Morningstar analysts have downgraded Nick Train’s Lindsell Train UK Equity fund amid concerns about how rapidly the fund’s assets have grown.
Previously Gold Rated, the £9.5 billion fund has been downgraded to a Bronze Morningstar Analyst Rating.
Morningstar analyst Peter Brunt says there are concerns about how the fund manager is controlling the capacity of the fund and whether its strategy will able to cope as it continues to grow.
The manager's £923 million Finsbury Growth & Income Trust (FGT) has also been downgraded from a Gold to Silver Morningstar Analyst Rating. While investment trusts do not face the same liquidity issues as open-ended funds, as they are not forced to sell their assets to meet investor redemptions, analysts are concerned that the growing size of the trust restricts its investment universe, which could hamper performance in the future.
Buy and Hold
Nick Train is notorious for his buy and hold approach to investing – running a concentrated portfolio of just 23 names he has a strong conviction in. The manager recently bought his first new UK stock for the first time in nine years.
But as the fund’s assets grow, so does the stake the manager has in each of his few portfolio names. Lindsell Train is the largest shareholder in RELX, for example, with a 1.82% stake in the firm – it is the largest holding in the portfolio, accounting for 10.2% of assets.
The highly concentrated approach also makes the fund vulnerable to any change in fortunes in the companies it owns. Also among the fund’s largest holdings are London Stock Exchange group, accounting for 10.1% of assets, Diageo and Unilever, with 9.8% of assets invested in each, and Mondelez 8.7%.
The fund is also concentrated in terms of the sectors it invests in, with Train a big fan of consumer companies, where he believes strong brands and a loyal customer base can generate returns. Indeed, 38% of the portfolio is invested in consumer companies and 29% in financials. The Finsbury Growth & Income portfolio is very similar, with the same top five holdings as its open-ended counterpart and 40% of assets in consumer companies.
Brunt says: “The crux of Nick Train’s investment philosophy lies in the belief that a highly concentrated portfolio of high-quality, cash-generative, strong and easily understood businesses franchise will outperform the market and reduce volatility over the long-term.”
Indeed, the manager has previously told about how he is looking for stocks that will return at least 100-fold on his investment, so-called 100-baggers, and recently opined that there are not more big British brands such as Burberry.
Strong Performance
The manager’s approach has yielded excellent results – the fund is up 23.7% year to date and has delivered annualised returns of 15.56% over 10 years. But such success has attracts hoards of investors and seen the fund’s assets swell considerably.
As a fund grows, its ability to react nimbly to market events lessens. So does its capacity to invest in companies further down the market-cap spectrum, because any position would make it too large a shareholder in the business.
Brunt adds: “While this has not had a large impact of performance so far, allowing assets to continue to grow will only further restrict Train’s potential investment opportunities. In light of this, we are concerned that the group has not taken action to manage capacity.”
A Lindsell Train spokesman said the firm estimates that "significantly more headroom remains available" for the fund to grow. Its own analysis concludes the fund could comfortably grow from its currently level of £9.5 billion to £12.5 billion.
But Brunt says the boutique nature of the firm means it “does not have the most sophisticated risk systems” which has “left the group behind the curve in assessing capacity”.
Lindsell Train said: "We also acknowledge that our investment strategy results in concentrated portfolios, predominantly concentrated on the shares of blue-chip, multi-billion pound companies. This concentration certainly brings investment risk, but has also been a key contributor to our competitive long term investment returns."
Train set up Lindsell Train with investment partner Michael Lindsell in 2000, after working at M&G and GT Management, which was later acquired by Invesco. His Lindsell Train Global Equity fund maintains its Morningstar Analyst Rating of Silver.
Train is the latest high-profile manager to be downgraded by Morningstar Analysts under the revamped Morningstar Analyst Rating methodology. In November, analysts downgraded Mark Barnett’s Invesco Income and Invesco High Income funds from Bronze to Neutral amid concerns about the manager’s exposure to small and illiquid investments. Just weeks later, Barnett was sacked by the Board of the Edinburgh Investment Trust, which he has managed since 2014, following a sustained period of poor performance.
