Investment trusts can keep the faith

It’s an important reminder of the capricious nature of the stock market. En masse, investors can – and frequently do – drive businesses to valuations that really aren’t justifiable on any sensible analysis of the numbers. Equally, they can leave good companies languishing in the doldrums; when a business is out-of-fashion, even the strongest of fundamentals don’t seem to shift its share price.

Train clearly believes Lindsell Train holds a lot of the latter. And while he’s sensible enough not to stubbornly refuse to make changes to the investment trust’s portfolio, he also rejects the idea of ripping it up and starting over.

For their part, investors have a decision to make. Do they focus on Train’s long-term record and trust his view that those unfavoured portfolio businesses will come good over time, as the market recognises their strengths? Or do they cut their losses and move their money to a fund they think will do a better job of delivering the returns they’re looking for?

Every investor will need to make their own decision. But it is worth saying that even the very best managers are vulnerable to the vagaries of the market. The thing that gives them their edge – a clear and consistent strategy for building long-term portfolios – is also their Achilles heel. When that strategy or style is out of favour, returns will inevitably suffer.

Baillie Gifford provides one very stark example of this in recent years. It’s growth-focused strategies – based on identifying businesses with huge long-term potential even if they are not yet producing the goods – generated stellar returns until about 2022, with flagship funds such as Scottish Mortgage soaring in value. 

Between 2022 and 2024, however, shifting macro factors such as rising interest rates prompted markets to move out of growth stocks and into value strategies. But while that shift hit many Baillie Gifford funds, there has been a strong rebound over the past two years, as market sentiment has shifted again, particularly in the context of the artificial intelligence boom. Scottish Mortgage Investment Trust, for one, has just broken through its all-time share price high.

There are countless similar examples of the rise and fall – and rise again – of star managers over time. From Anthony Bolton to Warren Buffett, even the most feted investment professionals have endured testing times. That doesn’t mean they suddenly lost the plot.

One additional point to make here is that this debate is an important reminder of the usefulness of the investment trust structure. Investment trusts are closed-ended funds to which investors buy or sell exposure on the stock market, rather than investing direct. This is important because it means the manager doesn’t have to worry about flows of money into and out of the fund. These are distracting at the best of times, but when performance soars or plunges, dealing with mass investor arrivals or departures can be really challenging.

All collective investment funds are long-term vehicles. But investment trusts are particularly well-suited to the nature of such a pursuit. They give managers much more freedom to run the portfolio as they see fit, whatever is happening with fickle market sentiment.

Will Nick Train’s numbers look better in a year’s time? It’s impossible to be sure, but Lindsell Train offers him the best possible vehicle for sticking with the approach that has worked for him in the past. Indeed, one reason why investment trusts tend to outperform similar open-ended funds over long-term periods is that managers benefit from this structural advantage.