LF Lindsell Train UK Equity: March 2022 update

• Nick Train aims to invest in successful companies that have stood the test of time
• He’s a long-term investor, and makes very few changes to the fund from year to year
• He's got a great long-term track record, boosted by his stock-picking ability, according to our analysis
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The LF Lindsell Train UK Equity fund aims to deliver long-term growth by investing in high-quality UK companies that generate lots of cash and have stood the test of time. We think it could be a good option for the UK part of a broader global investment portfolio. A focus on large, high-quality companies means the fund could work well alongside other funds investing in unloved UK companies with recovery potential, or those focused on smaller companies.

Manager

The fund was set up in 2006 by Nick Train, who has more than three decades of investment experience. Train was previously Head of Global Equities at M&G Investment Management, and before that he spent 17 years at GT Management in various senior roles including Investment Director and Chief Investment Officer for Pan-Europe.

Alongside this fund, Train is co-manager of the Lindsell Train Global Equity fund and lead manager of two investment trusts. Given the high degree of coverage overlap between the four portfolios, and the fact they all use a similar investment process, we think this is a reasonable workload. Train also has the support of an experienced and highly regarded team, including Mike Lindsell.

Although we rate the manager highly, the fund isn’t on the Wealth Shortlist. It was previously on the Wealth 50 (available prior to the Wealth Shortlist), but we made the decision to remove it as the Lindsell Train business owns (including via this fund) a significant number of shares in Hargreaves Lansdown plc. This was done to avoid any potential conflict of interest.

Process

Train invests mostly in large, longstanding businesses with characteristics that are hard to copy, such as strong brands, heritage or sports franchises. His search for high-quality businesses tends to lead him towards larger companies, although he has the freedom to invest in UK companies of any size if he spots an opportunity. This includes smaller companies, which are higher risk than their larger counterparts.

The manager sometimes invests large amounts in certain industries. Financial services companies, for example, currently account for almost a quarter of the fund. Train thinks stock markets will rise over the long term, so he's invested in companies that stand to benefit including asset managers Schroders and Rathbone Brothers. Beverages, personal goods and media companies also form significant portions of the fund.

The fund's largest holdings are household names – from Unilever and Diageo to Burberry Group and Heineken. They all make up a relatively large portion of the fund. In fact, the top 10 companies account for almost 80%. Some are close to 10% in size, which is as big as the rules allow. The fund currently invests in 25 companies overall. This gives each holding the potential to make a big difference to the fund’s performance, but it’s a higher-risk approach.

Train is the quintessential long-term investor, making very few changes to the fund. He’s made just one major change to the fund over the past year – the sale of publishing and education company Pearson. The company’s been plagued by setbacks and disappointing financial results in recent years as it’s tried to move its business online.

The fund’s investment in Daily Mail & General Trust (DMGT), the owner of publications including Daily Mail and Metro, was recently acquired by Lord Rothermere, whose family founded the Daily Mail in 1896. In exchange for its investment in DMGT, the fund received cash and shares in online car retailer Cazoo. The cash was used to top up investments in weaker performers at lower prices, such as global credit bureau and data analytics business Experian and drinks and mixers maker Fevertree.

Culture

Between them, Lindsell and Train own the majority of Lindsell Train Limited, the company that runs all Lindsell Train funds. We view this positively as ownership of the business ties the managers’ long-term incentives to the interests of investors.

The duo and their team spend all their time reading, learning and compiling information on companies they own shares in and those on their watch list. They’ve created a truly unique environment for staff, which includes a library within the office. They tend not to recruit experienced people, preferring to train and develop graduates who can be moulded into the Lindsell Train way of thinking.

The managers look for companies with the potential to thrive for decades, or even centuries, so it’s important companies have high governance standards, and manage their environmental and social impacts well. Analysis of environmental, social and governance (ESG) factors is therefore a natural part of their investment process.

Their focus on high-quality companies means they don’t invest in industries that require large amounts of capital, such as energy, commodities and mining. They also avoid industries they think are detrimental to society and, as a result, potentially exposed to regulation or litigation, including tobacco, gambling and arms manufacturers.

Cost

The fund is available to HL clients for an ongoing annual charge of 0.49%, which is 0.15% lower than the standard ongoing charge of 0.64%. We think this is a reasonable price to access Train’s best UK-focused ideas. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s performed exceptionally over the long term. An investment of £10,000 made ten years ago would now be worth £29,993*, while the broader UK stock market would have returned £19,512 over the same period. Our analysis puts this down to the manager’s ability to select outstanding companies, regardless of their size or the sector they’re in. Past performance should not be viewed as a guide to future returns. All funds will fall as well as rise in value so you could get back less than you invest.

The fund’s tended to lag the broader UK stock market when it’s rising, but its best periods of performance have usually been when markets have fallen, and the fund has held up better. That’s what happened in early 2020 when the stock market was hit by fears over the global pandemic.

The manager’s growth-focused investment style has led to strong returns throughout most of the last decade. But it hasn’t done as well as the market since the announcement of several Covid-19 vaccines in November 2020 – value-focused funds, which seek lowly-valued businesses, have come out on top since then. The first two months of 2022 have been a particularly weak period for ‘growth’ companies. The fund’s fallen 9.70%* in the year to date, compared to a fall of just 0.80% for the broader UK stock market.

The manager points out that the share prices of some of the companies he invests in have recently performed poorly, despite the business itself getting stronger. Examples include accounting software business Sage, where total revenues rose 5%, boosted by a rise in subscription-based revenues. Despite this, the company’s share price fell heavily following the announcement. Experian also announced strong growth in revenues and the company upgraded its earnings expectations for the full year. This positive news was met with a significant fall in the company’s share price.

It’s normal for investment styles to go in and out of favour. That’s why we suggest investors build diversified portfolios with exposure to a variety of investment styles, sectors, countries and asset classes. Plus, you should regularly review your investments to make sure they continue to meet your needs and objectives.

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2022.

LF Lindsell Train UK Equity factsheet, including charges

LF Lindsell Train UK Equity Key Investor Information