Lindsell Train IT underperforms: here’s three reasons why

For the second year in a row, Lindsell Train investment trust underperformed its benchmark, with its chair lifting the lid on why it is out of form.  

A lack of exposure to ‘big tech’, as well as the energy and financial sectors, and a valuation cut for the investment trust’s fund management firm, were the key factors behind Lindsell Train (LSE:LTI) investment trust’s notable underperformance over its latest financial year.

The figures, released this morning for the period to 31 March 2022, show a net asset value (NAV) decline of 2.3% versus a rise of 15.4% for its benchmark, the MSCI World Index. The trust’s share price return fell further, down 20%. This was due to its high premium of 20% falling to a discount of 0.8% over the 12-month period.

The decline in the premium serves as a reminder to investors that high premiums do not tend to be sustainable over the long term. When conditions change – such as when investors become more cautious or a trust’s performance weakens - premiums can fall. Investors who buy on a premium that narrows will see the holdings fall in value more than the underlying investments – the NAV.

• Don’t be shy, ask ii…when is an investment trust premium too high?
• Top 10 most-popular investment trusts: May 2022
• Investors are turning to income funds, but is a trick being missed?

Julian Cazalet, chair of Lindell Train investment trust, noted that it is the second successive year of underperformance compared to the benchmark, which he put down to three factors.

“First, the company has limited investments in the technology companies that have been at the vanguard of performance in global markets since 2019 and have contributed most to strong benchmark returns. The only direct holding that the company owns that could be categorised as technology – PayPal (NASDAQ:PYPL) – fell by 52% over the year and was the company’s worst performer, having done exceptionally well in the year to 31 March 2021 when it was up 154%.

“Second, the manager’s investment approach specifically avoids companies in two other sectors that also contributed significantly to the strong performance of the benchmark index – energy and financials. With little or no exposure to these three sectors of the market, and instead big positions in consumer franchises that faced headwinds such as disrupted sales during the pandemic and steeply rising input prices thereafter, keeping up with the market proved particularly difficult.

“The final factor was the lower valuation attributed to the company’s manager, Lindsell Train Limited (LTL) in which the company owns a 24.3% stake. Recently, LTL’s funds under management have fallen, largely as a result of net redemptions but also because of the decline in the value of investments held in client portfolios.”

Lindsell Train Investment Trust invests globally and, in common with other funds and trusts managed by the fund house, is a concentrated portfolio of high-quality growth companies, which the managers believe have sustainable business models, such as through having brand resonance. Consumer companies are particular favoured. It is also more concentrated than other funds and trusts in its stable, with just 13 holdings.

One key difference compared to the other funds and trusts in Lindsell Train’s stable is that Lindsell Train Investment Trust holds a big stake in Lindsell Train Limited. As of the end of March, the trust held 43.5% in the fund management company.  

Its longer-term returns remain ahead of the benchmark. The trust has achieved annualised returns of 17.2% and 20% over five and 10 years, outpacing gains of 10.4% and 13% for the MSCI World Index.

• Nick Train apologises for failing to deliver ‘acceptable’ performance
• What’s gone wrong at Lindsell Train?
• Nick Train: 'the one stock everyone should own' 

Nick Train, co-fund manager of Lindsell Train Investment Trust, said he is “displeased” with how the trust had performed over the one-year period. He noted that the business performance of the companies held is more promising than the market is giving them credit for.

He said: “Our investment approach is based on owning durable and predictable companies, while avoiding the speculative and cyclical ones – which often do offer rapid growth, at least for a period.

“The idea is that steady dependability is rarely highly valued, because investors are, as a generalisation, too busy trying to identify the next Tesla or trying to time the next gyration of the economic cycle.

“As a result – so our argument and historic track record asserts – you can be well-rewarded over time for holding what others regard as boring. We hope this remains the case.”