InvestmentsFeb 11 2020

Train: We will not alter style in response to events of 2019

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Train: We will not alter style in response to events of 2019

The £214m Lindsell Train investment trust has lost 14 per cent over the past year, compared with a gain of 14 per cent for the average trust in the AIC Global sector in the same time period (to February 10).

Woodford Investment Management, run by fund manager Neil Woodford and his business partner Craig Newman, closed in October 2019 after the demise of its flagship fund, the Woodford Equity Income fund.

Similarly to Mr Train, Mr Woodford's style was to take significant stakes in a relatively small number of companies, though he also had significant exposure to small, illiquid and unquoted companies of the sort Mr Train avoids. 

Mr Train said the demise of Woodford Investment Management had placed increased scrutiny on the effectiveness of active fund managers relative to passives.

It had also called into question whether investors will continue to pay attention to platform buylists, as Mr Woodford's fund, like Mr Train’s, was heavily promoted on the Hargreaves Lansdown list. 

The model of fund managers owning the business, and the level of scrutiny this allows, is also under scrutiny.

In his latest letter to shareholders, which is published on the Lindsell Train website, Mr Train wrote: “There have undoubtedly been ramifications for Lindsell Train Limited from the Woodford affair. Ramifications arising from the scrutiny that we and other fund management companies have understandably been subject to since that debacle.

"The shocking sight of a run on an open-ended fund demonstrates the bad things that can happen when investment managers take excessive risk with portfolio liquidity. We must acknowledge – as we have always sought to communicate to all our investors – that there certainly is risk inherent in the concentrated nature of Lindsell Train Limited’s portfolios and to an extent, therefore, with liquidity too.

"However, to be clear, we do not invest in unquoted shares in the open-ended funds. We only invest in long established, durable and substantive companies."

Outflows have been stark from Train's open-ended funds over the past year, with investors withdrawing £374m from his UK equity fund in September, the largest in the fund’s history.

The fund ratings agency Morningstar downgraded the Lindsell Train funds in December, on the basis that they had grown too big.  

But Mr Train wrote: "We will not alter our investment style or process in response to the events of 2019 or the scale of our business.

"Our willingness to run concentrated portfolios, with a very long term time horizon, has allowed and encouraged us to take truly strategic views about the companies we invest in – it is central to our ability to capture returns.

"We do not believe the size of our funds is close to compromising the potential to generate good returns into the future – although some rating agencies disagree. For as long as we believe this the open-ended funds will remain open to new investors.”

A feature of Mr Train’s investment style is to own a small number of companies in the funds he runs.

The largest investment in the Lindsell Train investment trust is a 24.2 per cent stake in Lindsell Train Limited, the fund management company owned by Mr Train and his business partner Mike Lindsell, which has the contract to manage the trust, alongside a range of open-ended funds and the Finsbury Growth and Income trust.

In recent years, the performance of the open-ended funds he operates has been strong, with the result that he had to stop buying more shares in some of his larger holdings to avoid breaching Investment Association rules, which dictate you are not allowed to own more than 10 per cent of any company listed on the stock exchange in one fund.

Mr Train wrote: "The Global and UK funds are at least 98 per cent invested in companies with market capitalisations of over £1bn. Under almost any scenario we analyse (and regularly monitor) our funds are highly liquid – given the nature of the companies that make up the vast majority of the portfolios.

"Admittedly, it seems probable that if we were required to return a big proportion of the capital entrusted to us in short order – say 20 per cent or more in a week - whilst we are confident we could do so, in order to raise cash we might have to take discounts on some of our holdings that would hit the value of fund units at least in the short term."

Hargreaves Lansdown has removed two of the open-ended funds he runs, Lindsell Train UK Equity and Lindsell Train Global funds, from its favourite funds list in order to avoid any perception of a conflict of interest, as Mr Train’s funds were among the largest shareholders in Hargreaves Lansdown.

Lindsell Train Limited had assets under management of £21.9bn at the end of 2019, an increase of 45 per cent on the year before. 

However, if inflows from Hargreaves Lansdown clients fall, then the assets under management of Lindsell Train Limited could fall, and so could profits. This could reduce the value of the investment trust’s stake in the company, which in the last set of accounts was £109m. 

david.thorpe@ft.com

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