From what I’ve read about him, I’ve no reason to see Nick Train as anything but a highly skilled investment manager. But six months ago I said the same about Neil Woodford. Are we in danger of dropping one guru who has fallen from grace and taking the same risk with another?
Train seems very much in favour at the moment, with shares in Lindsell Train Investment Trust (LSE: LTI) currently commanding a premium to net asset value (NAV) of 26%. But it has been a lot higher.
Massive premium
The shares are trading at £1,350 at the time of writing, but reached as high as £2,030 in June, so you’d have lost a third of your investment in just six months had you bought some at the time. What could you have done to avoid that pain?
The obvious clue was that Lindsell Train Investment Trust shares were on a premium to NAV of more than 90% at their peak.
That’s right — people were paying almost twice as much as the value of the underlying assets. Now, NAV had climbed 28% in the previous 12 months, but paying that price just seemed horribly irrational to me and I saw it inevitably heading for a fall.
Writing a little later in July, even though the shares had fallen sharply (probably spurred by Neil Woodford’s fall from grace), I still thought the premium was unjustifiable and had the trust down as a Sell — and at the time I wouldn’t even touch Woodford Patient Capital on a discount to NAV.
Valuation
But how do we go about trying to value Lindsell Train Investment Trust shares? How many people who have bought the shares know its objective and what it actually does?
Lindsell Train Limited (LTL, the company managing the trust) describes its objective thus: “To maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital.” So, to beat inflation, then? That doesn’t sound to me like something to pay well above asset value for.
The list of asset classes pretty much covers everything, including stocks, unquoted equities, bonds and funds. That’s maybe a decent spread for safety, but I don’t see sky-high growth there.
But wait, the trust also has a policy of putting money into Lindsell Train investment fund products (up to 25% of its gross assets), and has 24% invested in LTL itself (which is an unquoted equity).
Confused yet?
In fact, LTL says it set up the investment trust to “provide investors with the opportunity to share in LTL’s potential growth“. So you buy the trust (which charges fees), so it can buy its own manager, which in turn invests in its own funds (which charge fees).
When you can buy shares in investment managers on the open market, why pay a premium for one to buy unquoted shares in itself and charge extra fees for the purpose? I see no sense in it.
Anyway, to summarise, the answer to my question is no, I have no reason to suspect Nick Train is anywhere near as reckless as Neil Woodford appears to have been. But I do expect Lindsell Train Investment Trust shares to drift back closer to NAV over the longer term.
