Star fund manager Nick Train, who is famous for his “buy-and-hold” ethos and small portfolio of high conviction names, has added Prada to the Silver-rated Lindsell Train Global Equity fund. A fund manager buying a stock is not normally news, but this is the first purchase by the fund house since Hargreaves Lansdown was added in October 2017.
Michael Lindsell, who co-founded the boutique fund house with Train, said the Italian fashion house has many of the qualities the fund looks for and is at significant discount to luxury rivals LVMH and Gucci.
Lindsell is frank about the challenges facing Prada, but with the view that over the long term it can close the gap with its rivals. One area of concern is pricing, especially with high levels of discounting in the 634 “directly operated stores” (DOS). The company, which Lindsell describes as a “touchstone for luxury quality”, has also been slow to develop its e-commerce offering, launching its first transactional website in 2016.
Once the company upgrades its technology and gets a better grip on premium pricing, Lindsell thinks that Prada is a gateway to the Asian consumer growth story. Luxury brands are increasingly focused on using social media channels to target their marketing towards increasingly affluent Chinese consumers.
“Once the company is successful in repositioning pricing we think its ability to innovate and drive premium brand value will appeal to the growing aspirational demographic in the developing world, where the company is uniquely positioned with its high sales exposure to China and other Asian countries,” Lindsell says.
Lindsell also points to a short-term valuation opportunity offered by Hong Kong’s political crisis. Overseas investors have become concerned how the protests will play out and that has hit shares on the Hong Kong Stock Exchange.
Prada listed in Hong Kong in 2011 to tap into the growing consumer demand for luxury products in the region and the shares hit HK$80 in 2013. Lindsell says the fund has been buying into Prada at around HK$23 – “the company is potentially worth 2-3x more than today’s valuation but for that to transpire it has got to recover its pioneering zeitgeist, something that’s been absent in recent years”, he adds.
Prada is rated as a four-star stock by Morningstar analyst Jelena Sokolova, which means that is currently overvalued. The company is “one of the most recognised and best-loved luxury brands”, she argues, but recognises that it has to spend money on digital channels to catch up with its rivals.
Silver-rated Lindsell Train Global Equity has 20-35 stocks, with top 10 holdings including Unilever, Diageo and Heineken. The fund is manager by Nick Train, Michael Lindsell and James Bullock, who became a manager in 2015. The fund is up 28% in the year to September 4, according to Morningstar data.
