Train defiant in the face of investor sentiment

Train defiant in the face of investor sentiment

Nick Train said he expects investor sentiment to be against some of the largest investments in his funds, but insisted he won’t be selling.

In fact Mr Train said he has bought more of shares such as Unilever.

He said a recurring question from his clients in recent months has been whether it was time to sell the shares of Unilever, the largest holding in his £1.2bn Finsbury Growth and Income Trust, and Diageo, a top 10 holding.

Mr Train said many of those shares have fallen by around 10 per cent during the recent market correction, vindicating the view of the skeptics.

He said: "If you are a trader the answer [to the question of whether you should sell] is self-evidently yes."

But he said long-term investors should hold on, as he is doing, because the assumptions about the future direction of the economy, may not be correct.

Mr Train said the rationale put forward by many clients for wanting to exit those shares is that those stocks are bond proxies, meaning they will underperform as bond yields rise.

Because companies such as Unilever and Diageo sell consumer staple products for which there is constant demand, the market views the dividend yield generated by those companies as being almost as secure as the income generated by bonds.

In the years since the financial crisis, when bond yields have been depressed, the secure dividend yield of companies such as Unilever became more attractive, but since the start of the year bond yields have risen.

This is because the market expects higher inflation but Mr Train said the rapid pace of technological change may create a deflationary force more powerful than the short-term inflationary pressures in the global economy.

If inflation doesn’t rise then neither will bond yields, reinforcing the valuation of Unilever and similar equities.

But Mr Train said those companies were still attractive than those in sectors such as mining and financial services, which have done better as market sentiment shifted.

He said: "Cyclical, capital-intensive companies are the ones that get especially killed by inflation over time. [Warren] Buffett and [Charlie] Munger [the founders of Berkshire Hathaway] basically invented ‘quality investing’ as a response to rising and persistent inflation – as a protection against rising long term bond yields, not falling ones.

"They noted the superior inflation adjusted cash performance of branded goods companies through such episodes. They have the pricing power. Why would you sell Unilever, or its peers, if you really believed in a prolonged period of problem inflation?

"Do you really want to fund a stream of rights issues from cash-strapped coal miners, engineers, insurance companies and banks? Because, in my recollection of the 1980s, that is what you will be required to do."

Mr Train said the major question investors should be asking is what assets can cope with technological change, rather than what impact cyclical factors such as inflation will have on investment returns.