Nick Train: ‘generational’ opportunity to buy UK growth firms

Lindsell Train UK Equity and Finsbury Growth & Income manager Nick Train sits down with ii’s Sam Benstead to give an update on how he is managing his UK portfolios. 

He discusses why he is moved money from international shares and into UK shares, why the UK has a number of standout technology shares, and why the domestic market is undervalued. He also goes into depth about his large holding in Diageo, where the shares are under pressure. 

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Nick Train, who manages the Finsbury Growth & Income Ord (LSE:FGT) investment trust and the WS Lindsell Train UK Equity fund. Nick, thank you very much for coming into the studio.

Nick Train, manager of Finsbury Growth & Income and Lindsell Train UK Equity fund: It’s my pleasure Sam, I think. Let’s find out.

Sam Benstead: We last had you in 18 months ago, and since then you’ve sold all the international positions, more or less, in your UK portfolios. So, why have you done this?

Nick Train: I just felt that I had to respond to the change in value that was becoming increasingly apparent. Everybody knows that the UK stock market has been a disappointing market to invest in for longer than I care to think about. But the fact is that as it’s underperformed, and in some cases fallen, the value, at least as we see it, has got greater and greater.

And in particular, and I think this is such a crucial aspect of, at least our thinking here, there are, contrary to common opinion, some truly global growth businesses listed on the London Stock Exchange. And when you can buy great growth businesses at a discount to peers and to global markets, we just felt that we had to respond to that.

The obvious thing to sell in order to fund that increased exposure to these outstanding UK growth businesses were the non-UK holdings that we had. You’re right that is now historic. Time will tell. All I know is that it’s good discipline to respond to price changes when the prices are falling and value is increased. So, that would be my answer.

Sam Benstead: And where have you recycled that money into?

Nick Train: The UK has four or five world-class data and software technology-advantage type companies. Again, people don’t know that. Or maybe they do, but they haven’t really acknowledged that.

I would say as examples of such global substantive data-technology advantage companies, a business like RELX (LSE:REL), London Stock Exchange Group (LSE:LSEG), Experian (LSE:EXPN), Sage Group (The) (LSE:SGE)...We’re very, very interested in the opportunities that Sage has currently, and it’s those types of businesses that we've reallocated the capital to.

Sam Benstead: Two of the new companies that you’ve put money into are Clarkson (LSE:CKN) and Intertek Group (LSE:ITRK). Can you explain the investment decision there?

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Nick Train: I will do at a kind of headline level. In part, I don’t mean to talk against myself, these are still two relatively small positions that we're looking to gradually build up. So, I don’t necessarily want to encourage your listeners to rush out and buy stock in this pair. But what I’d say at a high level about Clarkson and Intertek is that they are both world-class global franchises. They're both very, very internationally oriented businesses.

Over a meaningful period of time, let’s say 20 years, both Clarkson and Intertek have outperformed the Nasdaq, the US technology index, in sterling terms. And that’s kind of interesting, isn’t it, when you can find world-class UK companies that, over a meaningful period of time, have done better than the Nasdaq, at least that’s interesting. And obviously you hope that they will continue over time to do better than the Nasdaq.

Clarkson is the world’s, by some margin actually, number one ship-broking business. Intertek is one of the four global testing and assurance companies, and as a result is locked into some very strong secular growth trends in world industry today.

As I say, both of them have done really well as businesses and the share prices over a longer period of time. Last year, when we initiated, both of them were at a relatively low ebb in terms of their share price, and we thought that presented an opportunity.

Sam Benstead: Diageo is a company you have owned for a very long time. You once said it was the company that everybody should own, but shares are off about 40% from their highs and it’s still a 10% position in your fund. So, why do you still continue to back this drinks company?

Nick Train: Let’s just be absolutely clear, we have bought some more Diageo (LSE:DGE) this morning. And again, as I was saying earlier, when world-class businesses, as every business does, go through a tougher period when the share price falls - we didn’t expect it to fall as much as it has - then the disciplined thing to do is to buy more, assuming that the original investment case or thesis remains intact.

We do think that that investment case remains intact, and that the share price fall is therefore a significant opportunity. What was the phrase you used? You said something like, ‘What’s gone so wrong for the company’? I mean, let’s just be clear. The company’s just reported half-year results, which disappointed, and the share price has fallen subsequently. The group’s half annual revenues or sales were down 0.6%. Profits were actually up slightly. Maybe that’s disappointing relative to expectations of a couple of years ago. Actually, it is disappointing relative to expectations, but it’s not a kind of corporate catastrophe. It’s not that profits or the business has in any way imploded.

I think the most critical perspective that we have on Diageo is that we agree that global per capita consumption of alcohol is declining. Indeed, it has been declining for like 30 years or longer. People around the world, as they get richer, they drink less alcohol. But the offset to that is that although they’re drinking less, they drink more high-quality premium beverages. And if you are, by some margin, the world’s number one distiller of premium, high-quality beverages, you are in a strong position.

Diageo, just to repeat, is by some margin the world’s biggest spirits company, and it also owns Guinness. But Diageo represents less than 5% of global alcohol consumption. So, there’s 95% of that market for Diageo to go for, even if the overall market is shrinking a bit. If you have the best brands and the best distribution and the best marketing, you’ve still got a big opportunity to grow and to take share.

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Sam Benstead: One of the risks associated with the Diageo is that weight-loss drugs will reduce demand for alcohol. What’s your view on this?

Nick Train: To me, to us, it seems implausible that...it is a drug, you know, but a drug that has been so embedded into socialisation and human interaction for millennia after millennia. It seems unlikely that a drug with uncertain long-term side effects is going to displace it. And therefore, yeah, I would tend to see this as a buying opportunity for the business rather than an existential threat to it. The company can only say what they see, of course.

But I do think it’s worth noting that in the United States, which is the market where people are most focused on the weight-loss drugs, Diageo are reporting that Gen Z consumers - I know that is not quite the weight-loss story - are more likely to drink spirits than the millennials were in the previous cohort. So, this idea that people are drinking less beer, less wine, but drinking more tequila, that seems to be still a very strong trend. And that’s very beneficial for Diageo over time.

Sam Benstead: Consumer brands are about a third of the portfolio now. They used to be around half five years ago. So, has that been a conscious decision to take money out of consumer stocks, or is that more a result of lower share prices?

Nick Train: I think it is a great question. There has been a deliberate reduction of the exposure to consumer brands. One reason why it got to nearly half the portfolio was that they had done so well for so long. And sometimes it is difficult to respond to changes after you’ve been rewarded so well for a long-term commitment to an idea. And don’t misconstrue anything I say here, the outlook for premium luxury, strong heritage consumer brands worldwide is as good, if not better, today than at any point in history.

The prospects for Guinness or Johnnie Walker, or Burberry Group (LSE:BRBY), or Fevertree Drinks (LSE:FEVR)...the prospects are as good, if not better, than ever. So, it’s not turning my back on this idea. But I do think - I mentioned earlier these London-listed data and software businesses - that what’s become apparent, very apparent, during the 21st century, is that the cash returns that businesses of that type can earn on their capital is just structurally higher than the great growth industries of the 20th century. At the margin, maybe more than the margin now, we’ve looked to try and increase our exposure to these capital-light, data rich, digital-type businesses that have truly extraordinary business economics and still a significant growth opportunity.

Sam Benstead: You own, you said, four or five of those world-leading UK listed businesses, but you actually can invest internationally too. I know you’ve just taken that part of the portfolio down to zero, but would you look internationally for data businesses? Would you look to the United States?

Nick Train: The underperformance of the UK stock market has resulted in a generational opportunity to access UK growth businesses that are undervalued. And I think at this juncture, it merits our sole attention. I mean, obviously we do other things at Linsell Train Limited, but this in the end is a UK strategy we’re talking about here. This is such a big opportunity, not just in the companies we own, but in companies that we could potentially own, that I think that that’s where we can get the best leverage for our clients.

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Sam Benstead: Of the four or five big UK data and technology businesses you own, could you give the investment case for one of them and speak about how it is valued attractively relative to international shares?

Nick Train: I always think it’s ironic that despite the disappointing performance of the UK stock market - we’ve agreed on that - one of the outstanding investments within the UK stock market over the last 20 years or longer has been the London Stock Exchange group itself.

So, the owner of the London Stock Exchange has been a fantastic investment. Despite the fact that the market hasn’t done terribly well. By the way, the explanation for that conundrum is that the revenues that the company derives from running the London stock market is only 3% of total group revenues. So, I’m not saying that makes it irrelevant. It is a very relevant asset within this company, but it’s not the big driver of London Stock Exchange Group's success.

The London Stock Exchange Group’s shares are up over 30 times since they listed in 2001. By the way, that beats everything. That beats Nasdaq as well by a long, long way since 2001. The reason that LSEG, as we must call it, has done so well as an investment, and as a business, is because it’s acquired and built on data assets and technology-related services that it offers to global market participants. That is a secular growth opportunity.

And London Stock Exchange Group is a systemically important global participant in the provision of those services. There’s a long runway ahead of providing such data and technology services. I think what’s so compelling to us about LSEG currently is that opportunity that the company undoubtedly has was recognised two years ago was by Microsoft.

Microsoft Corp (NASDAQ:MSFT), as I’m sure our viewers know, is a joint venture partner with London Stock Exchange Group. Microsoft has a main board director on LSEG’s board and Microsoft is a top six shareholder in London Stock Exchange. So, it’s a really important joint venture. Microsoft has made that commitment to LSEG because it believes that, in combination, they can accelerate both companies’ growth in selling those services and data products to the world’s financial institutions. It’s a very potent combination.

What it’s likely to do, in our opinion, is lead to an acceleration in London Stock Exchange Group’s revenue growth, which in turn will lead to an even smarter growth in their earnings. And you can access that opportunity today to participate in a joint venture that, well, the Microsoft chief executive says could transform the way global financial services are delivered. You can access that opportunity at a notable discount to the valuations placed on comparable global businesses, in particular relative to the US-listed exchange groups or data groups.

I still think there is an element of - maybe I’m being unfair - people saying, ‘Oh, it’s called the London Stock Exchange Group. I don’t like the London stock market. It deserves to be trading at a discount’. And if there’s anything left of that prejudice against the company because of that asset that it owns and the name it has, that’s a big, big opportunity, because it’s not irrelevant, but it’s not the central aspect of the bull case.

Who knows, maybe the UK stock market is going to do a bit better over the next few years, and that’s another tailwind.

Sam Benstead: Nick, thanks very much for coming into our studio.

Nick Train: It’s been delightful. Thank you.

Sam Benstead: And that’s all we’ve got time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment and subscribe. See you next time.