The curious case of Hargreaves Lansdown’s spat with Lindsell Train

Nick Train, co-founder and significant shareholder of Lindsell Train, endured a rocky 2022 as the kind of stocks he has long preferred fell sharply from favour; however, in a more recent update to clients he said he has the confidence to state that “things seem to be getting better” for clients in his funds. 

And the data gives some credence to that claim. The Lindsell Train UK Equity fund has returned 12 per cent in the year to May 25, compared with 2 per cent for the market as a whole. 

However, the ravages of the previous 18 months or so of poor performance is evident in the size of the fund, dropping from £6.5bn in June 2021 to £4.6bn today. 

The global equity fund has returned around twice the sector average over the past 12 months, but has also bled money over the past 18 months, dropping to £5.5bn from the £8.8bn in June 2021.

The reason for their concern is around whether there are sufficient people within the company to challenge the decisions of the investment team

The improved performance might be expected to contribute to better inflows into the funds, but any momentum the folks at Lindsell Train may have felt coming their way may have been dented by commentary from Hargreaves Lansdown.

In a recent note published on its website, the company said that it had concerns around “the capabilities and resource that the Lindsell Train business has in place to provide effective challenge to the investment teams.” 

The Hargreaves Lansdown note states they have had conversations with Lindsell Train about this, and are unhappy with the “progress” made since then. 

It has long been a feature of industry chatter that the Lindsell Train business is wildly profitable and has managed to grow without acquiring the bureaucracy of some larger firms. 

Companies House data shows the company made a profit of £65mn, with the total number of employees being 22, of which six work in the fund management department.

Hargreaves Lansdown notes the reason for their concern is around whether there are sufficient people within the company to challenge the decisions of the investment team, where the funds have as lead managers founders Mike Lindsell and Nick Train, as well as James Bullock. 

Train is certainly a high conviction investor, saying all of his holdings must fit within four key investment themes, and generally his sell discipline is “never to sell.” The latter was borne out in 2022, when the funds were struggling in performance terms and no holdings were sold. 

This has obvious echoes of the concerns many in the industry had around the risk levels in the Woodford funds.

Lindsell Train has been explicit that succession plans are firmly in place, with James Bullock, who has been with the firm since 2010, now a named manager on the mandates, while there are also deputy and assistant fund managers. 

In a statement responding to Hargreaves Lansdown’s concerns, Lindsell Train said: “When considering investment risk, our primary aim is to avoid losing permanent capital value for our investors and we believe that risk can best be mitigated by investing in high quality companies.

"In addition, we monitor and control other aspects of risk, including portfolio concentration and liquidity. We should add that our Global, UK, Japanese and North American Equity Funds invest only in listed companies, there is no exposure to unlisted securities.

"The independent oversight of risk is already the responsibility of a risk and compliance committee, chaired by an independent non-executive director with considerable experience in this area. We have also recently hired an executive focused on the monitoring of risk. We will continue to commit resources to this important part of our business.”

This has obvious echoes of the concerns many in the industry had around the risk levels in the Woodford funds prior to that firm’s implosion. 

Hargreaves Lansdown’s corporate reputation took a considerable hit when the equity income fund collapsed, as the company had recommended the product right up until its closure, including trumpeting the fact that Woodford provided Hargreaves clients with a discounted share class. 

But there are differences: Woodford Investment Management was 65 per cent owned by Neil Woodford, and although he highlighted the fact that he was not the chief executive of the firm, he was the only investor at the company with any sort of profile among advisers.

And when Woodford did speak of the wider investment team, he spoke positively of how they came from unconventional backgrounds, with one being an ex-policeman. 

It could make the next investor relations call between Hargreaves Lansdown’s representative and its second largest shareholder rather awkward.

However, many clients have expressed the view that such individuals, however talented, were essentially relying on Woodford for their professional careers, and their backgrounds may have hindered them getting jobs at rival firms.

Train, on the other hand, has equal ownership of Lindsell Train, with his business partner Mike Lindsell, a veteran and long-established fund manager, and Train owns less than 40 per cent of the business.

As for access to clients, the Lindsell Train funds were also available at a discount on Hargreaves Lansdown’s platform for many years.

Representatives of the platform have previously stated that being on the firm’s buy list, which typically coincides with a discount, can add more than £100mn to the inflows of a fund within the first year or two. 

Clients of the platform may then ponder whether they were encouraged into the fund, as they were with Woodford, although they will be thankful that Lindsell Train funds invest in large, liquid companies.  

There is another link with Hargreaves Lansdown, as the platform’s co-founder Peter Hargreaves previously revealed to FTAdviser that he personally has been invested in a Lindsell Train fund for many years.  

And the affection was mutual; Lindsell Train funds are actually the second largest shareholder in Hargreaves Lansdown, owning 13 per cent of the business behind only Peter Hargreaves himself. 

Not that it has been one of his shrewder investments; Hargreaves Lansdown shares are down 59 per cent in the past five years, while the Lindsell Train UK Equity fund has returned 26 per cent. 

In fact, Hargreaves Lansdown removed both Lindsell Train funds from its favoured fund list in order to avoid the perception of a conflict of interest, but that was years after the funds first went on the list, and presumably after Hargreaves clients had invested in the fund at the discounted price. 

Which all makes the events of this week somewhat baffling.

Hargreaves is not commenting further on the statement, so perhaps this is the end of the story, but it could make the next investor relations call between Hargreaves Lansdown’s representative and its second largest shareholder rather awkward.

Whether it will prompt any sort of outflows from Lindsell Train, given where the performance is improving, is another matter. 

 David Thorpe is investment editor at FTAdviser