The Lindsell Train Investment Trust (LSE: LTI) has a fantastic record of producing returns for investors.
In fact, according to data provider FE, Lindsell Train is by far the best performing trust in its sector and among the top performers of any trust in the UK.
The trust has returned a staggering 678% over the past 10 years. For comparison, an investment in the FTSE 100 has produced a total return of only 80% over the last five years.
This strong performance is down to the investment skill of fund manager, Nick Train. Train sits alongside Neil Woodford as one of Britain’s best-known fund managers, thanks to his outstanding investment performance and astute bets on high-quality businesses.
Buy the best
Train’s best quality is his long term focus. While other fund managers might chase story stocks, Train is happy to invest in high-quality businesses that slowly grind out growth. He’s looking for businesses with good cash flows that the managers believe will grow steadily. He also stays away from high-growth companies, including technology stocks, which can deliver outstanding returns but can also quickly fall from favour.
Buying high-quality businesses and holding for the long term is something we at the Motley Fool are keen supporters of, which is why I believe backing Train can help you retire early.
That said, I’m concerned about the trust’s current valuation.
Would Train buy Train?
Unlike other investment trusts and open-ended investment companies, Lindsell Train has a relatively limited number of shares in issue and doesn’t issue more stock to satisfy the needs of buyers.
As a result, due to popular demand, shares in the trust now trade at a premium of 34% to the underlying net asset value of 788p (as of June 6) as investors have been willing to pay whatever it takes to participate in the story.
Over the past five years, as shares in the trust have returned 253%, underlying net asset value has increased only 201%. Over the past six months, the performance gap is even wider. Underlying net asset value has increased by just 10%, compared to a 22% gain in the company’s quoted shares.
This leads me to ask the question, would Train, who is known for his modus operandi of buying out-of-favour companies at discount valuations, buy Train?
The answer to this question is probably no. But this doesn’t mean you should avoid the trust. Indeed, this isn’t the first time it has traded at a significant premium to net asset value. The same scenario occurred in 2016. However, Train’s investment skill managed to right the balance and even those who bought at the peak in 2016 would now be sitting on profits of more than 50%.
Income and growth
Train’s investment performance, coupled with The City of London’s (LSE: CTY) income profile, could make a powerful combination.
While Train’s fund has shot the lights out in recent years, City has produced a more mediocre performance, achieving a capital gain of 52% over the past five years. Where the company really excels, however, is its dividend yield, which currently stands at 4%.
The bulk of the portfolio is allocated to high-quality FTSE 100 income stocks such as BP and HSBC. As elephants rarely ever gallop, the chances that this portfolio will match Train’s in terms of performance, are low.
Nevertheless, what I really like about this investment trust is its stability. This company should be able to provide you with a steady stream of income, through the good times and the bad. Because the portfolio is devoted to high-quality blue-chips, even in bear markets it should be able to continue to produce a steady income stream for investors, making it the perfect retirement asset.
The performance of this income champion can only be improved by combining it with a growth fund such as Train’s. In my opinion, this mix of income and growth will almost certainly help you build a fortune in the stock market and quit the rat race early.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.