Lindsell Train has defended its approach to risk management in response to a note from Hargreaves Lansdown which criticised the level of oversight at the business.

A spokesperson for the firm, founded and led by portfolio managers Nick Train and Michael Lindsell, told Citywire that risk is ‘best mitigated by investing in high-quality companies’.

Another layer of interest in the exchange is that Lindsell Train is actually Hargreaves’ second-biggest shareholder, with about a 12% stake in the company second only to the platform’s founder Peter Hargreaves. 

Lindsell Train’s statement also noted that the firm has an independent risk and compliance committee, which is chaired by Julian Bartlett, a non-executive director who has ‘considerable experience in this area’.

Bartlett, who joined the board in 2020, has also chaired the audit and risk committee of Invesco Pensions Limited since 2018. He previously worked as a financial services audit partner at Grant Thornton from 2007 to 2017.

The firm has also recently hired an executive focused on risk monitoring, Richard Lambert, and will ‘continue to commit resources to this important part of our business’.

Risk controls not ‘sufficiently robust’

The response follows a note by Hargreaves Lansdown head of investment analysis Emma Wall, published last Thursday, in which she warned Lindsell Train’s risk framework was not ‘sufficiently robust’.

‘Our analysis highlighted some concerns around the capabilities and resources that the Lindsell Train business has in place to provide effective challenge to investment teams,’ Wall said.

‘We believe specific capabilities and resources are required to deliver effective oversight in line with industry good practice.’

Asked by Citywire what resources and capabilities Hargreaves views the business as lacking, Wall declined to comment further.

The note followed a ‘period of engagement’ between the platform and Lindsell Train, with Hargreaves ultimately finding the progress made by the fund team to be unsatisfactory.

Wall said: ‘At present, we don’t feel that the investment risk framework currently in place is sufficiently robust, nor that Lindsell Train have the correct capabilities to provide strong independent oversight and challenge of the investment team.’

She emphasised her analysis was not a judgement on Lindsell Train’s investment capabilities, nor a recommendation to investors to make changes to their portfolios.

Wall acknowledged the investment approach pursued by portfolio managers Train, Lindsell and James Bullock had ‘served investors very well over the long term’.

The Lindsell Train Global Equity , UK Equity and Japanese Equity funds all rank highly in their respective Citywire sectors over 10 years in terms of total return, with the global and UK strategies placing 6/223 and 12/214 respectively. 

In recent years the funds’ performance has suffered significantly, however, amid the broader rotation to value away from the quality growth stocks the team has favoured.

Similarly, Finsbury Growth & Income (FGT ), the UK equity income trust that Train has run since 2000, leads its sector over 10 years with a total shareholder return of 131%, though it ranks below the group average and the FTSE All-Share with an 18.4 return over three years.

Lindsell Train’s statement

The statement from Lindsell Train issued in response to Wall’s criticism emphasised the team’s investment approach as fundamentally mitigating the potential downside faced by investors.

‘Lindsell Train has a clearly defined and disciplined investment approach, managing concentrated portfolios invested in what we believe to be high-quality companies and franchises,’ the firm’s spokesperson said.

‘Protecting and growing the real value of our clients’ capital is the objective of our investment process.

‘When considering investment risk, our primary aim is to avoid losing permanent capital value for our investors and we believe that risk can best be mitigated by investing in high-quality companies. In addition, we monitor and control other aspects of risk including portfolio concentration and liquidity.’

The statement noted the team’s Global, UK, Japanese and North American Equity funds invest only in listed companies, with no exposure to unlisted securities.

Lindsell Train’s Global Equity and UK Equity funds were formerly on Hargreaves Lansdown’s Wealth 50 buy list, the predecessor of its current Wealth Shortlist.

Both were removed from the buy list over concerns of a potential conflict of interest as Lindsell Train’s funds owned – and continued to own – large stakes in Hargreaves.

Positions in the investment platform accounted for 3.5% of the UK Equity fund and 2.6% of the Global Equity fund, as of the end of March and April respectively, according to the latest Morningstar data.

Lindsell Train owns 12% of Hargreaves Lansdown’s shares, according to Refinitiv data. Co-founder Peter Hargreaves has a nearly 20% stake. 

Hargreaves Lansdown customers also make up a significant proportion of investors in some Lindsell Train funds. Investments made through the platform accounted for 23.1% of the assets of the Lindsell Train UK Equity fund last May, a chunk so large that it was disclosed under ‘related party transactions’ in the fund’s last annual report.