Nick Train has defended a drop in share price of his Linsell Train investment trust, saying the stock had become too expensive.
The trust, smaller than Mr Train’s better known Finsbury Growth and Income Trust, has delivered growth in net asset value terms of 31 per cent for the year to the end of October, the last month for which data is available.
But the share price has fallen by 8.4 per cent in the same time period.
Mr Train said the share price fall is the result of the premium to asset at which the share price of the trust traded becoming “excessive.”
The net asset value of a trust is the value of the underlying investments in it. A trust moves to a premium when the total market capitalisation of the trust exceeds the value of the assets.
The strong performance of the trust - it has returned more than twice that of the average in the AIC Global sector over the past five years - has seen the it trade at a stout premium, around 20 per cent at the time of writing.
In contrast, the average trust on the UK market trades at a discount, that is, the market cap is lower than the value of the assets.
Mr Train has repeatedly described the huge premium as not good, to the point of at one time telling investors not to buy the shares.
Traditionally investment trusts can erode the premium by issuing new shares, that forces the share price down, while improving liquidity for existing investors, and because the fee of a fund is calculated as a percentage of the market cap, issuing more shares increases the fee the fund manager can earn.
The other investment trust Mr Train manages has regularly issued new shares in recent months to the point where that trust trades at a premium of less than one per cent.
Lindsell Train investment does not issue more shares, and tackle the premium, because the largest investment the trust Lindsell Train Limited, the private fund management company owned by Mr Train, his business partner Mike Lindsell, and other individuals.
Because shares in this private company do not come onto the market very often, the Lindsell Train investment trust cannot buy any more, so if it issued new shares in the trust, those shares could not be used to buy more of the private company, disadvantaging the new shareholders relative to existing investors.
Another reason for the premium is the market’s view that the trust is valuing its stake in the private company very conservatively, and if it were valued differently, the trust would perform better, justifying the premium valuation.
Both Mr Lindsell and Mr Train might be expected to know more than the market as a whole about the financial performance of the private company, and as a result, they agreed some time ago to neither buy more sell any of their shares in the investment trust, lest the market take the view that either Mr Train or Mr Lindsell are expressing a view on the performance of the private company based on information the other shareholders in the investment trust do not have.
Mr Train said the weakness in the share price is the result of “profit taking”, and that the reduction in the premium is healthy.
David.Thorpe@ft.com
