The Finsbury Growth & Income Trust outperformed its benchmark in July helped by a trio of stocks that manager Nick Train thinks are being undervalued by domestic investors.
The trust delivered a 2.4% total return on a net asset value basis and the share price was up 1.9% while its benchmark, the FTSE All Share, was up just 0.5%.
Writing in the trust’s latest factsheet, manager Nick Train said Daily Mail & General Trust (DMGT), Experian and Relx helped performance due to their “globally significant digital, data and analytics assets”. The latter two reported trading updates during the month that reassured investors they were overcoming recent adversity and reaffirmed their credentials as growth companies, Train said.
He said data and digital companies have low capital intensity which means they have low returns on capital and generate copious amounts of cash. Such companies have been at the centre of the bull market in the US as high valuations have been reached.
“Whether those high US valuations are justified is a moot point,” Train wrote. “But one thing is clear. Applying 20th century measures of what constitutes ‘value’ to digital companies is a mistake. Their returns on capital are simply so structurally higher than analogue/bricks-and-mortar businesses that P/Es we might have regarded as excessive 20 years ago can now justifiably be designated ‘cheap’.”
Train said portfolio holdings Experian and Relx are examples of stocks with these qualities, as well as London Stock Exchange, but they look less highly valued than their US counterparts which could be due to the “lingering discount” global investors demand to hold UK-listed assets.
“Simply stated, if Experian, LSE or Relx were US companies we think they could be more highly valued,” he added.
“This is not just an idle assertion on our part. There is confirmation when you see the current interest being shown by US corporations and US private equity houses to acquire UK corporate assets. The ostensible valuation gap looks attractive from the other side of the Atlantic too.”
On DMGT, Train said this year the firm had successfully been able to translate the success of its newspapers into digital format and the value of the shares were up 47% to the end of July. He said US companies had acquired constituent parts of DMGT at valuations that make sense to them but much higher than UK investors were willing to give to a UK company.
“Moreover, the controlling Rothmere family has now tabled an indicative offer to take the rump of the company private – confirming that nature abhors a vacuum and that if something stays too cheap for too long eventually someone will act to capture that value,” he added.
Elsewhere, portfolio holding AG Barr appreciated more than 10% during the month after reporting a stronger than expected rebound in sales and forecasted profits higher than pre-Covid levels.
“We hope investors will be positively surprised by similar growth and productivity gains from UK companies in months to come.,” said Train.
