Lindsell Train  

Train 'encouraged' by UK equities despite underperformance

Train 'encouraged' by UK equities despite underperformance

Nick Train has said the opportunities for investment in the UK equity market were “hugely encouraging”, despite his UK equity fund's underperformance and the outflows seen from these assets in recent years.

In a letter to shareholders of the Lindsell Train UK Equity Fund, the fund’s co-manager Train said it seemed “safest” to assume mega-trends in global equity markets would continue in 2022.

“The backdrop for investing in equities remains hugely encouraging,” he said. 

“I can barely remember a time in my 40-year career when there have been so many opportunities, especially in the deeply unloved UK equity market – where there are compelling growth stories on much lower valuations than global peers.”

Train said the UK equity market was able to give exposure to these “global mega-trends” from valuations that were “demonstrably lower” than for global peers.

Although the whole UK equity market is not necessarily undervalued, he said: “It is possible to invest in UK companies with credible, long-term growth opportunities and that the valuations of such companies may have been penalised in recent years by global asset allocators’ disenchantment with all sterling equity assets.”

Investors have been abandoning UK equities in droves for several months.

During 2021 there were outflows of £4.4bn from UK equities funds which was this asset class's worst performance since 2018.

Overall, since the UK voted to leave the European Union in 2016 there have been outflows of £21bn from UK equity funds.

The UK All Companies sector has been the worst-selling Investment Association sector for five of the past seven years.

Despite Train's optimism, his fund saw a 12.7 per cent return during 2021, behind its benchmark, the FTSE All-Share index, which posted a 18.3 per cent return.

Train highlighted that in the past two “Covid-scarred” years, the fund’s portfolio has outperformed its benchmark, seeing a 10.2 per cent return, above the benchmark’s 8.5 per cent.

This was down to the portfolio’s “quality” characteristics which protected its value in a falling market in 2020, so in 2021 the fund lagged behind its benchmark both because there wasn’t as much scope for a rebound from its constituents, but also due to a handful of large holdings experiencing a difficult year.

The London Stock Exchange was the worst performer, losing over 20 per cent of its value in 2021. Train said “on paper” the firm, which took over data firm Refinitiv last year, looked like "one of the best-positioned" of any such market infrastructure and data companies in the world.

But the merger has been plagued with scepticism over how the two firms will manage a successful integration, and LSE’s share price has suffered accordingly, crashing over 30 per cent between February and December last year. 

Train was positive about its chances despite this, and said: “After LSE’s dismal year as a share price, the valuation differential between it and US peers is marked. 

“The 7 per cent jump in LSE’s share price in December shows that investors are worried the company may prove its sceptics wrong.”