Fund manager Nick Train cannot buy more shares in the top holdings in his £7bn Lindsell Train UK fund due to Financial Conduct Authority rules, he has said.
In his latest update to shareholders in the fund, he said that FCA rules mean he is not permitted to hold more than 10 per cent of the fund's capital in any one stock.
New money being invested in the fund would mean that the current investments would fall below 10 per cent of the fund's total size and enable him to buy more if he so wished. Most fund managers don't get close to having 10 per cent of a fund's capital in one stock.
The stocks include Relx, Unilever and Diageo. At the end of May, the fund had 10.1 per cent in Relx, and 10 per cent each in Unilever and Diageo.
Mr Train also owns those stocks in his Finsbury Growth and Income trust. But investment trusts are not subject to the same rules.
The Lindsell Train UK fund has returned 10 per cent over the past year, compared with a loss of 3 per cent for the average fund in the IA UK All Companies sector in the same time period.
Diageo shares have performed very strongly over the past year, rising from £27.73 to above £34.
Relx shares have risen from £16.09 to £18.89 over the past year.
Unilever’s UK shares have risen from £40 to £49 over the past year.
All three companies are in the FTSE 100.
In his update to shareholders Mr Train wrote: "Our highly concentrated portfolio comprises a number of big positions that have done very well recently, and indeed over the longer term too.
"And while we remain optimistic about the business prospects and long term share price potential in these holdings, it is also true that we have not been adding much to them of late.
"Anyway, some of these holdings we cannot add to because they are at or close to our maximum permitted position sizes of 10 per cent (indeed, we periodically have to sell shares to bring the holdings back below that 10 per cent).
"We love to outperform for our investors, but have to state the obvious: it would not at all be a surprise if such a highly concentrated portfolio that had performed well embarked on a period of poor performance at some point."
He said the share prices of those companies have performed well this year because the market views them as defensive holdings, that is, stocks that will perform better when markets fall.
This is because demand for the products of those companies tends to be relatively stable regardless of wider economic conditions.
Those companies are known to market participants as "bond proxies" because their share prices tend to move in line with bond yields.
This is because when economic growth and inflation are low, bonds yields are low. The share prices of these companies rise as investors compare the relatively secure dividends of these businesses favourably with the low bond yields, and because economic growth is relatively muted, they don’t wish to be exposed to riskier businesses.
Fund manager Richard Buxton, who runs the £1.6bn Merian UK Alpha fund, is skeptical that the performance of companies such as Unilever can be sustained.
He said that while market conditions have long favoured those companies, the valuations at which they trade makes them unattractive investments.
Andrew Bell, chief executive of the Witan investment trust, which has about 10 per cent of its assets invested in a separate fund run by Nick Train, said the investment has been the best performer in his trust for a long-time and he expects the fund manager to be able to perform in different market conditions.
He said: "When we invested with him, he had performed well for a few years, but the assets under management of his firm were not huge, and even then he said to us it might be better for us to deploy the money we wanted him to invest for us in stages, rather than all at once.
"But I had as much conviction in him as any of the other managers we use, so we put all the money with him.
"And I am very glad we did, because there hasn’t really been a period of underperformance since, and that was almost a decade ago."
david.thorpe@ft.com
