Applying traditional valuation metrics to modern digital businesses is a “mistake” and outdated, according to Nick Train, who runs the £6.5bn Lindsell Train UK equity fund and the £2.1bn Finsbury Growth and Income trust, among other mandates.
Writing to clients of the investment trust as part of his regular monthly update last week, Train said valuation multiples at tech firms today cannot be compared with those at older analogue businesses.
He wrote: “Investors, particularly US investors, understand the value that digital and data companies generate for their owners when they grow.
"Their capital-intensity is low, meaning returns on capital are high and copious cash generated. I say particularly US investors, because companies with similar characteristics have been right at the forefront of the bull market there and very high valuations have been achieved."
He said whether those high US valuations are justified was a moot point but added: "One thing is clear. Applying 20th century measures of what constitutes ‘value’ to digital companies is a mistake.
"Their returns on capital are simply so structurally higher than analogue/bricks-and-mortar businesses that [valuation multiples] we might have regarded as excessive 20 years ago can now justifiably be designated ‘cheap’.”
Train’s funds have struggled over the past year, with the Lindsell Train UK Equity fund returning 15 per cent, compared with 30 per cent for the average fund in the IA UK All Companies sector in the same time period.
The growth style of investing favoured by Train performed well in the world of low growth and low interest rates.
But the bounce experienced by equity markets since the announcement of the first vaccine discovery in November 2020 has broadly boosted value equities at the expense of growth shares.
Darius McDermott, managing director at Chelsea Financial Services, said: “When we launched our fund of fund range a few years ago, we had a split between growth and value that was perhaps 80/20, and for a lot of that time we looked like fools for having any value exposure.
"We gradually moved to having more value over the years, and the main reason the funds have outperformed this year is because of the value element.
"Why do we allocate to value funds? For diversification. The conditions of the past decade have suited growth, but conditions change and styles will always come in and out of fashion.
"In terms of what we look for in a value fund, we want the manager to be very clear about how they do things, and to be able to explain it well.”
david.thorpe@ft.com
