If You Think Train Can Turn Things Around Then Watch This Trust

Nick Train is one of the country’s best known fund managers, but after a long period of success he has run into difficulties. If you think that he will be able to turn things round there is an investment trust that would really benefit.

It is called Lindsell Train (LON: LTI) and its latest annual results reflect the extent of the challenges facing its eponymous manager. In the 12 months to the end of March the £200m trust made an NAV total return of 2.1%, yet the shares were down 19.8% due to a widening of the discount.

LTI is a unique vehicle that was set up to give investors an opportunity to share in the potential growth of the unlisted management company, Lindsell Train Ltd. Its 23.9% stake is by far and away the trust’s largest holding and accounts for 34% of the assets, with the remainder of the shares all held by the management team.

For many years their various funds all did really well and AUM grew at a healthy rate, resulting in a higher valuation for the management company. The last three years have been a lot more difficult though, with the holding being devalued and LTI shares falling around 50%, moving from a premium to a discount in the process.

The Management Company

One of the key differences between investment trusts and open-ended funds that often gets overlooked is the fact that the latter are not allowed to have more than 10% of their assets in a single holding, unless it an index tracker. There are no such restrictions for investment trusts and LTI has taken full advantage of this additional flexibility with a 34% exposure to its management company.

Writing in the accounts, they say that for the third time in four years their core Global, UK, Japan and North American strategies have all underperformed the comparative indices. This was because the market was dominated by a narrow range of technology companies that they don’t tend to invest in.

These pressures have resulted in clients withdrawing funds with AUM falling by £3.4bn to £15.9bn. The company now has 21 client relationships (funds and segregated mandates) so there could potentially be some more chunky losses to come if the performance doesn’t improve.

There is no way of knowing how long these market trends will continue, but the managers are reassured by the fact that the fundamentals of their portfolios, based on metrics such as the average underlying return on equity, are superior to the benchmarks. They think that in time this should win through, bringing a sustained improvement in absolute and relative performance.

Portfolio And Outlook

LTI’s strategy is to make long-term investments in durable and predictable companies, while avoiding the more speculative and cyclical areas of the market. Its global portfolio consists of just 11 quoted holdings that include well-known names such as London Stock Exchange, Nintendo, Diageo, RELX and Unilever. The trust also has money in two of their other products, the Lindsell Train North American Equity Fund and the Finsbury Growth & Income Trust.

Nick Train believes that the portfolio − and by extension their other vehicles – holds a combination of companies that are remarkable for their strong consumer brands or unique intellectual property. He says that these businesses have generated attractive investment returns for patient owners over many decades and he sees no reason to expect the coming ones to be any different.

You might be surprised to learn that the investment trust also pays a high dividend with this year’s figure of £51.50 giving the shares an attractive yield of 6.4%. There is no guarantee that it will continue at this level though, as 80% of LTI’s earnings come from the unlisted management company and might not be sustainable.

Despite the poor recent performance, the long-term record since inception in January 2001 is still very good with an annualised NAV total return of 12.7% compared to 7.1% from the benchmark. The shares are currently available at a 16% discount and are worth watching if you think that Train and his colleagues will be able to turn things round.