A 27% slump in funds under management in just over two years at Lindsell Train Limited has knocked another hole in the investment trust that backs the asset management business of Nick Train and Michael Lindsell and may cause changes in the way the firm is run.

Half-year results from the Lindsell Train (LTI ) investment trust, which owns 24.1% of Lindsell Train Limited (LTL), a stake that accounts for 38.6% of its assets, show its portfolio fell 8.3% in the six months to 30 September. This was largely a consequence of an 11.9% decline in the valuation of LTL, caused by a further decline in funds under management from £18.6bn to £16.4bn.

Julian Cazalet, the trust’s chair who is stepping down after eight years, said the underperformance of Train and Lindsell’s flagship Global Equity and UK Equity funds over three years because of their quality growth style being out of favour, had contributed to a £5.7bn decline in assets under management from £21.1bn in July 2021 to £16.4bn in September.

That had slashed the valuation of the unquoted fund management business by 38% with its share price plunging from £18,730 to £11,645 in the 27-month period, he said.

With revenues sliding amid ‘a gruelling environment for the fund management industry’, the chair warned that if LTL’s funds under management continued to fall it may be necessary to raise the firm’s long-standing salary and bonus cap, which limits pay to 26% of annual turnover.

He said this might be necessary to fund the new profit share scheme introduced earlier this year for the next generation of fund managers, such as James Bullock and Madeline Wright, who are positioned to succeed the founders when they retire.

The pay cap, along with an 80% dividend payout ratio, was designed to protect LTI shareholders since its launch in 2000. Raising it would require the support of 90% of LTL shareholders, which include chairman Train (below left), chief executive Lindsell (below right), the LTI trust and other directors and employees.

The accounts show the 6%-yielding investment trust’s dividend is under pressure with the payout from LTL dropping 21%, leaving the board to draw on revenue reserves to maintain its half-year payout to shareholders.

The payment of the £51.50 dividend reduced the total underlying investment loss to 3.6%, although shareholders saw their stakes fall 11% as the shares slid to an 8.5% discount to net asset value, a far cry from 2019 when they traded at more than twice NAV. The discount has subsequently widened to 11%, leaving shareholders down nearly 27% over three years. Longer term it has done much better, delivering a total 10-year return to shareholders of 216%.

Cazalet expressed confidence in Train’s concentrated portfolio of consumer stocks that make up the majority of the trust’s other investments. While there had been no growth in NAV in the past three years, the businesses had continued to earn an average annual return on equity of more than 20%. ‘As long as LTL’s equity selections maintain these superior returns on capital, we would expect investment returns to recover from the current depressed levels,’ he said.

Train elaborated on this point. Acknowledging he was ‘stuck in a long period of underperformance with little sign of respite’, he insisted that key holdings such as the London Stock Exchange, Unilever and Heineken had ‘excellent prospects’. The durability of their brands made steady profits growth likely and offered earnings yield of about 5%. He said these were in line with the yields on long-dated UK government bonds, the difference being that his high calibre stocks offered growth as well as income from their current low valuations.