The share price plunge of Lindsell Train on Friday almost halved the investment trust’s premium over net asset value with the shares recouping nearly 8% this morning as buyers moved in.
The share price plunge of Lindsell Train (LTI) on Friday has halved the investment trust’s premium over net asset value (NAV) with the shares bouncing nearly 8% higher this morning as some buyers move in.
From a standing point of 80% above NAV at Thursday’s close Lindsell Train shares plummeted 22% to end the week on a much-reduced 43% premium over the underlying value of the £213 million portfolio.
The sudden decline on Friday was in response to Hargreaves Lansdown removing two of Lindsell Train’s best-selling open-ended funds from its Wealth 50 recommendations list due to their big stakes in the broker’s shares, which raised a potential conflict of interest.
Its move provoked fears that investors could stop putting money in - or even withdraw holdings - from the firm’s top-performing UK and Global Equity funds, which could undermine the valuation of Lindsell Train Limited, the fund management group of star Citywire AAA-rated fund managers Nick Train and Michael Lindsell, in which Lindsell Train investment trust holds a lucrative 24% stake.
Shares in the investment trust had rallied strongly in this year’s markets rebound and the sudden £437.50 drop on Friday left them at a three-month low of £1,515.
Although the shares still look very expensive compared to their underlying NAV some investors believed this was a buying opportunity and the trust recovered 7.8% or £118 to £1,633 this morning.
Compared to recent trading history, the trust does look over sold. Numis Securities data shows Lindsell Train had the ‘cheapest’ 13-week Z-score of -4.7 on Friday’s close.
Z-scores are a measure used by analysts to determine if an asset is trading significantly beyond its normal trading range. A rule of thumb is that a score of 2 or more is ‘expensive’ and a potential opportunity to take profits, while a score of -2 or below is ‘cheap’ and could provide a buying opportunity.
Our weekly Trust Watch on Fridays uses 12-month Z-scores which provide more meaningful trends than the shorter-term 13-week data.
Whether today’s rise in Lindsell Train trust is a dead cat bounce or the start of a sustained recovery will depend on how investors in the Lindsell Train funds respond to their removal from the Wealth 50. Although Hargreaves’ list has proved hugely influential on investors’ buying decisions in the past, its credibility has been damaged by retaining Neil Woodford’s poorly performing Equity Income fund until after it was suspended to trading.
Lindsell Train has consistently traded at a big premium. In May the shares stood at a record 105% above their underlying asset value. This apparent chronic over valuation has three factors: Train’s strong track investment record, speculation that the fund management business, which now accounts for nearly half of the trust’s assets, is undervalued in its accounts, and the company’s refusal to issue new shares, which would take the heat out of the share price.
The lack of new share issuance reflects a promise by Train and Lindsell when the trust was launched 18 years ago to never dilute its holding in their fund management business. As a result of their success, Lindsell Train Limited has grown to be by far the biggest investment in the portfolio, hence the negative share price reaction on Friday when its prospects were suddenly in question.