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Nick Train: I’m following the golden example of McDonald’s

28 November 2018

Lindsell Train fund manager Nick Train turns to staggering long-term performance of McDonald’s to justify why once again he has not made changes to his high-performing, £235 million portfolio.

Lindsell Train (LTI) fund manager Nick Train has turned to the staggering long-term performance of McDonald’s (MCD.N) to justify why once again he has not made any changes to his high-performing, £235 million portfolio.

Commenting on half-year results published last week that showed a 15.6% increase in net asset value in the six months to 30 September, the star fund manager referred to a quotation an investor had sent him by one of his heroes, Peter Lynch, former manager of the Fidelity Magellan fund.

Lynch, who made Magellan the best-performng mutual fund in the world with an average annual 29.2% return between 1977 and 1990, used McDonald's to illustrate why investors should not simply sell stocks on apparently high valuations, a subject close to the heart of the famously low-turnover Train.

Speaking about the burger bar chain's share price performance some time after its intial public offer (IPO) in 1965, Lynch said: ‘McDonald's was up 10-fold after IPO but it was only in 18% of countries. Then it gets to 30% and the stock is up 30-fold.

‘You have to know what innings you're in. There were more post offices in California than there were McDonald's restaurants.

‘People missed the overseas potential too... Are you in the third innings of a ball game that might last 20 years?’

Train used the example to explain his buy-and-hold philosophy and justify his trust’s long-standing holdings in alcoholic drinks company Diageo (DGE), PayPal (PYPL.O) and academic publisher RELX (REN). These represent 6.8%, 4% and 3.1% positions, respectively, in Lindsell Train investment trust.  

According to Bloomberg data, McDonald’s share price shot up from $1.10 in 1980 to $177.33 (when Train wrote his commentary although it is currently $186.49). The manager said the stock's current 2.5% dividend yield suggested a decent income return had been had on top of the magnificent 161-fold capital gain in the share price – ‘a cherry to the icing on the Big Mac bun’, said Train.

Train said Lynch knew the difficulty of maintaining long-term conviction in holding so-called ‘baggers’ – shares that multiply many times over their initial share price.

‘In addition, the truth is it was only obvious in hindsight that McDonald's was going to become a 100-bagger and more,’ said Train. ‘Every single trading day for 38 years someone could have offered a plausible reason to sell and probably did. What's more there was also plenty of extraneous market noise and volatility to unnerve you and shake you out of the stock.’

By 1990 McDonald’s shares stood at $8 and traded at a price-earnings (PE) ratio of 18 times historic earnings of $0.48 per share. Any doubts on its valuation at that time would have been ‘more or less irrelevant’, said Train, given its value grew by 22 times between 1990 and 2018, three times more than the S&P 500 which rose 7.5 times in that period.

‘And any quibbling about the valuation that actually encouraged a sale of the stock was downright ruinous,’ Train remarked.

Sceptics might seem more certain and convincing in their arguments for not investing in apparently highly-valued companies but Train said ‘exactitude is dangerous in investment’.

In the case of Diageo, PayPal and RELX, Train said he was not certain on the ‘correct’ ratings for these companies but thought that each had ‘an unquantifiable but material growth opportunity ahead of it that justifies us hanging on to their shares and not paying too much mind to the valuations, within reason’.

Train said he intended to stick to this mantra in the hope of delivering his own ‘baggers’ in the Lindsell Train trust, which had risen 12-fold in value since its launch in 2001, rather than selling out of companies on ‘arbitrary’ reasons.

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