Interactive Investor

Fund spotlight: Lindsell Train UK Equity Fund

interactive investor's analysts give an update and view on the Lindsell Train UK Equity Fund.

7th February 2020 16:02

Dzmitry Lipski from interactive investor

interactive investor's analysts give an update and view on the Lindsell Train UK Equity Fund.

So-called ‘value’ shares have been out favour for some time, but investors have been eager to capture the potential re-rating in such stocks. However, those who resisted the urge to chase value have been well rewarded in recent years. The performance of UK growth companies has been more than double that of their value peers over the last three and five years. 

With the risk of a global recession and, therefore, a bear market thought to be relatively low currently, it would probably be prudent for investors to favour quality growth companies that are better positioned to withstand any market volatility or slowdown.  

History shows that high-quality companies have rewarded patient shareholders over the longer term. For example, over the last 20 years the share price of well-known global leaders like Diageo (LSE:DGE) and Unilever (LSE:ULVR) are up 1,136% and 946%, respectively, while the FTSE All-Share index is up a more modest 171%.

The fund

LF Lindsell Train UK Equity Fund aims to achieve capital and income growth and provide a total return in excess of that of the FTSE All-Share index, by investing in a concentrated portfolio of UK equities. The fund has been managed by a highly experienced investor, Nick Train, since its launch in July 2006.

Nick Train follows the investment philosophy of Warren Buffett, investing in “exceptional”, high-quality companies for the very long term, likely over several economic, or market cycles. 

He looks for durable, cash-generative businesses that will still be profitable in 20 years’ time, maintain a high return on capital and demonstrate superior capital allocation. He finds most of these companies in the food and beverage, internet/media/software, financials and healthcare industries. 

Train find that companies with brands or franchises of great durability and value, are not only rare, but also appear to be undervalued by other investors for most of the time. So, by forming a high conviction, concentrated portfolio, they should better reduce risk over the longer term, rather than via diversification. 

What's in it?

The portfolio is entirely bottom-up – it analyses only individual stocks, not macroeconomics - focuses on no single index and has a very low turnover of holdings. It typically includes 20-30 companies (currently 25) with a bias to larger cap, higher quality names with global earning potential. Almost 90% of the fund is invested in FTSE 100 companies or in non-UK companies that qualify to be its constituents if they were listed in the UK.

Among the fund’s top holdings are London Stock Exchange (LSE:LSE) 10%, RELX (LSE:REL) 9.8%, Diageo 9.5%, Unilever 9% and Burberry (LSE:BRBY) 8.6%. Since launch there have been relatively few changes in the portfolio: seven purchases and six sales. In December last year the manager bought a stake in PZ Cussons (LSE:PZC), which was the first new holding since 2010. The company owns global brands such as Carex and Imperial Leather. 

The fund does not have a sector limit and sector exposure is a result of bottom-up stock selection. The top sector allocation is Financial Services at 27.2%, followed by Beverages at 18.7%, Personal Goods at 17.9% and Media at 16.1%. 

The manager follows a strict discipline and commitment to his investment approach which has proved very successful. The fund has seen its assets grow rapidly, reaching £6.7 billion at the end of December 2019, and the manager believes it can accommodate up to £12.5 billion.

Any successful strategy that invests in only a limited number of stocks is destined to build substantial positions over the longer term. Although the manager has always followed a rule not to own more than 15% of the voting shares of any company, he argues that it makes no difference what stake they own as he considers himself a part owner of a business, and a thoughtful long-term investor.

How does it perform?

The fund has consistently outperformed its benchmark and peers over both the short and longer term, with lower risk. 

Annual Returns % (GBP) 01/02/2019 - 31/01/2020 01/02/2018 - 31/01/2019 01/02/2017 - 31/01/2018 01/02/2016 - 31/01/2017 01/02/2015 - 31/01/2016
LF Lindsell Train UK Equity 18.04 2.83 17.51 14.97 2.59
EAA Fund UK Flex-Cap Equity 13.92 -6.24 14.17 17.45 -1.44
FTSE All Share Total return 10.67 -3.83 11.28 20.06 -4.63

Source: Morningstar Direct as at 31st January 2020. Total Returns in GBP.

The ii view

Lindsell Train UK Equity Fund is included on the ii Super 60 list of high-conviction active and passive funds as a UK Equities, Core recommendation to hold over the very long term. The fund is managed by a very experienced manager with an excellent track record. The manager's investment horizon is long term and relies on building a high-conviction portfolio of quality growth stocks and is unconstrained by its benchmark and sector. As such the portfolio may look very different from the FTSE All-Share index, and performance is likely to substantially deviate from its benchmark. 

The fund was put under formal review on 29 November 2019, while interactive investor’s experts investigated concerns around possible issues with liquidity. After concluding the review, the fund remains on our Super 60 list. You can read more about the process here.

The fund has an outstanding long-term performance record since inception. Worth noting is the benefit from quality growth driven markets in recent years which could potentially struggle when value and lower-quality stocks eventually begin to outperform. The quality growth strategy employed by the fund can be diversified by blending it with a value-focused UK equity fund in a well-diversified portfolio.

Find out why this fund is on the ii Super 60 investments list

Click here for more information on this fund, including price, yield and charges

If you enjoyed this article, you may also like other funds picked for interactive investor's Super 60 range of high-conviction investment ideas. Click here to find out more.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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