s just make that clear. Even after more than 40 years in the UK stock market, I’m still finding new ideas of companies with unique franchises or brands that it’s very, very difficult to compete against and where you’ve got, we think, tremendous longevity to look forward to.
Actually, we’ve got a couple of newer holdings in Finsbury initiated over the last 12 months, say. So, just to name them, just to give you a sense of ideas that can populate a portfolio, even after you’ve been running it for as long as we have.
We’ve recently built a holding in a company called TP ICAP, which is the world’s number one over-the-counter inter-dealer broker. It’s got a 45% share. It’s the clear global number one in a huge investment bank-to-investment bank capital market. It’s 20 times the size of global equity market. So, this liquidity pool that ICAP sits at the heart of, it’s been the number one for many years. It’s going to remain the number one for many years. It’s another example of a unique British business that maybe gets overlooked by investors, maybe we overlooked it for too long, but there’s that.
We’ve also recently initiated in Games Workshop as well. I guess everybody knows Warhammer, 39 years old, totally unique global entertainment franchise. More people around the world are enjoying Warhammer in more countries than ever before and maybe it’s just getting started.
Q3: What are the main investment themes that are running through the portfolio today? Where do you see the most significant long-term opportunities?
A3: Well, I would characterise the main investment theme as expressing belief in the historical importance of, let’s call it the internet, and by the internet, I mean very, very broadly, digital technology and AI. AI in a sense is just a continuation on steroids of the internet.
I, we, are believers that this technology is evidently changing the world for businesses, consumers, maybe ultimately for governments as well, I wish our government was a bit quicker at it. Everything is being affected by this new technology.
What the new technology is doing is creating extraordinary opportunities for efficiency gains for industries and companies, new growth avenues for industries and companies. Ultimately, like every other technology wave, we expect it will create new significant wealth for consumers around the world.
Finsbury’s portfolio, within the confines of thinking about what’s available in the UK stock market, we’re invested in businesses where we believe that the internet and or AI is a huge tailwind for their business. We’re also invested in companies with consumer brands, particularly premium, heritage-rich, luxury-type consumer brands that we think will be a beneficiary over time of the wealth that’s being created.
So, just a couple of names. I mentioned London Stock Exchange Group in my earlier comments. London Stock Exchange Group is, by some measures, the world’s biggest provider of financial data. Some people disagree and say it’s the second biggest but it’s a very, very important provider of financial data to the world’s financial institutions.
What’s really interesting to us is that, OK, so humans access that data, but increasingly machines access that data too, to try and derive insights and value from LSEG’s proprietary data. When machines get set loose on LSEG’s data, they use it 10 times more intensively than human beings.
That’s a significant, massive step change, potential increase in the value of London Stock Exchange Group’s proprietary data and it’s an opportunity that wasn’t presented to the company 10 years ago, and it’s being presented because of the changes in technology.
Just thinking about those consumer names. We own and have done for quite a long time a holding in Burberry. Again, Burberry post-COVID, there have been problems for some of these consumer companies. Burberry has this outerwear franchise, its trench coats, its scarves, that trench coat franchise is well over 100 years old and yet it’s selling more today than ever in its history.
When you look at the areas where even right now, Burberry is doing well and indeed doing better, where Burberry is doing well is in China, amongst Gen Z in China and it’s also doing well in the United States.
What that is saying to me is that where new wealth is being created in China, in the United States, that’s where a luxury or heritage brand like Burberry has the best potential to grow.
Q4: Just sticking with AI, it’s created some uncertainty around data and information businesses. Why do you see AI as an opportunity rather than a threat for portfolio companies such as RELX or Experian?
A4: We have a view, and that view is currently being tested in the market, it’s clear that there are a significant number of Investors who disagree with us and that’s a bit uncomfortable. All you can do is respond to developments in, let’s call it the industry, but also developments in the companies that we’re invested in.
I don’t think anybody disagrees with the proposition. The proposition that in an AI world, data is more important than ever before. I don’t think that’s up for debate. The LLMs need access to data to generate the insights, the efficiency gains that the whole multi-trillion bull market is predicated on. They’ve got to train on something.
What’s clear, we think, is that what the models most want to train on is, to use a phrase that we’ve been using, constantly replenishing business data at scale. We’re not talking about static, historic data, we’re talking about, up to the minute data being created by transactions or whatever, data that’s being aggregated by certain companies. That data is evidently extraordinarily valuable.
So, Experian that you mentioned, not only has arguably the biggest and best collection of data about consumer and business finances of any entity in the world, that database updates a billion times every month. It’s just incredible waves of data being accumulated in that company and no LLM can access that. It’s proprietary data, it’s privileged data, it’s private data, but Experian owns it. That’s theoretically hugely valuable.
You also mentioned RELX, and I say, OK, maybe we’re wrong, but let’s look at what’s actually happening. The bears, the pessimists on RELX will say, well, the division in RELX that’s most vulnerable to disintermediation or disruption from AI is its legal division. We can see a lot of new entrants into the legal AI space, let’s call it, that are tangentially competing with RELX. So, maybe that’s the basis for the bears’ concerns.
We think you have to observe, that over the last two years, when worries about RELX’s legal franchise have arisen, over that two-year period, the revenue growth rate of RELX’s legal division has doubled.
Two years ago, LexisNexis, it’s called, was growing at about 4% per annum and at the most recent set of interim results, the growth rate was more like 10% per annum. There’s no question or doubt about it, that acceleration in the growth rate in that division is the result of RELX developing its own AI-enhanced tools to make its proprietary data even more valuable to its current captive customer base.
So, we think you’ve got to look at the companies on a case-by-case basis. There will be some AI losers, but we’re sure that some of these data owners are going to be big, big winners. Let’s hope we’ve found the right ones.
Q5: Now, Diageo and Unilever, they’re important consumer holdings in the portfolio. What gives you confidence in their long-term prospects? What could drive improved returns from these businesses going from here?
A5: There’s a cliché that says, ‘slow and steady, the tortoise wins the race’ and sometimes that is true in stock markets. I’m not saying there’s any necessary predictive power in what I’m about to observe, but nonetheless, I still think it’s important for people to consider this.
If you had invested in Unilever on the 1st of January 2000, so the start of this millennium, and you’d also invested in NASDAQ on the 1st of January 2000, through to the end of August of 2026, you would have done better on a total return basis in Sterling if you’d invested in Unilever as compared to NASDAQ.
Now, that’s not been true over the last five or seven years, NASDAQ has done a lot, lot better, I’m not denying that. But over a long period of time, that slow, steady growth delivered by Unilever, and it has, over a quarter of a century, delivered slow, steady growth, that’s been highly competitive with, well, many global indices, and it’s actually beaten NASDAQ.
Let’s be absolutely clear about this. One reason that Unilever has beaten NASDAQ over the last quarter of a century is because between 2000 and whatever it was, 2007/2008, NASDAQ was a very tough market to be invested in, it fell quite a lot from its highs of 2000. I’m not saying that’s going to happen again, but you’ve got to factor it into your thinking.
So, we know that with a business like Unilever, you have the potential for steady, reliable, persistent growth, and sometimes that’s undervalued.
I think that when you look at Unilever’s set of brands and you look at Unilever’s geographic exposures, there’s every reason to believe that over the next 10 years, say, Unilever will continue to grow steadily. Right now, that growth seems pedestrian. Who cares if Unilever is growing at 5% per annum, I can buy NVIDIA, it’s doubling every year, or I can buy a construction company in the middle of a housing boom or something. But there will come a time again when that remorseless steady growth offered by Unilever will seem much safer and a lot more attractive.
Actually, at a conceptual level, although it seems even more absurd in a way than what I’ve just said about Unilever, I think we’d be even more optimistic about Diageo over the next decade because actually, Diageo is much more of a premium, almost luxury company than Unilever is. Diageo really is playing to this tendency that I kind of expressed earlier of when people feel wealthier, they tend to treat themselves to higher quality booze in nicer restaurants. If you own the world’s premium collection of global spirits brands, that’s a nice strategic position to be in.
Not denying that the last couple of years have been tough for consumers, and that’s hurt Diageo and not denying the fact that Diageo maybe made some missteps during the COVID period. Fundamentally, when you look at the brands and you look at the trajectory of likely sales of global spirits in years to come, I think you might get better growth out of Diageo actually than Unilever.
Q6: Valuations for many UK-listed companies remain at a discount to comparable US businesses. What do you think could help narrow that valuation gap? Where do you see the most compelling opportunities?
A6: Well, the most unhelpful way that that value gap can get closed is by a continuation of the takeovers. We’ve seen quite a flurry of takeovers in the UK stock market, where often global businesses or global private equity outfits are picking out wonderful nuggets, wonderful companies in the UK stock market that for whatever reason are undervalued.
I think it’s one of the clearest indications that the UK had become undervalued during that long period of underperformance and one of the clearest signs of that is this upturn of takeover activity.
I feel that we as investors, whether institutional or private investors, we’ve got to encourage British companies to be ambitious and to invest in their growth potential. There are so many British companies with extraordinary global growth potential, but you sometimes feel they’re not being encouraged to fulfil that potential.
Just to give an example, maybe to try and capture what I mean here, we have a holding in Rightmove. Rightmove shares, sadly, have been weak over the last 12 months and they’ve been weak because, rightly or wrongly, probably we think, people are worried that AI is going to take away Rightmove’s incredible business franchise.
When Meta’s Muse product was announced or there was that publicity around it 10 days ago, Rightmove’s price fell because this new technology, the Americans are coming, what can this little British company do?
When you look at Rightmove and you look at the decisions that the company is taking to utilise AI itself, to create its own AI tools to make its service even more valuable and sticky for its visitors and for the estate agents who use the site, it seems to us that it’s by no means certain that Rightmove is an AI loser. It might actually be a massive AI winner.
I think that we need, as investors, to encourage companies like Rightmove to fulfil its potential as a business. and maybe as investors, we need to be a bit more optimistic. It just seems to me, here’s a development in the industry, let’s sell the British company because it can’t possibly compete but actually, it really can compete. We ought to be encouraging it to do so because the rewards are potentially extraordinarily high.
