Morningstar has downgraded Nick Train's flagship funds from gold to bronze, saying it is 'concerned' that Lindsell Train has not better managed the products' capacity.
The ratings agency said the £6.7bn Lindsell Train UK Equity fund and £1.9bn Finsbury Growth & Income trust’s increasingly large asset bases might restrict investment opportunities in future. It said heavy inflows had led to the manager taking increasingly large stakes in individual companies.
“While such large ownership levels do not conflict with the long-term investment approach, they could make the strategy far less nimble to respond to adverse circumstances (including a significant liquidity event for the Oeic),” wrote associate director Peter Brunt.
The Lindsell Train UK Equity fund saw £374m of outflows in September, the largest monthly amount in its history, though redemption levels have since fallen back once more.
While Mr Brunt said Mr Train was a “highly experienced and longstanding manager [with] a unique, well-structured investment approach”, he added that “allowing assets to continue to grow will only further restrict his potential investment opportunities. In light of this, we are concerned that the group has not taken action to manage capacity.”
Analysts at Square Mile have also raised questions over the funds’ liquidity profile in recent months, similarly lowering their rating on the open-ended strategy.
Analyst John Monaghan said Mr Train had told the firm that he would manage hypothetical outflows by selling shares in all holdings on a proportionate basis, rather than cutting larger positions alone.
Mr Train noted last month that fund flows for the year to the end of October remained “marginally positive”. Performance has also remained healthy: Lindsell Train UK Equity has returned 23.8 per cent so far in 2019, compared with a 22.9 per cent return for the UK All Companies sector.
A market rotation away from quality growth stocks has had a more notable impact on the fund's six-month performance. But the manager has said he takes comfort from his view that outstanding businesses will create wealth for patient investors as long as they are “prepared to hold them for long enough”.
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