Hargreaves investor Nick Train: I like young and tiny companies

Star manager also hits out at UK dividend culture

Nick Train (pictured) believes Finsbury Growth & Income holdings Burberry, Diageo and Hargreaves Lansdown are “young”, “tiny” companies that have their best years of growth ahead of them.

The trio of investments are among the top 10 investments of Train’s £1.5bn trust, with Johnnie Walker and Baileys maker Diageo the biggest position at 10.8% of the portfolio.

While most of his investments are FTSE 100 businesses, many of which would be considered mature, Train thinks it is more productive to look at them as businesses with room to grow.

‘A very fruitful way to look at Diageo’

He was struck by this revelation after speaking to Diageo CEO Ivan Menezes earlier this year. Diageo was one of the biggest contributors to performance last year with shares up 5%.

Menezes told Train the company’s revenues make up 2% of the world’s alcoholic beverage sales by volume and 4% by value “and that means we are still tiny”.

“That really struck as a very fruitful way to look at Diageo as a business and as an investment opportunity,” Train explained to the Finsbury Growth & Income investors in February.

Although Diageo is a £73bn company and one of the largest constituents of the FTSE 100 index, Train thinks it has further room to grow and will benefit from the “strong mega trend” of people “drinking less and less firewater and more and more premium spirits”. Gin brand Tanqueray, which is owned by Diageo, grew revenues by 20% last year and sold more bottles than in other year in its 189-year history, Train noted.

“With only a 2% share of global booze then why wouldn’t Diageo have many years decades of growth ahead of it?”

Burberry would be valued higher outside the UK

Similarly “the best is still to come” for 163-year old luxury fashion brand Burberry.

Although recent trading updates from the British design house have been “drab” and sales have stayed more or less flat over the second half of 2018, Train notes there were over one million new sign ups to Burberry’s Instagram and WeChat accounts, over the same period, which he thinks is not insignificant.

“To us, however simplistic, if millions of new people are getting excited about Burberry’s new product range, particularly millions of young Chinese, then we’re sure it’s right to be enthusiastic about the prospects for the company.”

Given this growth potential, the star manager said Burberry, which is currently trading on a P/E ratio of 28x, would be valued much higher if it was not listed in the UK.

He said more UK companies would be “100 baggers” like their counterparts in the US if not for the UK’s dividend culture.

“Payout too much of the dividend too early in the life cycle of the companies and you’re denying them access to their cheapest and most valuable form of capital which is retained earnings. They wouldn’t do that in the States. As long as the growth potential was there, every cent would get re-invested back into the business.”

Finsbury Growth & Income NAV falls in 2018

Train has built his career on buying and holding a select number of UK-listed businesses, many of them “beloved brands”. The long-term average turnover for his Finsbury Growth & Income Trust, which currently has 21 stocks, is 4.5% but this was even lower in 2018 at 2.5%.

Finsbury Growth & Income was the best performing trust in the Association of Investment Companies UK Equity Income sector in 2018 but Train said he “can’t be particularly proud of a year when the NAV actually fell”.

Train’s trust finished the year down 0.91% but this was better than the FTSE All-Share which lost 9.47% over the year.

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