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:
Nick, we have asked interactive investor customers to send in their questions, and the postbag was full. We've narrowed it down to 10 questions. Here's the first one. Coronavirus is the market moving news of the moment, and you've bought more Burberry (LSE:BRBY), Remy Cointreau (EURONEXT:RCO) , and Diageo (LSE:DGE) during the virus outbreak. Why are you sticking with consumer staples which you already own a lot of?
Nick Train, Lindsell Train fund manager:
Because history has demonstrated in every previous such event that it's made sense to buy more of these outstanding businesses, and they are outstanding businesses. We can debate that, but I'm telling you they are outstanding businesses. It's rewarded investors buying on the dips during these sorts of scares. I have no insights into the trajectory of this virus. I sincerely hope that it diminishes very, very quickly for everybody's sakes. But all you can say is that past episodes suggest that buying when there's panic makes sense.
Okay. A reader is also asking about a couple of stocks as well. PZ Cussons (LSE:PZC) and Carnival (LSE:CCL), I mean the latter has been hit especially hard by the coronavirus, a lot of the travel companies and peers have been hit. Again, any sort of company specific thoughts on those two, PZ Cussons and Carnival?
Listen, candidly, not on Carnival, it’s not a business that I’m particularly familiar with. PZ Cussons though, that is relatively new investment for Lindsell Train. We’ve begun very gradually to build a holding in that company over the last six months.
Actually, I think PZ Cussons is a potential beneficiary of coronavirus because you may or may not know the biggest brand in PZ Cussons is Carex which is the UK is leading antibacterial handwash, and that's a nice market position to have during a time of heightened hygiene concerns.
But, yeah, the opportunity that we see in PZ Cussons has got nothing to do with this current market wobble. It's to do with, we hope, a recovery over time in PZ Cussons’ emerging market positions.
Okay. So how do you deal with volatility like we're seeing now? Rather than a sort of keep calm and carry on approach, is there a masterplan or – and a connected question we had, can ordinary private investors make rational investments in this era of quantitative easing? Stock market highs, bond price highs, low interest rates. The reader says bonds and equities are risky, and most savings rates are below inflation. What's a lad to do?
We operate using just a handful of rules of thumb. Can you have a handful of rules of thumb? I’m not sure.
On this occasion we can.
Well we have a few rules of thumb. Very, very simple. Very, very simple, but over time they've worked for us. And on this virus, just as on, let's say, the Brexit issue, our rule of thumb on all such episodes is to say this: probably over time everything will work out just fine. Yeah? Now that sounds trite and it sounds maybe even a bit complacent, but the reality is, if you look back over economic history, stock market history for five years, 10 years, a hundred years, there has always been something to worry about.
I can never not remember being told that I ought to be worrying about something. Something political, something extraneous to market. Actually, when you look at what's happened to stock markets, when you look at particularly what's happened to the shares of great businesses over time, these episodes don't matter that much unless you need the money tomorrow, but if you needed the money tomorrow, you shouldn't have been invested in an equity in the first place. You understand what I'm saying?
So, there's no secret masterplan here. There isn't, but understand how psychologically difficult it is to do the right thing, how difficult it is to do nothing when people are telling you ‘you should be panicking,’ and also how difficult it is to be buying when other people are panicking. And yet if you can master those two, you're giving yourself a really good chance of having a successful investment career.
Okay. Another question, you don't trade much, how do you fill your time?
Well get the cameras to pan round the room here, and what you'll see are two walls full of books. Full of books. And I'd say that, you know, yeah, we read a great deal. I mentioned earlier, we've hired these young people to work with us. I absolutely promise you, you are as likely, if you walked into our investment room, you are as likely to see them sitting at their desk reading a book as, I don't know, on the phone talking to a broker. And we positively encourage them to increase their learning.
Again, I said to you earlier, like a good wine, you get better as you get older, and it is true that your knowledge and learning and experience can compound. So, keep yourself open to as many ideas and as much wisdom as you possibly can. It's absolutely a full-time job, but you don't need to be wheeling and dealing.
Okay. So, besides owning the fund management company, do you have skin in the game in any of your funds or trusts? You did allude to it earlier on that you have sort of – you’d bought a stake fairly recently.
No, absolutely. And, you know, we feel that – Mike and I feel it’s absolutely our duty, our responsibility to ensure that we have more invested in our strategies proportionately than anybody else. And I believe that is true. Mike and I, one of the principles that we established when we set the company up back in 2000 was that we would never invest in anybody else's investment product or investment strategy. Every penny of our, if I can put it this way, stock market savings are invested in Lindsell Train vehicles, and that is as it should be for a business.
Just going back to what I said earlier, we're a boutique fund management company trying to do one thing as well as we can. That does involve risk. We must be the ones who are taking the most risk, and that's why we are invested, that's why we buy more.
Okay, another question. What’s been your biggest investment mistake and what did you learn from it?
Oh, do you know, I did not understand, I did not understand how much risk banks were taking. I didn’t fully understand the impact of the leverage, the borrowings on banks’ balance sheets. And therefore, unquestionably, although we kind of got out of the 2008 episode with a bit of – by the skin of our teeth, that was a big, big learning lesson for me and for us.
Not just in banks, but just really recognising how badly debt can hurt you when unanticipated things happen.
So, I’d say that was the biggest lesson.
What do you think of banks now?
We’re not invested in any banks currently, but there are aspects of what banks do that we still think are an attractive area to invest in. I mean I think your business is attractive – you know, what you do is what banks were doing 30 years ago and are still trying to do but not as successfully as you. So, help savers make sensible decisions about cash that they’ve got sitting in current accounts or whatever. I mean that’s a very important social function, and it’s also a justifiable source of good profits as well.
Another one, Finsbury Growth & Income (LSE:FGT), it’s been an outstanding performer, but is it time to reconsider current limits on overseas investing? I think the idea is to benefit from US-centric and inevitable future growth in technology and renewable energy which you – again, you’ve alluded to earlier.
Well that’s a decision for the board who’ve got to take a perspective that’s even longer than Nick Train or Lindsell Train Limited. I mean Finsbury Growth and Income Trust, I forget quite how old it is, but kind of 90 years or something, and hopes to go on for another 90 years. All I can assure you is that the board constantly review the investment objectives that they set for us, and want to ensure that those investment objectives are relevant to shareholders but also give shareholders the best chance of long-term returns.
At the moment, I think we are not – there aren’t any constraints on us to – and the performance is fine, so clearly at the moment there isn’t an issue, but I would be the first to tell the board if I thought there was.
Okay. Do you have any plans to make both your global and UK funds less concentrated, and if not, what drives the concentration?
Well the concentration is driven by the reality that it’s tough to outperform benchmarks. You know, why are tracker products, why are ETFs so fashionable? I mean they’re fashionable deservedly so, because they are difficult to outperform, they’re also very good value. How can an active management company, and that’s what we are, how can we add value relative to passive strategies?
One way to do it is to trade aggressively, another way to do it might be to invest in highly speculative small companies, we actually don’t do either of those things. You know, we don’t trade, and we absolutely don’t invest in small speculative businesses.
What we do, the way we’ve sought to add value, and it’s worked to a degree, yeah, we’ve sought to add value by owning concentrated portfolios made up of really substantive, predictable, reliable businesses. That’s where the return has come from, and I think we’d be mad to walk away from that because we don’t have an alternative.
You know, having said that, in Finsbury we’ve added two new holdings over the last six months, maybe in the current market turmoil maybe there could be another two ideas. I never know when you’re going to be presented with a new idea. What you want to do is to make sure that when you have that idea you take advantage of it and make sure that it really matters for returns.
Nick, your global fund is relatively underweight, the US versus many global peers. Is the global fund’s higher allocation to the UK and Japan because you run dedicated UK and Japanese funds?
It’s not overweight Japan and the UK consciously. It’s not a conscious deliberate decision. But probably Mike and I would have to acknowledge that, yeah, Mike’s been investing in the Japanese stock market for 30 years, and I’ve been investing in the UK stock market for at least as long, and that must have an influence on the way that you think about structuring a global portfolio.
I think the reality is that there are some, and we own some of them, there are some world-class businesses available in the UK stock market that absolutely deserve to be in a global portfolio. I think what’s even more interesting, you know, in the context of Japan, a stock market that, as you know as well as I do, has been a very, very difficult stock market, not just for a couple of years, but kind of for 20, 30 years, actually to us there are some not just exceptional businesses quoted in Japan, but exceptional businesses valued far, far more lowly than comparable companies around the world, and we’ve always seen that as a big opportunity.
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