It’s not quite fair to describe Nick Train as Britain’s Warren Buffett but there are some similarities. Both invest for the long-term, focus on quality and put more store by a unique and durable franchise than getting an investment at a bargain basement price. Both frown on diversification: for Buffett it is a poor substitute for knowing your investments; as for the Lindsell Train UK Equity Fund, it has just 24 holdings.
When asked how he would characterise the qualities he looks for, Train says: ‘all you know is that when you see it you know what it is. In an uncertain environment, we would own business brands and franchises where we have the highest degree of confidence in their durability and relevance to customers, not just today but for decades in the future.’
That willingness to stick with a business that he has identified as being of the highest quality can be seen as either admirable consistency or dogged inflexibility, depending on your point of view. A good illustration of this might be Train-favourite Pearson, which currently stands at barely half its level of three years ago as investors have questioned whether the company is fatally holed below the waterline of technological disruption.
Train admits that Pearson’s traditional book business may well disappear in the fullness of time as students prefer online resources. And he confesses that owning the stock has been an ‘extraordinarily mortifying experience’. But he is sticking by the investment: ‘what Pearson has been doing is investing heavily, probably more than anyone else in the world in digitising the unique educational content and know-how that it has built up over many decades. There are few companies in the world with the credibility or investment base to make a success of a transition to digital education. Pearson is one of those.’
Pearson is the exception which proves the rule. Most of Train’s investments have been supremely successful long-term investments. They are a great advertisement for ‘buy and hold’, the investment approach which champions buying the best and sticking with it so that the magical power of compounding can work its powers on a portfolio.
Does this mean that Train will always pay up for quality? ‘Within reason, yes, you can with a true investment time horizon at least continue to hold if not buy more of these extraordinarily rare companies.’ Even if they are expensive? ‘Frankly, who cares? You shouldn’t care. You should care about your investing assets being allocated to things that are going to last, that won’t be obliterated by the next economic downturn and just may survive the period of technological transition that we are going through.’
After a long period of outperformance, both by Train’s fund itself but also by the quality, growth style he espouses, some investors are questioning whether his approach has had its day. They argue that value is due a come-back against a backdrop of higher growth and rising inflation.
‘In previous periods of high and rising inflation, those companies that did the worst are what people today call value stocks - engineering companies, banks, construction companies, insurers - they all got killed by rising inflation’, Train says.
He further argues that his investing hero’s track record proves his point. ‘Most of Warren Buffett’s career, when he was championing companies like Coke and other consumer staples, was during a period of rising inflation and that is why he valued them so highly. So, I would say to a value investor, be very careful what you are wishing for.’
An irony of Train’s approach is that, despite pouring scorn on other investors’ attempts to seek value among cyclical companies of lesser long-term quality, he actually considers himself to be a type of value investor himself. ‘We would describe ourselves as value investors. We have a strong intellectual conviction that if any of our companies were bid for, the price to own 100% of them would be very materially higher than the current stock market value.’
With two of the stocks in Train’s concentrated portfolio the subjects of takeover bids - Fidessa and Dr Pepper Snapple - his theory is currently being tested. The challenge now will be how he re-invests the proceeds of those bids. The good news is that the market volatility since the beginning of 2018 has provided the opportunity to top up some of the UK Equity Fund’s holdings at interesting discounts to their recent highs.
For an investor with the courage of his convictions (both Train and Buffett are prime examples) this is the ultimate gift from Mr Market.
Watch our latest interview with Nick Train.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.