Finsbury Income & Growth manager Nick Train is reassured by several of his longstanding holdings that have inked deals in the last month, including Diageo buying a craft gin company backed by a Hollywood celebrity, as the current Covid environment leaves investors feeling fatigued.
In the August factsheet for the £1.8bn trust, Train (pictured) reflected on the importance of pausing to “stop and think” about how his portfolio companies are re-investing for the long term.
The ongoing Covid-crisis has left investors, including Train himself, feeling fatigued.
“As 2020 progresses market participants are in danger of losing the plot – I know I am,” he wrote. “Too much time staring at screens, too much misinformation, too much volatility. And for professional investors almost certainly not enough time spent having a reflective, sobering cup of coffee with a respected colleague. I wasn’t designed to work as a sole trader.”
That’s why he was heartened to see top 10 holdings Diageo and Relx closing deals last month.
“We’re pleased to see that some companies are robust enough to be doing deals in the current environment,” Train said. “It is a reassuring sign that boards aren’t just in fire-fighting mode and that balance sheets and liquidity are in good enough shape to make investments for the future.”
Diageo and Relx strike ‘classic’ deals
In mid-August Diageo announced plans to snap up craft gin company, Aviation American, which is part-owned by movie star Ryan Reynolds. “No, I hadn’t heard of him,” Train confessed, “but that is almost certainly the point”.
Though Train notes the deal is “ostensibly an expensive one” with Diageo paying a total consideration of $610m for Reynolds’ gin business, he adds it is similar to the British booze firm’s acquisition of George Clooney-sponsored Casamigos in 2017, which “raised eyebrows at the time” but now “looks smarter and smarter as the US spirits boom continues“.
“Diageo has the balance sheet, the distribution and the expertise to make these deals work and we were cheered to see the announcement,” he said.
Around the same time British publisher Relx purchased software pharmaceutical firm SciBite for a rumoured £65m. The Cambridge-based firm helps clients including Astrazenca, GSK and Novartis in analysing data to create efficiencies in drug discovery.
“Again, this is not a transformative deal for Relx, but a classic one nonetheless, adding to its capabilities in science and pharma research,” Train said.
“The company has now spent some £800m in 2020 on similar data/AI assets – thereby reinforcing its position as a global leader in the provision of important information and tools to important and growing industries. In due course and in happier times we’d wager that newly bullish stock market investors will ascribe billions of pounds of new value to this short £1bn of 2020 acquisitions Relx has made.”
Investor aversion to UK stocks is ‘getting ridiculous’
Train also applauded Burberry for pushing ahead with its interactive store in Shenzhen. Partnering with Tencent on the project, Train said the store has the potential to revolutionise the shopping experience and provides a glimpse of what shops will look like in the digital age.
The luxury retailer, which makes up 6.2% of the trust, has seen its share price pummelled during the Covid crisis and been forced to scrap its dividend amid plunging sales.
Burberry shares are down 30% year-to-date, Train noted, which is far worse than the market reception toward fellow designer Prada which has seen its shares “essentially unchanged,” despite both businesses having similar strategic issues to work through.
“It is hard to analyse the difference in share price performance between the two as being anything else than a punitive discount being placed by global investors on a company that is listed in London, rather than Hong Kong,” he reflected.
“Apparently global investors have an aversion to the UK stock market, but this is, in some cases, getting ridiculous.”
