Follow this fund and you certainly won't be following the herd.
Most private investors do the same silly things:
- over-trading dents their returns due to frictional costs;
- excess diversification reduces their returns by diluting their best ideas;
- chasing faddish themes or sectors flatters their performance in the short term, while often they're just taking on more risk; and
- supposedly contrarian positions are informed by the consensus.
Most of us could therefore take a leaf out of -- or even invest into -- Nick Train's funds.
Co-founder of boutique fund manager Lindsell Train, Nick Train says he's a disciple of Warren Buffett. Making that statement is another thing that most private investors do, but Train's claim is backed up by his actions.
Think different
Let's look at the unusual characteristics of one trust Nick Train manages -- The Lindsell Train Investment Trust (LSE: LTI).
- The trust's objective is a positive absolute return.
- Its benchmark is an irredeemable government bond -- the UK 2.5% Consolidated Loan Stock (ConSol).
- The trust owns 25% of the Lindsell Train management firm, plus holdings in several other Lindsell Train run funds.
- Between March 2008 and March 2009, LTI disposed of just two shares (including a delisting) and went crazy to buy four more.
- It has just 16 equity holdings -- close to Train's expected average of 15.
- Two of those companies are Japanese!
It's hardly your average index-hugging managed fund!
Absolutely fabulous
Benchmarking the Lindsell Train trust against ConSol is novel -- the bond yield oscillates according to investors' expectations about inflation, so theoretically buying it gives you exposure to the market's current best guess of a real return on your money.
Trying to beat ConSol with equity-orientated portfolio every year is a steep challenge, and LTI didn't do so during the savage bear market of 2008.
In the 12 months to 31 March 2009, the Trust's NAV was down 5.4% (the share price fell 12.6%) compared to +4.6% from ConSol.
The sunny side of the tracks
So you could argue that Train has failed, since LTI both lost money and underperformed its benchmark.
The obvious retort is while LTI has a bond as a benchmark, investors ultimately want equity-like returns (otherwise they'd buy ConSol). And LTI's performance has knocked spots off buying the market.
The MSCI World Index was down a far worse 22% for the year -- even in sterling-denominated terms, which boosted returns for UK investors.
LTI does hold bonds (including ConSol), which helped, but with cash these amounted to less than 20% of assets to the end of March 2009.
The longer-term record to date is good, too:
| | 1 year (%) | 3 years (%) | 5 years (%) |
|---|
| Lindsell Train Investment Trust | +12.5 | +16.8 | +73.1 |
| NAV | +0.1 | +19.5 | +60.6 |
| Global Growth | -9.4 | -6.7 | +50.2 |
| FTSE All-Share | -9.5 | -8.7 | +32.1 |
Note: Figures from Trustnet, to 1 September 2009.
How has Train achieved these excellent results?
On founding, the company set out four principles:
- investors undervalue durable, cash-generative business franchises;
- concentration can reduce risk;
- transaction costs are a 'tax' on returns; and
- dividends matter even more than you think.
These guidelines can be seen at work in the Lindsell Train Investment Trust.
We've already discussed concentration and low turnover. For dividends, LTI has over 25% of funds in five consumer-focussed, cash generative companies with decent yields -- A G Barr (LSE:BAG), Cadbury (LSE: CBRY), Diageo (LSE:DGE), Heineken, and Unilever (LSE: ULVR). Train notes they also provide some insulation against inflation.
Away from these income plays, Nick Train looks for big companies that will benefit from change, with positions in eBay and London Stock Exchange (LSE: LSE), as well as media franchises Pearson (LSE: PSON) and Reed Elsevier (LSE: REL) (both pay decent dividends, too) and a big holding in Lindsell Train's media fund.
LTI's Japanese investments -- Nintendo and Canon, presumably informed by Japanese expert and co-founder Michael Lindsell -- also fall into the 'durable franchise' category.
Not everyone will like these shares, but that's the point -- if you're paying for a manager's opinion, you want to see it in his portfolio.
Counting the cost
Many will shudder at such a quirky collection -- one reason the Trust has a market capitalisation of just £30 million.
Others may dislike LTI's cross-holdings in different Lindsell Train managed funds, not to mention the direct holding in the manager itself.
I wouldn't be too hasty. Lindsell Train rightly rebates the fees on these cross-holdings, and they're doing relatively well, too. The stake in Train's fund management company looks particularly valuable, with dividends payable to LTI increasing ten-fold in seven years, despite representing just 6% of LTI's assets.
Management charges might put others off. The 0.65% annual fee is fairly typical for a trust, but as a performance fee, Lindsell Train takes 10% of the annual increase in the share price (plus dividend) above the annual average yield on ConSol. This seems a bit cheeky, given ConSol is a bond you'd usually expect equities to beat.
Overall, I'd estimate expenses will average about 1% a year -- on balance acceptable for an active investment.
Train yourself
LTI shares are trading at around £150 each, at a 6% discount to NAV. (Given the unusually high cost, take extra care when putting in your order.)
Should you buy? I think there's a good case for anyone who wants to bet on a potential star beating the market. Remember though that this trust could be volatile, and that its performance could diverge massively from the index -- exactly why you're buying it, of course!
Even those of us who don't invest might watch the shares and its manager.
It wouldn't do to copy Train's purchases when we're trying to be think for ourselves -- but we'll be regularly reminded what independent investing actually looks like.
More from Owain Bennallack:
