Finsbury Growth & Income Trust's higher quarterly Dividend took effect from 1 October, following a first half of sharp underperformance and a sizeable programme of share buybacks.

Finsbury Growth & Income Trust (LSE:FGT) has entered a new phase in its relationship with shareholders. From 1 October the trust moved to a policy of paying about 30p a year, at least 50% more than its previous level of about 20p, with distributions made quarterly and with the ability to draw on Capital as well as Revenue reserves.

The change was set out alongside half-year results on 28 May, and it came at a demanding moment for the portfolio managed by Nick Train. In the six months to 31 March, the net asset value total return was a decline of about 14%, while the FTSE All-Share index gained 8.9%. Shares in Rightmove fell by more than 40% during that period, Experian and RELX by more than 30%, Sage by almost 25% and Diageo by more than 20%.

At a share price of about 869p, the 30p annual payment would represent a Yield of around 3.5%.

About the company

Finsbury Growth & Income Trust is a closed-ended Investment trust listed in London and a member of the FTSE 250. Its objective is to provide capital and income growth, mainly through a concentrated portfolio of quoted United Kingdom companies, although it can invest overseas in limited amounts. The portfolio is run with a long-term, low-turnover philosophy that seeks high-quality businesses with durable brands, dominant market positions and consistent cash generation.

The trust does not operate commercial activities itself. Returns arise from the share price performance and dividends of the holdings, and shareholders experience those results through net asset value and the Market Price of the trust's own shares. A small number of large positions drive outcomes, and the manager's approach has historically favoured companies in areas such as information services, software, consumer brands and financial platforms.

Recent numbers show how demanding the period has been. Net asset value total return was a decline of about 14% in the six months to 31 March, against a gain of 8.9% for the FTSE All-Share Index. On the other hand, the trust has used its Balance Sheet actively, buying 23.3 million shares into treasury at a cost of around £188.1m, and it moved to a payout of about 30p a year from 1 October.

Buybacks and borrowing

The board has been active in other ways too. During the first half, the company (LSE:FGT) bought about 23.3 million shares into treasury, equal to some 17.5% of the share base, at a cost of around £188.1m. Those purchases help explain how the discount averaged 6.5% in the period, narrower than the 7.4% recorded in the previous financial year, even as returns suffered.

Gearing has become part of the same argument. The trust said it intended to make full use of a borrowing Facility of up to £100m, within a limit of 25% of net assets, reflecting what it described as confidence in the valuation of UK equities. A reduction in the management fee took effect at the start of this year and saved about £129,000 in the first quarter.

Portfolio concentration remains a defining feature. Around 58% was classified as data, software and platform businesses, 31% as consumer brands and 9% as stock market proxies. The trust held no positions in six of the index's 11 sectors, with its largest underweight positions in healthcare and energy.

How a capital-supported dividend works

Investment trusts in the UK are able to pay dividends from capital reserves as well as from income, provided their articles permit it. That allows a board to set a target level of distribution without relying only on the natural income received from holdings. For a portfolio weighted to growth businesses that tend to pay modest dividends, such a policy can widen appeal to income-seeking holders.

The trade-off is that paying from capital reduces net Assets unless returns replace what is distributed, so the policy ties the trust's sustainability more closely to total return. Boards often describe the approach as a way of supporting Demand and managing the discount.

Factors that could shape the outlook

Sentiment toward companies seen as exposed to artificial intelligence, and the way markets treat high-quality Growth Stocks when interest rates and Earnings expectations change, will be influential. A concentrated approach can produce long stretches of relative underperformance, but it can also recover quickly when sentiment turns.

Readers may follow the discount, the pace of buybacks, the use of the borrowing facility and subsequent portfolio turnover. The next report will show how the first period under the new dividend regime fared and whether relative performance has stabilised.

The style question

The principal debate centres on whether the market's concerns over artificial intelligence and data-driven businesses have been overdone. The risks include five consecutive years of underperformance against the benchmark, persistent style headwinds and key-person reliance on Mr Train among the risks, while acknowledging the trust's long-term record and suggesting that any shift in sentiment about AI could materially improve relative returns. Mr Train himself owns more than 5.5% of the trust (LSE:FGT), which aligns his interests with those of other holders.

For the FTSE 250 constituent, the coming quarters will show whether a higher, capital-supported distribution can sustain demand for the shares while the portfolio's data and consumer franchises seek to rebuild their standing with investors. Portfolio turnover ran at about 9.7% on an annualised basis, roughly three times the trust's historical rate, indicating that the managers have not been entirely passive through the period.