Lindsell Train group’s 41% gain not enough to keep trust on track

Nick Train's asset management group has seen bumper inflows this year but it wasn't enough to avoid underperformance at Lindsell Train trust, which has a 24% stake in the business.

The pandemic took its toll on Lindsell Train (LTI ) investment trust despite its largest holding manager Nick Train’s fund management business Lindsell Train Limited (LTL) seeing a bumper rise in assets.

The £294m trust run by Train underperformed the MSCI World index – which recently became its formal benchmark – ‘for the first time in a number of years’ as the manager’s strategy of buying compounding growth stocks and holding for the long-term faltered during the coronavirus outbreak.

In the year to end of March, the net asset value (NAV) total return was 29%, including dividend payments of £50 per share, up 12% from the previous year, falling short of the 38.4% sterling return from the benchmark.

LTI’s largest holding, making up 48.2% of NAV, is the unquoted fund management group which Train founded with business partner Michael Lindsell and which also manages the trust. The stake in LTL contributed a total return performance of 40.8%, making it the biggest contributor to the trust’s NAV as the other half of the portfolio made up of equities lagged. 

The trust owns just over 24% of the shares in LTL, which saw its funds under management (FUM) soar 26% over the 12 months from £18.2bn to £22.9bn. The asset management group saw £1.1bn of inflows over the year, with the majority due to growing support for the US-domiciled Lindsell Train Global Equity fund that took in £940m of new assets.

Shares in LTL had slumped 13% in last March’s coronavirus crash to £13,783 per share, but during the recovery jumped 28.4% over the year to £17,711 at the end of March 2021. 

Adding to total return, the business also paid a £1,817 per share total dividend to shareholders including Train and Linsdell, a yield of more than 10%. 

The gains for LTL represent a continuing recovery in Train’s personal wealth, which was estimated by Citywire to stand at at least £264m at the end of 2019, including his stakes in the business and funds.

Chair of the trust Julian Cazalet said the ‘relative performance of LTL’s investment strategies has suffered’ and there is no way to know how long the underperformance will last or what affect it will have on LTL’s business.

‘We must therefore be prepared for LTL to face more of a challenge to raise new assets and to be vulnerable to redemptions as investors are lured to other approaches. This could lead to a fall in LTL’s FUM and if so a corresponding fall in its valuation,’ said Cazalet.

Cazalet said profit margins at LTL should be protected by a salary and bonus cap that is in place. However, the trust still paid a performance fee of £2.6m to LTL, which is majority owned by Train, Lindsell, and their spouses. 

The performance fee rewards not only this year’s NAV performance but last year’s when the NAV total return was 9.8% – the two years combined generated a return of 39.9%, which beat the index rise of 30.4%. Train and Lindsell agreed to defer the payment of the fee last year as the share price was tumbling and the pair eventually waived half of the total, which should have been £5.3m.

From April this year, the performance fee will be calculated as 10% of the value of any positive relative performance versus the new MSCI World index benchmark. Cazalet said the change ‘incentivises LTL to achieve both parts of the company’s objective to preserve value and to maximise long-term returns’.

Train said he was ‘disappointed’ with the performance of LTI, which invests across three strategic ideas. These are companies that use technology to inform or entertain, such as PayPal and Nintendo; beloved and trusted consumer brands like drinks group Diageo (DGE) and consumer giant Unilever (ULVR); and wealth management businesses which offer ‘an attractive proxy participation in wealth creation around the world’, as represented by the stake in LTL.

He said ‘very recently…the strategy has not been so successful’, with all of LTL’s portfolios lagging their respective markets over the past nine months.

The underperformance was due to a lack of exposure to the technology bull market and Train’s avoidance of cyclical sectors, which staged a vaccine-led recovery.

‘What will we do in response? The answer is not much,’ said Train (pictured), who added he remains ‘optimistic’ about his themes and companies.

‘Submitting client portfolios to surgery incurs transaction costs which need to be justified; and certainly reinvesting in the areas of global stock markets that are currently booming would not only be costly but could also expose our clients to the risk of joining a party late.’

Train is instead relying on an easing of lockdown restrictions around the world to boost portfolio companies like Irn-Bru maker AG Barr (BAG), Heineken, and Unilever.

‘Diageo is one of the biggest holdings we have across LTL, with c£1.9bn invested and its shares have rallied over 30% from the lows of last year, as consumption of premium spirits picks up pace around the world,’ he said.

‘We hope there is more to come for Diageo and peers.’

In the decade to 23 June, LTI’s shareholders have enjoyed a 646% total return while there has been a 626% return on the NAV, versus the 225% rise for the MSCI World index. 

Investment company news brought to you by Citywire Financial Publishers Limited.