Interactive Investor

Michael Lindsell warns over Lindsell Train IT’s high premium

26th August 2021 13:00

Kyle Caldwell from interactive investor

The fund manager has expressed concerns over investors buying the trust at current levels. 

Michael Lindsell, the co-founder of fund management firm Lindsell Train Limited alongside Nick Train, has warned investors over the high premium Lindsell Train investment trust (LSE: LTI) is trading at.

Lindsell Train investment trust, run by the duo and James Bullock, is currently trading on a premium of over 30%. The trust invests in global shares.

Investment trusts that trade on a premium have a higher share price than the value of the underlying investments – the net asset value (NAV). When a premium declines, investors’ shares lose more value than the underlying assets.

In an update to investors, Lindsell said that the trust’s premium had been rising of late. Figures from Winterflood, the investment trust analyst, show the premium stood at 21% three months ago.

Lindsell pointed out that the high premium carries greater risks for investors, while also questioning the key reason why investors believe it is worth buying at its current valuation.

The trust persistently commands a high premium. Over the past year, figures from investment trust analyst Numis show the premium reached a high of 41.1% and a low of -2.1%, which represents a small discount. Its 12-month average is a premium of 15.4%.

The high premium is largely because of its largest holding – Lindsell Train Limited, the fund management business. It is a big position, representing 46% of the investment trust’s assets. Lindsell Train Limited is unquoted. Its second biggest holding is PayPal (NASDAQ:PYPL), which accounts for 7.4% of the trust, followed by LF Lindsell Train North American Equity fund, with a weighting of 7%.

The school of thought among some investors is that it is worth paying a substantial premium for Lindsell Train Limited on the assumption that the unquoted fund management business’ valuation has been undervalued by the investment trust.

Lindsell, however, cautioned against this viewpoint. He said: “Some investors believe the value of the premium is attributable to the undervaluation of Lindsell Train Limited. We caution this opinion and think the trust’s board of directors do a good job at valuing the shares given the information at their disposal and their deep knowledge of the company as a longstanding significant minority investor.”

The assumption that the fund management business is undervalued is therefore rooted in its future success, with the expectation that assets under management will rise from here. Investors buying for this reason are banking on Lindsell Train’s funds and trusts continuing to prove successful in order to retain its investor base and attract new investors.  

Ben Yearsley, of Shore Financial Planning, says: “It is sort of self-fulfilling, if the investment trust does well, Lindsell Train Ltd gets more fees, benefiting the holding in the investment trust. Unquoted companies only get revalued a few times a year and the next time this happens it is likely the fund management arm will get revalued if it has higher assets under management and is collecting more money from investors in the form of management fees.”

Lindsell concluded by pointing out that, “buying shares in the trust at a premium could lead to a significant loss if stock markets fall and/or Lindsell Train Limited’s funds under management decline”.

The chair of Lindsell Train Investment Trust, Julian Cazalet, has also urged caution. In mid-June, he said: “We continue to advise new investors to exercise restraint, or at least consider carefully, before buying the company’s shares at a premium to the NAV.

“Falling markets, similar to that experienced in early 2020, or poor relative performance from our concentrated portfolio (there are only 14 holdings, with the top five accounting for around 80% of NAV) could quickly undermine the company’s share price.

Investment trust premiums

It is generally not a good idea to buy a trust on a high premium because it tends not to be sustainable over the long term. The high premium is at risk of falling and even turning into a discount when conditions change. As a rule of thumb, a premium of 5% is considered excessive for a listed equity strategy.

To find out more, our explainer video and written guide runs through how investment trust premiums and discounts work.

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