Has Train had his 'day in the sun'?

One of a few “star managers”, Train especially has built a strong reputation with his buy-and-hold approach, and sometimes unconventional investing style.

But last week, in the half year results for the Lindsell Train Investment Trust, Train acknowledged the company he co-founded could be facing its worst period performance in 20 years.

Worst hit was the Lindsell Train Global Equity fund, which saw an annual return of 3 per cent compared to the 24.4 per cent return of its benchmark, the MSCI World Index.

Last week Train said protecting the long-term value of savings after the effects of inflation and tax was "no trivial challenge".

Performance of Lindsell Train's equity funds

Source: FE total return in GBP to 30th Nov 2021

The question for investors is whether this was a bad year, or if the investing style that has proved so fruitful for Train over the past decade is falling out of favour.

Nick Wood, head of investment fund research at Quilter Cheviot, told FTAdviser the performances did not concern him.

I think any manager who has been a good long-term investor should, and can, be allowed to have short-term periods where they just got it wrong.Nick Wood, Quilter Investors

“Every manager has short-term periods of underperformance, and I would say you don't need to worry about the one-year [performance] number.

“I always say that you have to bear in mind that there is a headline risk with these managers, the media like talking about them, and if they’ve been underperforming there are more headlines attached to these than other particular managers.”

He added that most investors should be looking towards the long term, and despite a bad year, none of Trains trusts or funds have underperformed their benchmarks over a 10-year period.

“For most people, you’re investing for the long-term, and I wouldn't say you don’t need to worry about the one-year number but you need to think about the long term.

“Long-term, [with these] individual managers, the style will be right at some point, and they’ve got skill and have shown over the long term that they can add value.

“I think any manager who has been a good long-term investor should, and can, be allowed to have short-term periods where they just got it wrong.”

Wood said that if Train began buying value cyclicals, it would go directly against his investment policy and be a reason to sell out of his funds.

“From my perspective that would be a good reason to exit - if he started to chase the market. That’s just not what he’s told me he’s doing.”

Laith Khalaf, head of investment analysis at AJ Bell, said the important lesson for investors was not to put all their eggs in one basket.

“The bear case is that Lindsell Train’s investment style has had its day in the sun, and that rising interest rates will mean less demand for the reliable compounding stocks they favour,” he said.

This assessment seemed a bit premature after such a short period of underperformance, he added.

“As with any active manager though, it pays to make sure you don’t have too much of your portfolio riding on it.”

Khalaf said that the funds’ previous strong performance would help its case.

“Lindsell Train has a very particular investment philosophy which focuses on companies with robust brands, balance sheets and earnings streams, and this style can be expected to move out of step with the wider market, sometimes for better, sometimes for worse.

“The managers have earned plenty of credit in the bank, which will likely mean most investors stay on board with Lindsell Train for now.”

Among the stocks which Lindsell Train has invested in most heavily are large consumer goods companies like Diageo, Unilever and Mondalez, as well as financial services companies such as Hargreaves Lansdown and Schroders.

Academically and logically, if you look at the numbers, it’s quite hard to consistently outperform the market.Warren Shute, Lexington Wealth

Underneath it all is the age-old argument between active and passive investing.

Warren Shute of Lexington Wealth, said Train's recent underperformance confirmed the reasons for passive-only investing.

“It's my belief that you possibly could outperform the market, but you're taking a certain amount of risk.”

“Academically and logically, if you look at the numbers, it’s quite hard to consistently outperform the market," Shute said.

"Even Warren Buffet underperformed the S&P 500.”

Data released last week by AJ Bell showed that a third of active equity funds have beaten a passive alternative this year.

sally.hickey@ft.com