Nick Train: stick or twist with the struggling star manager?

Just one fund in the UK All Companies sector, out of 232, has performed worse than Nick Train’s Lindsell Train UK Equity fund over the past 12 months.  

Over the past 12 months, the £3.5 billion fund is up just 1.2%, including dividend reinvestment, compared with a nearly 13% gain for the FTSE All-Share and the typical UK All Companies fund.   

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Over five years, Train’s strategy has also lagged the pack. It is still in the bottom quartile of performers, returning 12.5% compared with 29.6% for the typical manager.  

Short-term performance is poor, but looking back to 2006, when Train launched the fund, shows that the long-term faithful have been rewarded, banking gains of 417% compared with 187% for the FTSE All-Share and 167% for the sector average, according to data from FE Analytics.  

Train also manages the £1.5 billion Finsbury Growth & Income investment trust in a similar way to the open-ended fund, and so it is also struggling and is languishing on a 9% discount.  

So, should investors stick with the star manager?  

The case for Nick Train 

Nick Train’s concentrated portfolio of just 21 holdings in Lindsell Train UK Equity means that performance is bound to be volatile – so when his investment style is in favour, it performs very well. But when it is out of favour, such as during periods of rising interest rates, then returns are destined to be worse than peers.  

This suggests that periods of poor returns could be followed by periods of strong returns and investors could be rewarded for holding on through a difficult period.  

Numis, the investment analyst, says that because Train deploys very different sector weights to his index, with a heavy emphasis on branded consumer goods, data analytics and software, performance is likely to deviate significantly from the benchmark.  

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Not owning “cyclical” shares such as mining and oil stocks helps explain part of his recent run of poor returns. 

Numis calculates that in the three years to September 2023, not holding five of the larger constituents in the index (Shell (LSE:SHEL), BP (LSE:BP.), Glencore (LSE:GLEN), Rio Tinto (LSE:RIO), HSBC (LSE:HSBA)) accounted for roughly two-thirds of the underperformance over the last three years in Finsbury Growth & Income. 

However, the analyst still rates the manager highly and believes that long-term returns could still be strong, so long as investors accept that there will be periods of notable underperformance. 

Train’s investment approach of staying invested for the long term has its up and downsides.  

If he’s right about a company, then long-term returns will be strong, but if he is wrong then the portfolio will suffer.  

He has invested in just three new companies in his UK funds since 2020: Experian, Fever-Tree and Rightmove and remains a dedicated follower of some well-known UK companies such as Diageo, RELX, London Stock Exchange Group, Unilever and Burberry.  

However, a handful of these are struggling. Unilever shares are down 11.5% over five years, and the Burberry share price is off 41.5% over the same period, including a 25% drop so far this year.  

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His long-term winners are very impressive, however, and he argues that they have years and even decades of sustainable growth ahead of them.  

Train says some companies have the potential to double or treble profits over the next decade or more. He names, in the large-cap space, RELX and Sage, and among smaller companies, Fever-Tree, and Rightmove. 

Lindsell Train UK Equity is a member of interactive investor’s Super 60 list of recommended funds. Dzmitry Lipski, head of funds research at ii, says that owing to the fund’s high-conviction approach, the portfolio will not outperform in all market conditions.  

Lipski adds: “As such, the fund greatly benefited from growth-led market performance until 2022 and had a tough time since then. Nevertheless, the long-term performance results are strong.” 

The case against Nick Train 

For some investors, owning such a small number of shares may just be too risky and volatile, especially if Train’s UK funds are viewed as a core portfolio building block.  

That’s before considering that Train may have lost his touch when it comes to picking winning shares.  

For example, the winning run for consumer-facing names could be stalling or ending, as Diageo, Unilever and Burberry shares are all struggling as growth slows or even goes into reverse. Meanwhile, finance groups such as Schroders (LSE:SDR) and Rathbones Group (LSE:RAT) are under pressure due to the rise of passive investing.  

Train, owing to his long-term investment style, is holding on to these shares even as performance wanes. In contrast, rival investor Terry Smith is quick to drop companies facing issues.  

But even Train’s technology-related shares have not performed as well as Train might have liked. In fact, he admits that at the beginning of 2020 the portfolio did not have enough exposure to companies “with products and services likely to become more relevant and valuable to their customers as we proceed deeper in the 21st century”. 

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In a recent note to investors, Train adds: “To put no finer point on it, the portfolio in 2020 did not have enough exposure to technology or companies well-positioned to exploit technology. It had some, but evidently not enough.” 

In Finsbury Growth & Income, Train calculates that in early 2020 roughly 30% of the portfolio was invested in “first-class data or technology assets” but now that figure is 55%. 

Nevertheless, investors after technology shares have been better served in global and particularly US stock markets, where giants such as Nvidia, Microsoft, Apple and Alphabet are leaders in artificial intelligence (AI) and internet-related services.  

Lipski says that investors could look to own Lindsell Train UK Equity alongside funds that deploy a different investment style, such as a value investment approach. 

He says: “Given the quality-growth bias in the portfolio, the fund can be diversified by blending it with other funds that carry different characteristics, styles or market cap, such as the value-oriented Fidelity Special Values Trust.  

“High concentration and a long-term investment horizon also mean that investors should be prepared for short-term volatility and underperformance.”