I recently came across an interesting comment from Nick Train, the highly regarded manager of the Finsbury Growth & Income Trust (FGT). He was quoted in the Telegraph as saying that he had not bought or sold a single share for four years and that on average he retains his shareholdings for eighteen years.
FGT has an extremely concentrated portfolio of 25 stocks with Train justifying his hands off approach by saying that he has been running his winners and that they continue to produce handsome returns. This is certainly borne out by the strong outperformance of the fund.
I first came across Nick Train in 2004 when I stumbled upon his Lindsell Train investment trust (LTI). At the time it was still relatively new, having been set up in January 2001, but what caught my eye was the investment objective:
‘To maximise long-term total returns subject to the avoidance of loss of absolute value and with a minimum objective to maintain the real purchasing power of Sterling capital, as measured by the annual average yield on the 2.5% Consolidated Loan Stock.’
This struck me as exactly what I was looking for and I invested in it, paying the princely sum of £98 a share. Eleven years on I still own them, although they now change hands for more than £450 each.
The reason for mentioning all this is that many of the largest shareholdings in the two funds are the same. These include the likes of Unilever, Diageo, Pearson, Heineken, and the London Stock Exchange. This made me think about how advisable it is to hold on to such strong performers.
Train is quoted as saying that he looks for companies that he thinks will be around in 50 years’ time, with big brands that will allow them to grow their earnings ahead of inflation for decades. He also wants to see them embracing technology and becoming more profitable by making the transition to digital.
Unilever with its ubiquitous consumer brands clearly fits into this category and it is interesting to look at the performance and valuation. The shares touched £10 in 2007 but at time of writing were up over £28. According to the consensus analyst expectations they are trading on 20 times forecast 2016 earnings and yielding a forecast 3.2%.
This doesn’t strike me as overly expensive or particularly cheap, which goes some way to justifying his approach as the higher share price simply reflects the growth in earnings. Train uses a company’s long-term return on equity as a guide to its valuation and has recently published an interesting explanation of his methodology.
There’s a lot to be said for this type of buy and hold strategy if you can pick the right shares, not least because you save on all the transaction costs. It also means that you give the companies time to grow without getting caught up in all the market noise and short-term speculation.
My biggest concern with LTI is the size of its exposure to Lindsell Train Ltd, which is the unlisted management company that Train and his colleagues set up in 2000 to run their various funds. This is now its largest holding at just over 28% of the assets and represents a sizeable stock-specific risk.
Well managed funds that use a long-term buy and hold strategy like LTI, FGT and others may well represent the ideal mandate for investors. As long as the people running them remain alert to the possibilities and retain a willingness to challenge their own investment beliefs they can deliver superb market beating returns.