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Train blames Brexit optimism for underperformance

Train blames Brexit optimism for underperformance

Nick Train has blamed the increasing confidence investors have in the UK economy for his fund's recent under-performance.

The Lindsell Train UK Equity fund has lost 2 per cent over the past three months, compared with a gain of 6 per cent for the average fund in the IA UK All Companies sector in the same time period.

The fund has returned 84 per cent over the past five years, compared with 36 per cent for the sector average. 

In his latest letter to investors in the £6.6bn Lindsell Train UK Equity fund and £1.7bn Finsbury Growth and Income Trust, Mr Train wrote: “The strategy under-performed in October for the second month.

"Broadly the reason for the under-performance is that as confidence increases that the UK will avoid a no-deal Brexit the so-called 'defensive' companies that make up a significant part of your portfolio become less highly valued by investors and their share prices have fallen. (I persist in calling them 'so-called defensives' because we think this is not a useful designation for companies which have created huge wealth for their owners over long periods.)"

The largest investments in Mr Train’s UK funds include consumer goods company Unilever and drinks business Diageo, both of which are international businesses that derive most of their revenue from outside the UK, and so are relatively unaffected by the performance of the UK economy.

Those stocks rose sharply in value since 2016, as investors viewed the overseas earnings of those companies and the fact they sell products for which there is a constant demand, as defensive at a time of political uncertainty.

Mr Train said the financial performance of many of the companies he held remained strong. 

His investments in those global companies pre-dates the Brexit referendum and is a function of his view that global brands will benefit from the growth of the global economy, especially emerging markets, in the decades ahead. 

Mr Train also believes the global rate of inflation will be slower in the years ahead, meaning bond yields will be lower, and this benefits those stocks that perform most like bonds, including consumer goods companies.   

Bond yields and inflation have been low over the past months, so the global stocks Mr Train owns should be benefitting from that, as they have done for much of the past decade.

Simon Edelsten, who runs the Artemis Global Select fund, said the reason stocks such as Unilever and Diageo had underperformed of late, despite market conditions appearing to be in their favour, was because their share prices were very expensive. 

david.thorpe@ft.com 

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