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Nick Train tackles Hargreaves relationship amid Woodford fallout

8 July 2019

Nick Train says he understands questions over his fund group's relationship with Hargreaves Lansdown amid the fallout from the suspension of Woodford Equity Income.

Star fund manager Nick Train has tackled questions over his Lindsell Train fund group's relationship with Hargreaves Lansdown (HRGV) as the broker faces scrutiny over its Wealth 50 buy list following the suspension of Woodford Equity Income .

In an update to investors in his funds published at the weekend but written before Hargreaves dropped them from its buy list, Citywire AAA-rated Train said he was alert to the potential for conflict of interest.

Lindsell Train has built a 12% position in Hargreaves Lansdown shares and the broker has encouraged its clients to pour millions into the £7.1 billion Lindsell Train UK Equity and £8 billion Lindsell Train Global Equity funds, which it has featured in the Wealth 50 for more than five years.

Hargreaves Lansdown announced last week the funds would be dropped from the Wealth 50 at the end of the month due to their growing stakes in its shares. Shares in the Lindsell Train (LTI) investment trust, which holds a big stake in Train's fund management business, slumped 22% on Friday on fears the move would damage its value.

The broker is facing increasing scrutiny of its fund recommendations following the suspension of the Woodford Equity Income fund, into which it channelled billions of pounds of customers' money.

Train 'can understand' questions

'Of course we do consider on an ongoing basis the possibility that the investment decision to invest in Hargreaves Lansdown, that Mike [Lindsell] and I first took as long ago as 2007 could lead to such a conflict,' said Train.

'We do not believe there is a conflict, because we cannot conceive how our investment in Hargreaves Lansdown shares could influence that company's investment experts to recommend purchasing or selling our funds to its customers,' he added.

'But in the current environment we can understand why questions might be asked.'

Hargreaves' decision to drop the funds, two of the best performers in its Wealth 50, followed Lindsell Train's stake in the broker rising above the 12% threshold last week as Train pounced on the fall in the shares in the fallout from the suspension of Neil Woodford's flagship fund.

'We were not surprised by the fall and agree that Hargreaves Lansdown's reputation has taken a blow,' said Train.

'We also agree it is appropriate that the media, regulators and politicians should review Hargreaves Lansdown's role in the affair, if for no other reason to help us all understand and address areas where where we can better manage risks and serve the needs of investors.'

The manager pointed to the recovery of Hargreaves' shares from the lows reached in the immediate aftermath of Woodford Equity Income's suspension, arguing this pointed to 'investors coming to the conclusion that Hargreaves Lansdown's reputation can recover - over time'. 

'We agree and accordingly have added to our holding over the last few weeks.'

Hargreaves Lansdown accounted for a 7.5% position in the Lindsell Train UK Equity fund at the end of June and 8.6% of the £1.8 billion Finsbury Growth & Income (FGT) investment trust at the end of May. The Global Equity fund, run by Train with fellow AAA-rated managers Michael Lindsell and James Bullock, has a smaller position, amounting to 2.7% of the portfolio at the end of last year. 

Woodford affair hurts us all

Train said the suspension of Woodford Equity Income was 'damaging to the whole active management industry, including us'. He said it was likely to lead to some investors shunning actively-managed funds in favour of passive 'tracker' funds and savers becoming 'even warier about investing their savings in any kind of equity vehicle'.

'This is a shame for the UK economy and society in general,' he said.

Train said his 'greatest concern' from Woodford's downfall was 'the shocking sight of a run on a UK open-ended fund'. 

'It demonstrates the bad things that can happen when investment managers take risk with portfolio concentration and illiquidity,' he said.

'And the truth is - as we seek to communicate with all our investors - that there is risk inherent in the concentrated nature of our portfolio and to an extent with liquidity too.'

Train said that were he forced to liquidiate a large portion of the portfolio quickly to meet redemptions, the large size of the companies he invests in meant he would be 'confident we could do so' but cautioned 'we would have to take discounts on some of our holdings'.

'Actually what really concerns us is that the episode has arisen at a time when Lindsell Train's long- and short-term performance and inflows into our funds have been so strong,' he added.

'Elevated expectations for future returns and a growing predominance of new fund holders set up the circumstances for possible disappointment.'

That echoed the manager's warning last month, when he cautioned that 'it would not at all be a surprise' if his funds 'embarked on a period of poor performance' given the high conviction stakes he takes in the companies he backs.

'We intend to remain as frank and transparent possible about the risks intrinsic to our funds', he said, but added that 'we should not alter our investment style or process in response to the recent events or the scale of our business'.

'We do not believe the size of our funds is close to compromising the potential to generate good returns into the future,' he said.

Lindsell Train has announced a cut to its fees on the UK and Global Equity funds as a result of their larger size and 'as a signifier that we are open for business'.

Last Monday, the annual charge on the platform share class of the funds fell from 0.65% to 0.6%. On Hargreaves Lansdown, the UK and Global funds cost 0.51% and 0.50% respectively due to the discount the broker has secured.

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


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