Just before the stock market crash, we spent the afternoon with star fund manager Nick Train. Here’s what he told us.
[Video filmed on 25 February 2020]
Lee Wild, head of equity strategy at interactive investor:
2020, it's a big year for you and Michael Lindsell. It's nearly 20 years since you set up Lindsell Train (LSE:LTI). Does it feel like 20 years?
Nick Train, Lindsell Train fund manager:
Sure, it feels like 20 years, but to us actually the business still feels like a start up. You know, we’ve still got that buzz, that energy involved in building up a small business. By the way, I just have to say to anybody who’s contemplating taking that step of setting up their own business in whatever field, from our point of view I’d say, ‘go for it,’ because it just makes life so much more rewarding.
But lots has changed since the turn of this century. Have you adopted a different approach to investing? Have you learned any lessons both in the approach and the strategy? Is it the same now as it was when you first started?
I’d say fundamentally there’s been remarkably little change in the way that we approach the investment challenge. And maybe one way of illustrating that is just to note that many, many of the original core investment ideas, the original companies that we invested in, you know, 19 years ago still make up the majority of our investment portfolios. I think that really does demonstrate the very, very strategic way that we think about the investment challenge.
I hear what you’re saying that the world has changed over the last 20 years, particularly changes in technology. But to us there are three fundamental ideas that drive our portfolios, they did 20 years ago, they still do today, and personally I believe that these three ideas will still be driving returns in another 20 years time. And with your patience I’m just going to outline what those three big strategic ideas are.
The first of all is if a company makes a product that tastes good. Literally, if it makes a product that tastes good, you should invest in that business. I don’t think technology is ever going to take away the attraction of a product that consumers enjoy eating or drinking.
Second important thing that drives our portfolio construction is the idea that people never get bored of being informed or entertained, and again that’s an idea that’s led to a lot of successful investments that we have across the portfolios.
The final idea is that, by and large, we think that investors, including professional investors, are just too pessimistic about the outlook for stock markets. You know, as well as me, you speak to a lot of fund managers, everybody always says ‘well, you know, markets look expensive, and there’s uncertainty out there at the moment,’ but that sort of caution, that sort of pessimism about markets to us creates an opportunity to invest in businesses that do well when stock markets do well. Because, over time, believe me, stock markets will do well.
All right, well, Nick, we’ll talk a bit about that later.
20 years on, your funds have had phenomenal success. As a fund manager you’re widely respected within the industry, investors continue to back your strategy with their own money. But I guess a question lots of people are asking is how long do you plan to keep doing it? Now, you seem enthusiastic, but will we be talking to fund manager Nick Train in 20 years time, or are you grooming a successor? In short, what happens when you call it a day?
Well, it’s kind of you to put the question in that way. I think it’s very important for me, it’s very important for Michael Lindsell and me to convey the reality of what our business is. I mentioned just a moment or so ago, we still see ourselves in a way as a start up, you know. We are what is called a boutique investment management company. We only do a very limited number of things. We run a limited number of funds, there’s a limited number of investment ideas at work in what we do.
If you wanted to be cruel, you might say that Lindsell Train is something of a one trick pony, you know, we do one thing and we try and do it as well as we possibly can. But we have to acknowledge, and we want investors to recognise that that means that there’s risk. You know, I mean we’re just doing one thing, maybe what we do will go out of fashion or go out of favour at some point. And if it does, then that’s going to be an issue for us because we’re not going to change.
So, what I’m saying is that we have no sense that we have solved the investment challenge. You know, we’re just doing one thing amongst a wide variety of approaches to the investment challenge.
What I’d say is that – in answer to your question about longevity, I think it was Lou Reed in an obscure Lou Reed song who said, ‘I’m like a good wine, I get better as I get older.’ And however much of a cliché that might sound, actually I do think that investment is one of those human activities where you do get better as you get older. You definitely learn more, and you definitely can benefit from experience of different market cycles or different company histories.
So, both Mike and I sincerely believe, and we sincerely hope that we can still continue to get better. And, as long as we can, then we figure that we ought to keep on, we ought to keep on going.
But is there a succession plan in place? Have you both sat down and thought well, you know, at some point we need to sort of hand over the reins to somebody?
Well, we’ve hired – over the last seven or eight years we’ve hired five very, very smart young people to help support us in our investment work. And we’re delighted with the progress that those individuals have made. One of them is a fully-fledged portfolio manager, that's James Bullock, he works with Mike and I on our global fund, and we have every confidence that James and his colleagues could take over from us. It's just that we're in no hurry for that to happen.
We've talked about your success over the 20 years, but it hasn't all been plain sailing. Last year was a was a tricky one. I mean, you were unwittingly caught up in the fallout from the collapse of Neil Woodford's funds, and two of your funds were removed from a large broker's ‘best buy’ list, that was to avoid a conflict of interest.
Did that affect your investment style at all, and I’m thinking particularly in the sense of building large stakes in single businesses? And was there any sort of emotional reaction from you sort of aside from the sort of the business approach, the investment approach?
Well, I mean, you say that 2019 was a tricky year. I mean, it was a tricky year for the industry, no question, and in part because of, you know, some of the unfortunate events that you’ve alluded to. But I have to say from a Lindsell Train Limited perspective, it was a pretty good year. We run three strategies, and two of them usefully outperformed their benchmarks. The UK strategy, that's me, but our Japan strategy did very well last year. Global, maybe slightly less well, but it was still up nearly 20%. So, we didn't feel, you know, when we took an audit, if you like, on 2019 that it was such a tough year.
And the direct answer to your question is no, we felt no necessity or even temptation to change the way that we approach portfolio construction, the way that we approach the investment challenge. And the truth is that great companies are rare, and the opportunity to invest in a great company at an advantageous price is even rarer, yeah. And that means, in our opinion, that it’s absolutely critical to back your judgment. When you come across these rare opportunities, it’s important if you want to outperform, if you want to add value for clients, that you should have big positions. And that's been the characteristic of our investment approach over the last 20 years and it's going to continue to be.
Okay, so no change. Some industry professionals have argued that – okay, I’m looking back to next year and – last year, sorry, and the Woodford issue, that the lack of internal challenges let Neil down. And so, do your decisions get challenged at Lindsell Train, or – I mean clearly you get the final say, but are there challenges?
You know, also – it’s such an interesting question, thank you for asking it. I mean also on this, that there's a piece of stock market wisdom that we strongly disagree with, and that's the piece of stock market wisdom that says you should never fall in love with your investments.
We profoundly disagree with that. We think it's absolutely critical to fall in love with, or have deep, deep commitment, both intellectual commitment and, if you like, emotional commitment to the ideas that you build into an investment portfolio. How else are you going to stick through thick and thin, because there will be tough periods for any company that you invest, how do you get to stick through thick and thin and ride through the inevitable downturns in order to capture the full potential of an investment?
So, while I understand the question, you know, are we adequately challenged, it's also important to say too much challenge, if it leads to too much activity or disagreement amongst a team, that can be damaging as well. But I think that the clearest, most forceful challenge that any investor, you know, you can't get away from is the challenge of the market, isn't it? The market is constantly saying to you, ‘Nick, you're an idiot,’ you know, when something is going down. Believe me, you never, ever can turn your back on that, it’s always niggling away at you. And to me that’s the ultimate discipline in this business is to seek to convince yourself that you’ve got an insight t hat’s superior to the average.
What is the overlap between the strategies under the Lindsell Train umbrella? Do you consider high correlation a risk for the strategies?
In a sense, the correlation between the three strategies that we have, global, UK, and Japan, in a sense the correlation is a hundred percent, yeah, because all three of them are run to the same set of investment principles. All three of them are run, by and large, investing in similar industries driven by similar investment ideas.
Now, of course, the Japan fund does look very different from the UK fund in that there aren’t any UK stocks in our Japan fund, but there is an actual overlap of shares between the UK and global, probably maybe over 30% of the two funds are the same. So, actually practically speaking, yes, there is overlap between the mandates.
And if you want the candid answer, does that increase risk for the company, yes, I guess it does. But I want to come back to what I said to you earlier, I said it in a slightly pejorative way, we’re ‘one trick ponies,’ and, you know, that can be a good or a bad thing. We want to be the best we possibly can at the one or two things that we think we’re good at. Because we think that gives our investors a chance to earn exceptional returns, that’s what we’re looking to deliver.
We would say to any investor, please be diversified, be diversified between investment management companies and investment management strategies. We’re just trying to do one thing as good as we can.
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