Everyone seems to have it in for Nick Train and Michael Lindsell at the moment. The desperate tale of Neil Woodford has focused attention on star managers, just as Lindsell Train’s funds hit a bit of a rough patch.
Decent year, but a weak finish
However, a ‘rough patch’ for Lindsell Train needs to be put into context.
In 2019, its UK fund returned 22.8% and Finsbury Growth & Income was close behind with 21.8%.
Its Global fund came in at 19.4% with Lindsell Train Investment Trust managing just 2.1%, primarily due to its large premium to net assets narrowing considerably (it was up 32% on a net asset value basis — the best performance of all Lindsell Train’s funds).
By contrast, UK markets returned 19.2% in 2019 and global markets 22.7%.
That means Lindsell Train’s UK funds outperformed by a couple of percentage points and the main global-facing one underperformed by about the same about.
That’s a score draw in my book, albeit with a somewhat nervy and unconvincing second-half performance.
James Bullock summed the year up neatly with this comment in the Global fund’s latest factsheet:
The dip in relative performance is unwelcome; though I find it a difficult one to post-mortem given our 2019 total return was still a hearty 19.4%. As an absolute figure taken out of context, this is hard to be too disappointed with; it’s certainly not the fund’s worst year and it enhances rather than detracts from our annualised, since-inception returns.
A concentrated approach
Lindsell Train’s investment strategy is a fairly simple one and they have applied it pretty consistently for nearly two decades.
They take large positions in a small number of companies with “durable, cash generative business franchises”. Their typical portfolio only has about 20 holdings.
And they buy and sell very, very infrequently.
For example, Pearson, which has endured a rough few years, has been a major Lindsell Train holding since 2001. Whether this represents extreme patience or downright stubbornness is up for debate!
Capacity concerns begin to build
In July 2019, Hargreaves Lansdown caused a stir when it withdrew the Lindsell Train UK and Global funds from its Wealth 50 list. This was because of a perceived conflict of interest, with both funds owning a large stake in Hargreaves Lansdown.
At the end of last year, analysts at Square Mile downgraded the Lindsell Train UK Equity fund on concerns that a continued run of withdrawals could cause serious issues.
Soon after, Morningstar downgraded the same fund and Finsbury Growth & Income — effectively its investment trust equivalent — for similar reasons.
‘Liquidity’ is very much the key focus for many in the investment fund industry at the moment. The fund-rating agencies might be playing it safe with these warnings, but it’s worth digging a little deeper.
Four funds compared
However, I’ve kind of ignored Finsbury Growth & Income and the Lindsell Train UK Equity fund. They all have several holdings in common, though, so considering them together makes sense.
My first table below attempts to do that. The percentage of assets for each position is a mixture of the December 2019 factsheets for each fund’s top 10 holdings and the interim/full-year reports for the remainder.
For the first two columns — the investment trusts — those more detailed reports are as of September 2019. The latter two columns — the open-ended funds — are as of June 2019.
As Lindsell Train is a rare seller, I’m hoping my hybrid figures aren’t out by too much.
However, some of the percentages shown, such as those for PZ Cussons and Prada, are likely to be higher now, as they are positions that were still being built up.
(By the way, for this exercise, I’m ignoring Lindsell Train Japanese. Although it has £520m in assets, it’s more niche and I don’t think it would add much to my overall analysis.)
& Income Trust
|Number of holdings||23||15||20||26|
|In common with FGT||N/a||33%||98%||46%|
|Fund’s net assets (£m)||1,850||220||6,727||8,444|
(% of assets)
|London Stock Exchange||11.1||8.8||10.0||6.6|
|Daily Mail & General Trust||2.6||–||2.3||–|
|Euromoney Institutional Investor||2.2||–||2.0||–|
|Lindsell Train Investment Trust||0.7||–||–||–|
|Young & Co Brewery||0.6||–||0.6||–|
|Fuller Smith & Turner||0.4||–||0.1||–|
|Lindsell Train Limited||–||49.9||–||–|
|Other Japan (5 holdings)||–||–||–||5.0|
|Lindsell Train Japanese||–||2.2||–||–|
|Finsbury Growth & Income||–||0.8||–||–|
We can see that Lindsell Train UK Equity and Finsbury Growth & Income are almost identical. That’s also evident when you look at their performance charts. They pretty much overlap each other.
Finsbury is marginally ahead over 5 years (82% vs. 79%) and 10 years (345% vs. 315%). The investment trust can carry a little debt whereas the mutual fund needs to have some cash on hand for potential redemptions.
Lindsell Train Investment Trust and the Global fund are cousins rather than twins. The former is dominated by its holding in Lindsell Train Limited — the management company for the Lindsell Train empire — while the latter has an expanded suite of US and Japanese companies instead.
There are six holdings which are large positions in all four funds:
- London Stock Exchange;
- Mondelez; and
Pearson used to fall into this group, but with its share price down by two-thirds over the last few years, it’s become of far less consequence.
Burberry, Schroders, Hargreaves Lansdown, and Sage are all big holdings, but just for the two UK-focussed funds.
The sectors that Lindsell Train prefers are also clear. Consumer goods (food, drink, cosmetics etc), media, and financial services pretty much cover the entire portfolios.
Pharmaceutical firms are also mentioned in the investment approach on Lindsell Train’s website, but they seem more of a side issue right now. I think one of the smaller Japanese holdings in the Global fund is a drug company but that’s pretty much it.
The lobster pot
Here my analysis gets even cruder. I’ve multiplied each fund’s position by the size of each company to estimate what percentage of their shares Lindsell Train holds.
I’ve rounded it to the nearest percentage point on the basis that it’s better to be roughly right than precisely wrong. As I’ve ignored the Lindsell Train Japanese fund, the Japanese company weightings are likely to be understated.
held by LT
|Held by UK and Global|
|London Stock Exchange||26.7||5%|
|Held by UK only|
|Daily Mail & General Trust||1.8||11%|
|Euromoney Institutional Investor||1.5||12%|
|Lindsell Train IT||0.2||6%|
|Young & Co Brewery||0.7||7%|
|Fuller Smith & Turner||0.3||5%|
|Held by Global only|
There are 14 companies where Lindsell Train seems to own more than 5%.
And 5 of those are higher than 10%, although they are typically smaller positions within each fund.
For the most part, though, you can see the largest overall Lindsell Train holdings are in the two UK-focussed funds and in companies valued at between £1bn and £10bn.
The global funds, where most positions are in companies valued in the tens of billions, don’t really seem to have the same problem.
There are a few exceptions, such as WWE and Juventus, where the global funds seem to have an outsized position but they aren’t in the top 10 holdings.
Lindsell Train’s view
To be fair to Lindsell Train, they have been highlighting this issue of capacity for a while now, just as they warned about the excessive premium to net assets at Lindsell Train Investment Trust.
In May 2019, Michael Lindsell reckoned their Global strategy had a capacity of £15bn (which compares to its current size of some £9bn plus a little extra for institutional mandates). That assessment was based on its self-imposed limit of a maximum 15% holding in any one company across all its funds.
A recent quote on the UK strategy in the Investors Chronicle said its “capacity is in the region of £12.5bn compared with the current assets … of around £9.5bn”. So, there’s definitely less wriggle room domestically.
In some respects, the issue could be largely self-correcting. If these companies continue to do well, they’ll grow in size and the capacity for Lindsell Train’s strategies should grow accordingly.
As long as the inflows of new cash don’t grow at a much faster rate, everything should be cushty.
And there’s certainly been a slowdown in cash inflows to the open-ended funds recently. The Global fund was the same size in June 2019 as it was in December 2019, while the UK fund shrank by £0.5bn.
The downgrades that Lindsell Train’s funds received highlighted what might happen if punters withdrew money on a sustained basis, a la Woodford.
While that’s certainly a risk worth considering, I’d be more concerned if these funds continued to grow in terms of assets held and major compromises had to be made with desired position sizes.
However, this data wrangling has made me feel a little more comfortable about the prospect of that happening in Lindsell Train Global. I think it should have a sufficient pool of sizeable US and European companies, should a few extra positions be required.
Looking down the list of FTSE 100 stocks, though, it’s harder to see many other sizable UK companies that fit the Lindsell Train mould.
For example, there are 45 UK-listed companies valued at over £10bn. 5 of those are owned already and another 17 are oils, miners, banks, insurers, and property companies. So there aren’t too many firms of sufficient size to choose from.
Perhaps we might even see the holdings in Finsbury Growth & Income and UK open-ended fund start to diverge a bit? The investment trust should be able to buy some smaller companies and still take a meaningful position size.
Finally, I’ll close with some interesting comments from Nick Train in his December commentary for the Lindsell Train Investment Trust:
We do not believe the size of our funds is close to compromising the potential to generate good returns into the future – although some rating agencies disagree. For as long as we believe this the open-ended funds will remain open to new investors.
We implemented a fee reduction on our funds in mid-2019 as a signifier that we are open for business, but also keen to share benefits of scale with our clients.
I think this is the first time the possible closure of these funds has been mooted, publicly anyway. But I find it reassuring they’re happy making such statements.
Please note that I may own some of the investments mentioned above. You can see my current holdings on my portfolio page and the index page summarises all my posts by category. Nothing in this article or on this website should be regarded as a buy or sell recommendation as this site is not authorised to give financial advice and I'm just a random person writing a blog in his spare time. Always do your own research and seek financial advice if necessary!
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