Two reasons why Lindsell Train Investment Trust is underperforming

Nick Train and Michael Lindsell are sticking doggedly to their investment strategy.

Nick Train has conceded that the performance of the funds and investment trusts he manages are experiencing “arguably the worst period of relative investment performance in our 20-year history”.

Train, who is lead manager of LF Lindsell Train UK Equity, Lindsell Train Global Equity and Finsbury Growth & Income (LSE:FGT), made the comment in Lindsell Train Investment Trust’s half-yearly results, which were published this morning. Train is co-manager of Lindsell Train Investment Trust (LSE:LTI), alongside Michael Lindsell.

For the six-month period, covering 1 April 2021 to 30 September 2021, the investment trust’s share price rose 5.6% and its net asset value return stood at 5.9%. Both were below its benchmark, with the MSCI World Index delivering 10.2%.

Lindsell Train Investment Trust invests globally and, in common with other funds and trusts managed by the fund house, is a concentrated portfolio of high-quality growth companies, which the managers believe have sustainable business models, such as by having brand resonance. Consumer companies are particular favoured, dominating the top 10 holdings.

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One key difference compared to the other funds and trusts in Lindsell Train’s stable is that Lindsell Train Investment Trust holds a big stake in Lindsell Train Limited. As of the end of October, the trust held 47.9% in the fund management company.

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Julian Cazalet, chair of Lindsell Train Investment Trust, said there are two factors behind the recent spell of underperformance, which he put down to “not enough exposure to software/platform technology; and no exposure to capital-intensive manufacturing, whether that be hardware technology, materials, energy or infrastructure”.

Cazalet added: “We would not expect Lindsell Train Investment Trust to invest in the latter as it would be contrary to its stated investment approach, but we might expect to see more investments in the former if opportunities for establishing an investment at a favourable entry point present themselves.”

In addition, there have been a number of shares that have disappointed of late. Cazalet noted that London Stock Exchange Group (LSE:LSEG), Unilever (LSE:ULVR), Heineken (EURONEXT:HEIO), A.G. Barr (LSE:BAG) and Nintendo have all fallen in value by 20% or more from recent peak prices. Cazalet said the management duo of Lindsell and Train “believes the reasons for this weak performance to be short term, related either to disruptions caused by the pandemic, or for more company-specific reasons. Either way the concerns should unwind over time.”

Lindsell and Train, as to be expected, are sticking doggedly to their investment strategy, with no changes to the portfolio and minimal trading. In today’s half-year report, Train pointed out: “Lindsell Train has persevered fishing in the ponds that history has shown throw up long-term winners and why we have avoided chopping and changing and trading the constituents of our portfolios. There are talented traders out there, but there are more who overestimate their trading chops and end up frittering away precious savings on transaction costs.”

Train concluded his update to shareholders by acknowledging that short-term performance is proving challenging.

“We will not make flippant or complacent predictions about prospects for Lindsell Train Limited, as we experience arguably the worst period of relative investment performance in our 20-year history. 

“We assure you, we remain disciplined and serious in our efforts to invest in assets with the potential of protecting or enhancing the real, after-tax purchasing power of your savings.”

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Despite short-term performance troubles, Lindsell Train Investment Trust is trading on a premium of 13.3%. This, however, is lower than it has been, as over the past year the trust has typically traded on a premium of 24%.

The trust persistently commands a high premium, mainly due to its holding in Lindsell Train Limited. The school of thought among some investors is that it is worth paying a substantial premium for Lindsell Train Limited on the assumption that the unquoted fund management business’ valuation has been undervalued by the investment trust.

In August, Michael Lindsell cautioned against this viewpoint. He said: “Some investors believe the value of the premium is attributable to the undervaluation of Lindsell Train Limited. We caution this opinion and think the trust’s board of directors do a good job at valuing the shares given the information at their disposal and their deep knowledge of the company as a longstanding significant minority investor.”

In today’s results, it was announced that the trust’s valuation of the fund management company was unchanged from six months ago.