Buy British for cheap ‘mega trend’ exposure, says Train

Nick Train says UK equities offer cheap exposure to enduring ‘mega trends’ in digital technology and consumer goods.

Unloved UK shares are offering cheap exposure to ‘mega trends’ and providing a volume of opportunities Nick Train says he has ‘barely’ seen before in four decades of investing.

Train, who runs the £6.1bn Lindsell Train UK Equity Income fund, has reassured investors about the direction of the portfolio after a rare period of pandemic underperformance that saw the fund lag its benchmark last year. Over 2021, the fund gained 13%, falling behind the 18% return from the FTSE All-Share, while Train lost his long-held Citywire performance rating.

‘Of course, in early 2022 what matters now is – what’s next?’ he wrote in his latest fund factsheet.

UK equities have long been disregarded by investors, but Train maintains they are an inexpensive way to cash in on what he described as ‘mega trends’ in global markets that ‘will continue into 2022 and beyond’.

‘Of course, there will be corrections to these trends, but no fundamental change of direction,’ said Train, who also runs the £2bn Finsbury Growth & Income (FGT ) investment trust.

‘This means investors should expect to see digital technology creating ever more new wealth around the world, and at an accelerating rate; but in addition to see older industries and business models losing relevance, at an accelerating pace too.’

He added that consumer demand for luxury and aspirational products and experiences will also ‘intensify’.

These global megatrends mean Train ‘can barely remember a time in [his] 40-year career where there have been so many opportunities’ and that is especially the case in the ‘deeply unloved’ UK market.

‘The UK equity market can give exposure to those global megatrends and can do so from valuations that are demonstrably lower than for global peers,’ he said.

‘Note, we are not saying that the whole of the UK equity market is necessarily undervalued – though it may be. Instead, that it is possible to invest in UK companies with credible, long-term growth opportunities, and that the valuations of such companies may have been penalised in recent years by global asset allocators’ disenchantment with all sterling equity assets.’

Train added that through 2021 investors began to ‘acknowledge the calibre of some of the UK’s best secular growth companies’, such as drinks company Diageo (DGE) and information and analytics group Relx (RELX), which his funds hold.

Diageo shares rallied 43% over the year, while shares in Relx were up 37%, as the former meets the call for luxury goods and the latter rides the digital technology trend.

The manager also highlighted private wealth manager Rathbones (RAT), whose shares rose 34% last year. Train said the positive backdrop for UK equities will naturally mean ‘it is also attractive to invest in UK wealth management franchises, that can help UK savers take advantage of the wealth being created around the world’, including in the British market.

That hasn’t been quite the case recently for his holdings in Hargreaves Lansdown (HL) and Schroders (SCR), which were down 8% and 10%, respectively, last year.

‘This was disappointing, given the strategic progress and business growth both…were able to report in 2021,’ he said.

‘New customer acquisition at Hargreaves Lansdown remained strong and Schroders was able to announce several strategically consistent and earnings-accretive acquisitions towards the end of the year.’

Train also lost long-time holding Daily Mail and General Trust from the portfolio, after it was taken private at the end of the year. In return, the notoriously reluctant-to-trade manager received an estimated £250m of cash to splash across his funds as well as shares in online car dealership Cazoo, setting up a decision whether to sell the loss-making tech stock when a lock-up period expires.

Train’s upbeat tone was echoed by Michael Lindsell, despite the Lindsell Train co-founder updating investors in the firm’s Global Equity fund on a ‘harrowing’ year. The £7.8bn flagship fund racked up its worst-ever year of relative performance as the fund lagged global markets by more than 20%.

Lindsell said he was considering 2022 with ‘optimism rather than dread’, adding that ‘rarely have the relative values of the companies we own looked so alluring’.

The fund suffered disappointments, such as World Wrestling Entertainment and Juventus football club, but he said there were ‘some bright spots’ in the form of Pepsi and confectionery company Mondelez, both of which grew their market share and enjoyed share price gains.

‘These shafts of light give us encouragement that the contribution to performance in the market might broaden away from its overwhelming focus on technology and cyclicals to the benefit of some of our holdings, thus helping deliver improved absolute and relative performance to our fund investors,’ said Lindsell.

The Lindsell Train UK Equity fund has returned 61.1% over five years, double the 30.2% from the FTSE All-Share. The Global Equity fund is up 87.9% over the same time versus 83.7% for its MSCI World benchmark.

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