In a wide-ranging interview, Train names the one share he expects to hold forever, runs through why he is confident the consumer stocks he owns will weather a potential recession in 2024, details why he runs concentrated portfolios, and explains that while he has no plans to hang up his boots anytime soon there is succession planning in place.
Lindsell Train UK Equity is one of ii’s Super 60 investment ideas.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Nick Train, manager of the Lindsell Train UK Equity fund, and the Finsbury Growth & Income Investment Trust. Nick, thanks for coming in today.
So, Nick, you manage money in a similar way to Warren Buffett. You rarely trade and you like to buy and hold for the long term. Could you name an example of a company that, all things being equal, you could never envisage selling?
Nick Train, manager of Lindsell Train UK Equity fund and the Finsbury Growth & Income Investment Trust: Yeah, it's a great question and it's a too-flattering analogy, me and Buffett. It's so important to say how generous he and Charlie Munger have been with their ideas, which are fundamentally sound ideas. I first read them in the mid-1980s and almost immediately my investment performance began to improve. So, everybody needs, it doesn't matter whether you're thinking about investing in tech or energy, to read and understand Buffett.
I also think it's an interesting question because sometimes people look askance at us when we say that our ideal holding period is forever. It sounds like a weird thing to say, doesn't it? I mean, most professional investors like to give the impression that they're creating value by trading in and out, and that they are finding the next hot thing and moving to the next one.
I've always thought it's so important, it's so simple, but so powerful. Imagine if you and your family owned a wonderful business and you could pass it down from generation to generation. Why would you ever sell it? Our mindset is not, oh, let's find the next idea, then the next idea after that. Our mindset - sometimes it works, sometimes it doesn't - is let's find something that ideally we might never have to sell because that's going to achieve our financial objectives.
It's dangerous for me to name individual companies in a way because they probably have a propensity to blow up in my face tomorrow. But to me, in our UK strategy, for at least 20 years, Diageo (LSE:DGE) has been a core major holding. I think it's the third-biggest position that we have today. And I just can't believe that you could go badly wrong over time if you own a business that owns Johnnie Walker and Guinness and Tanqueray and a whole bar shelf full of beloved beverage brands that have been beloved for, in Guinness's case, more than a quarter of a millennium, not even quarter of a century.
I think that the likelihood that Diageo's brands will both have grown and protected you against the malign effects of monetary inflation for as far ahead as I can see, are pretty high, pretty high. And that's a company that I can't really conceive of selling unless the world is going to go teetotal. And, maybe that's a serious risk, but I'm not feeling it when I look at my sons, so that's what I would say.
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Kyle Caldwell: Both the fund and the investment trust have a lot of exposure to consumer-related businesses. Given the wider macroeconomic backdrop, some commentators think the UK may be in for a recession in 2024. Do you think most of these companies, if not all, will be able to weather the storm of a recession?
Nick Train: A risk of what we do is looking at the past and extrapolating from the past. Sometimes the future is different from the past and we all need to be alert to that. But it's so important to note that some of the great consumer brands that we are invested in have gone through multiple recessions and interest rate cycles. And, OK, maybe the growth has slowed down a bit during a deep recession. But, essentially, this is the point about beloved consumer brands, people feel that their life would be poorer if they didn't allow themselves the occasional Guinness.
The best of these businesses historically have protected you in times of recession, and I imagine they will continue to do so. I do think, and this is a nuance perhaps, in the margin of my portfolio I've been building more exposure looking at these consumer stocks to true luxury or premium brands than I might have done 20 years ago. I do think that the world has changed a bit. Consumers around the world are getting wealthier and what gradually enriching consumers want, and I'm talking globally, are heritage and luxury products. So, our holding in Burberry Group (LSE:BRBY), for instance, that is a bigger holding today for me than it would have been 10 or 15 years ago because I think that, yeah, that trend towards consumption of luxury is likely to be a long-lasting one.
Kyle Caldwell: You have concentrated portfolios, the fund and investment trust have around 20 stocks. In terms of the top 10 holdings, they account for around 80% of the fund and the investment trust. Does this provide enough diversification?
Nick Train: Well, I think that 20 holdings is a nice number. It's risky. But listen, you've educated your viewers and readers well enough to know that active managers have to take some risk. I mean because otherwise there's passive, there's exchange-traded funds (ETFs), and there's a whole lot of things you can do if you just want the index. We've got to try and take some risk to beat the index. The risk we've chosen to take is portfolio concentration. But if we do our job well, concentration on high-quality businesses.
Now, let me be completely candid with you. I'm not so thrilled with our investment performance over the last two to three years. There are a number of holdings that because they've not done as well as I've hoped, have got smaller within the portfolio as our winners have gone on. And I'd like to see some of the things that haven't done so well over the last couple of years do better and make the portfolio less concentrated if some of the smaller positions do better.
Kyle Caldwell: In terms of the day-to-day dealings with company management, how actively involved are you in terms of challenging company management? For example, If there’s an issue that you see in a company that you want to change for the better?
Nick Train: I would say quite active. When there is an issue, there's almost no company that we're invested in where I think that we are qualified to tell current management how to run the business better. I look at the businesses we're invested in, I admire them. I don't see how to run the business better than current management. Occasionally, there are issues about capital allocation. So, like how much dividend are they paying? Are they paying too much dividend? Should they be doing a share buyback? Should they be investing more aggressively in the more-promising areas of their business? Those sorts of strategic capital allocation questions we will engage [in] because that really can make a difference. We're not telling companies how to run the business better on a day-to-day basis. We're just not qualified to do that.
Kyle Caldwell: There have been a number of fund management retirements over the past couple of years. Now, I know you've not got any plans to hang up your boots any time soon because yourself and Michael Lindsell, the co-founder, announced last year that you'll run money for at least another seven years. But is succession planning something that you are starting to put into place? And is there a protégé?
Nick Train: There is a succession plan in place. Listen, let me put it this way. Throughout the bulk of my career, I've had one overarching ambition, burning ambition, which is to make our clients’ savings as valuable as we possibly can. I mean, that's what I want to do. And I still really, really want to do that, not least because I'm invested in these strategies as well. I really am. It really does matter to me and my family how these strategies do.
I do find over the last four or five years that I have a second ambition. Maybe it's a subsidiary ambition, but it's still a real ambition. And that is that Mike and I have built a team of, let's call them younger people, and not necessarily that young anymore, but they're younger than me.
And if I have a subsidiary ambition, it's that I really hope that those people who've joined our business, who've worked with us, in some cases for 13 or 14 years, that they have an opportunity to express themselves; running money within the context of Lindsell Train. And I hope, in the end, that they have as rewarding and fun a time as I've had.
And what that means is that, if I'm to fulfil that second ambition, at some point we are going to need to hand some responsibility over to the people who are working with us. Candidly, I think if I quit tomorrow, there are two or three people in our team who could walk into this job and do it possibly even better than me. Who knows? I mean, I think they're ready for it. So, yes, we've given it thought. Yes, we've got a team becoming more and more competent day by day, but I've still got that burning ambition to make these strategies work.
Kyle Caldwell: You've just touched on the answer to my last question. In terms of skin in the game, do you invest in all the funds and investment trusts that you manage?
Nick Train: I'm invested in every single product, I hate that word, that we have [at] Lindsell Train. But, because the UK strategy, that's where my longest track record is, that's where my real day-to-day focus is, that's actually where the bulk of my savings are, and enough to matter. That's all I would say. Sadly, the correlation between having skin in the game and necessarily generating great performance, there's no direct guarantee. But at least you can assure the investors that what happens truly matters. It really does truly matter to me.
Kyle Caldwell: Nick, thank you for your time today.
Nick Train: Well, Kyle, and yours. Thank you, and your viewers.
Kyle Caldwell: That's it for this episode. You can check out the rest of our Insider Interview series on our YouTube channel. You can like, comment and subscribe. Hopefully see you again.
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