Thursday, 14 December 2017

Finsbury Trust - Final Results

I have held FGT in my ISA for the past 6 years. It continues to deliver year after year and remains one of the top UK Income Trust in terms of net asset value and share price performance over five and ten years, its returns far outstripping those of the FTSE All-Share index. A sum of £1,000 invested 10 yrs ago would now be worth £3,052 compared to a total return of £1,752 from the benchmark FTSE All Share index.

Its aim is capital appreciation and income combined, with a total return in excess of the FTSE All-Share.

Long standing manager Nick Train’s approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises.

The characteristics that define a quality company for Lindsell and Train are:

·                     durability – companies that can prosper through business cycles for many years to come;
·                     high return on equity – companies with the ability to grow earnings year-in, year-out are favoured over those with rapid short term growth, but uncertain long term prospects; and
·                     low capital intensity/high free cash flow generation – companies that do not have to make heavy balance sheet investment to generate earnings growth.

3 Yr Chart FGT v All Share Index
(click image to enlarge)

He holds shares for the long term regardless of short-term volatility, aiming for them to double or more in value over time. This results in extremely low portfolio turnover, which saves on transaction costs. The trust's total expense ratio remains reasonably low at around 0.7%.

Results

The trust has this week announced 
results for the full year to 30th Sept 2017 (link via Investegate). The trust has outperformed the all share index in each of the past 5 years and once again, this year is no exception. Share price total return is 14.2% compared to 11.9% return for the FTSE All Share.

Top five portfolio holdings are: Unilever 10.1%, Diageo 10.0%, Relx 9.3%, London Stock Exchange 8.6% and Hargreaves Lansdown 7.0%.

Over the past year the dividend has increased by a respectable 8.4% to 14.2p (2016 13.1p). Revenues were 15.8p (2016 15.2p) and therefore there is a surplus after accounting for payments of dividends which will further bolster the dividend reserves.

It is worth noting that Nick Train has made a significant addition to his personal share holding and now holds 1.2m shares in the Company which represents the whole of his personal investment in UK equity and is a significant portion of his total assets.

Commenting on the results, manager Train said  "
We know that currently some shareholders worry about Brexit and other macro-economic or political issues, but we continue to believe that the most rational way to respond to these concerns is to work on the following assumption. “Everything will work out just fine in the end.” This may read as complacency, but the truth is that ever since the FT All Share was first calculated, back in 1962, there has always been something to worry about. The index had a base value of 100 in 1962 and now stands at 4130 – that’s a 7% pa compound return, excluding dividends. Those returns, earned from the compounding profits of well-run UK companies, have accrued despite dramatic political, economic and social changes. We think it sensible to assume steady wealth creation will continue. And this is why I have continued to add to my own holding in Finsbury throughout 2017".

The shares are currently trading at 760p and I have recently reduced my holding by 20% to provide a little more 'income' from the capital appreciation over recent years. I am happy to continue holding the remainder for the coming year and beyond.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Feel free to leave a comment below if you hold this investment trust in your portfolio.

Monday, 4 December 2017

Financial Literacy - A Problem for the Many Not the Few

"There can be little doubt than many ordinary people struggle to deal with issues of personal finance and particularly such matters as pensions and equity investments. On the few occasions I discuss these issues with friends and relations it seems the subject matter quickly moves on to less challenging topics. However, just because personal finance is not widely discussed or understood, does not mean it is not important". 

The opening lines to my book 'DIY Simple Investing'


In March 2014 two American economists, Annemarie Lusardi and Olivia Mitchell published their research (pdf) on the subject of financial literacy.  They conducted a 3 question survey to see how much respondents understood interest, inflation and investment risk.

Here are the questions :

Question 1
Suppose you have $100 in a savings account and the interest rate was 2%  per year. After five years, how much do you think you would have in the account if you left the money to grow?
A. More than $102
B. Exactly $102
C. Less than $102
D. I don't know

Question 2

Imagine that the interest rate on your savings account was 1%  per year and inflation was 2%  per year. After one year, how much would you be able to buy with the money in this account?
A. More than today
B. Exactly the same as today
C. Less than today
D. I don't know

Question 3

Do you think the following statement is true or false: Buying a single company stock usually provides a safer return than a stock mutual fund?

This was a global survey and the results revealed a surprising level of financial illiteracy all around the world.

Only 3 out of 10 people answered all three questions correctly in the US. In Europe, the best performing respondents were the Germans (53% got a perfect score) and the Swiss (50%), but this still leaves almost half of each country’s population without a basic understanding of very basic financial matters. In countries with relatively strong economies, the numbers are sobering: 79% of Swedes, 75% of Italians, 73% of Japanese, and 69% of French could not respond correctly to all three questions. The score for Russia was a 96% fail rate! Unfortunately the study does not provide results for the UK.

Whilst men outperformed women on the finance quiz, greater numbers of women responded that they “don’t know,” a result that held true all over the world. The upshot is that women, more conscious of their limitations, are more likely to be interested in financial-education programs.

This lack of education appears to be taking a toll - half of all Americans have nothing saved for retirement, just one third of all adults in the U.S. have only several hundred dollars in a savings account and 61% report that they don't have sufficient rainy day savings to cover six months' worth of essential expenses.

Interesting but Does It Matter?

Financial literacy involves the ability to make informed decisions which are integral to our everyday lives - how a bank account works, how to save, how a mortgage works and how to avoid debt. People who lack the basic ability to negotiate the basic financial landscape will be at much higher risk of falling prey to the unscrupulous system which snares the unwary into a spiral of unsuitable financial transactions and which result in high levels of unaffordable debt.

People with low levels of financial literacy are likely to borrow more on credit, and tend to pay off the minimum each month. They are unlikely to save let alone invest and will have little or no provision by way of pension for retirement.

This is increasingly what we are seeing not just here but in all parts of the world. In a study undertaken by the OECD in 2016 (pdf).

Financial knowledge is an important component of financial literacy for individuals, to help them compare financial products and services and make appropriate, well-informed financial decisions. A basic knowledge of financial concepts, and the ability to apply numeracy skills in a financial context, ensures that consumers can act autonomously to manage their financial matters and react to news and events that may have implications for their financial well-being. The literature indicates that higher levels of financial knowledge are associated with positive outcomes, such as stock market participation and planning for retirement, as well as a reduction in negative outcomes such as debt accumulation.

Thirty countries and economies, including 17 OECD countries, participated in this international survey of financial literacy; In total, 51,650 adults aged 18 to 79 were interviewed using the same core questions.

The UK came 15th overall, just ahead of Thailand and Albania and below the average for all countries in the study.

The survey results indicate that :

The average score across all participating countries is just 13.2 out of a possible 21 (a combination of a maximum of 7 for knowledge, 9 for behaviour and 5 for attitudes), and 13.7 across participating OECD countries, showing significant room for improvement.

On average, just 56% of adults across participating countries and economies achieved a score of at least five out of seven (considered to be the minimum target score)

Fewer than one in two achieved such a score in 11 of the participating countries (South Africa, Malaysia, British Virgin Islands, Belarus, Thailand, Albania, Russian Federation, Croatia, Jordan, United Kingdom and Brazil). However, in stark contrast, over four out of every five (84%) adults in Hong Kong, China achieved the minimum target score.
Across all participating countries and economies, two in five respondents had not saved in the last 12 months.

The weakest areas of financial behaviour across these measures appear to be related to budgeting, planning ahead, choosing products and using independent advice.
Interestingly, relatively few people are choosing new financial products with the aid of independent information or advice – including best buy tables – indicating that more could be done to guide consumers towards unbiased sources of information.

Financial resilience and long-term planning could be further promoted through
user-friendly budgeting tools and ways of monitoring income and expenditure which could encourage more adults to create a household budget and use realtime data to make necessary changes before falling into difficulty

People may also need education and guidance to identify realistic alternatives to borrowing when income is insufficient to make ends meet.

Education that applies behavioural insights, such as encouraging people to set goals and commit to them, could also help people to behave in more financially literate ways, including active savings behaviour and longer-term planning.

Conclusion

Maybe it's not such a big problem if most of us cannot work out the better value between a 4 pack and nine pack of loo rolls in the supermarket. Some people who are not so good with finances will be good at other aspects of life and can get by with a little help from their partner or friends.

However it matters a lot if people are conned out of life savings because they lacked a basic understanding of how the system works, or end up borrowing more than they can afford to pay back because they cannot understand APR, or opted out of a workplace pension because some guy down the pub gave them dodgy advice.

This year, personal consumer credit lending passed £200 billion in the UK.

I have been writing this blog for close on five years and I have written and self-published four books. I suspect that, whilst aiming to reach a broad audience of would-be investors, in reality I am just scratching the surface or finding a small audience of readers who are already well versed in the dark arts of personal finance. There may well be a very large section of the general public, probably well over 50% who cannot understand simple personal finances and therefore cannot access the basic information. They may never be in a position to implement a savings plan or monitor their income and expenses let alone set up a basic DIY investment portfolio.

Leave a comment below if you have any thoughts on the state of financial literacy.