Nick Train funds breach concentration rule limits

Lindsell Train funds are known for favouring concentrated portfolios, making them more at risk of breaching holding limits. 

Several of star fund manager Nick Train’s funds broke rules on portfolio concentration over 10 times last year, according to new research from the Financial Times.

The European Union’s UCITS rules, a regulatory framework for funds sold to investors in Europe, stipulate that holdings accounting for more than 5% of a fund’s portfolio cannot collectively account for more than 40% of the fund's overall holdings. At the same time, UK fund rules prohibit an individual holding exceeding 10% of fund’s total assets.

According to analysis from the Financial Times’ FTfm, Lindsell Train Global Equity, a UCIT fund managed by Train alongside Michael Lindsell and James Bullock, broke the breached the EU’s UCIT rule at least six times in 2019. According to the FT, holdings accounting for over 5% of the portfolio accounted for a total of 50% of the fund in October.

Similarly, Japanese Equity, a fund managed by Lindsell, breached UCIT limits on at least five occasions.

Lindsell Train UK Equity is structured as an open-ended investment company and therefore subject to slightly different, UK-made regulations. The fund, however, has also apparently broken concentration limit rules on single companies not accounting for more than 10% cent of the fund’s portfolio.

However, according to a spokesperson from Lindsell Train, it is important to recognise that the rule breaches were “inadvertent,” meaning that they were caused by “circumstances outside the portfolio manager’s control-  normally significant price movements in stocks that are held in the portfolio.”

Lindsell Train funds are known for favouring a portfolio with concentrated holdings. For instance, the Lindsell Train UK fund factsheet notes that its holdings are unlikely to ever exceed 35. This means that the fund can more easily breach holding limits. If the value of one holding or set of holdings fall, the percentage of some of the fund’s large holdings can be pushed over the 10% limit, as appears to have happened multiple times last year.

The spokesperson notes: “As is clearly articulated in all our product literature for investors, our investment approach leads to concentrated portfolios (typically 20-30 holdings). By their nature, concentrated portfolios are more susceptible to price moves that could lead to inadvertent breaches.”

The spokesperson also stressed that the regulations in question all recognise that such breaches can occur “inadvertently.” They note: “The requirement is to resolve them as soon as reasonably practicable and in the best interests of investors. In practice, this means avoiding unnecessary trading costs whilst still ensuring timely correction.

The spokesperson also pointed out that Lindsell Train makes use of automated trading rules that prevent any fund manager from making trades that would breach any such regulations, allowing them to avoid making any so-called “‘advertent breaches.”

The concentrated nature of Train’s holdings has previously been flagged up as a creating potential liquidity risk. For example, the highly concentrated nature of Lindsell Train UK Equity portfolio means that it has a large ownership stakes in the companies it backs. The potential risk of this is that should a large number of investors in one of the funds ask for their money back, Train may be forced to sell holdings at a significant discount.

On the back of these concerns, Lindsell Train UK Equity and Finsbury Growth & Income were both recently downgraded by Morningstar.

Train has previously rebutted these concerns, noting: “We only invest in long-established, durable and substantive companies. The global and UK funds are at least 98% invested in companies with market capitalisations of over £1 billion.”