Lindsell Train 24 October 2023
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
To maximise long-term total returns with a minimum objective to maintain the real purchasing power of sterling capital.
Lindsell Train Limited
Association of Investment Companies (AIC) Sector
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Lindsell Train Investment Trust (LTI) provides investors with a unique portfolio, marrying a high-conviction global equity strategy with a holding in Lindsell Train Limited (LTL), the management company behind this trust and a much wider business. LTI is managed by the longstanding manager and co-founder of LTL, Nick Train, who employs a strict quality-focussed, ownership-based approach to identify companies he hopes will offer the greatest opportunity to generate very long-term, sustainable growth for shareholders.
As discussed in Portfolio, this has typically resulted in a greater allocation to more defensive, staple-like businesses that have the potential to offer growth across the market cycle whilst offering some protection against inflation and the increased cost of borrowing. Some diversification is offered through the US and UK allocations to the LF Lindsell Train North American Fund and the Finsbury Growth and Income Trust, both managed by the team at Lindsell Train. However, what really sets the trust apart is the exposure to the underlying economics of LTL, which currently makes up 40% of LTI’s NAV. LTL is periodically valued by the board based on AUM and profitability and exposes LTI shareholders to risks as well as opportunities. The holding is also responsible for significant volatility in the share price discount and premium.
A focus on quality employed by the managers has contributed to the trust’s consistently strong Dividend growth. That said, the dividend has historically been bolstered by LTL’s dividends, giving LTI the highest dividend yield within the AIC global sector at 5.8% versus a sector average of 2%.
Long-term NAV Performance has been strong, in large part driven by the holding in LTL. However, shorter term the relatively balanced stylistic exposure has meant LTI has underperformed during both growth and value-driven environments. The pressure on LTL’s valuation has also weighed on performance. This has contributed to high discount volatility, and LTI has traded its longstanding premium rating for a Discount which has continued to widen to 11%.
Nick’s high-conviction approach combined with the stake in LTL has delivered handsome long-term returns for shareholders. Underpinning the strategy—which also clearly influences the long-term value of the management stake—is the exposure to quality, staple-like companies that offer the promise of continued growth regardless of the economic environment. These may offer stronger earnings potential in a higher interest rate and inflationary environment—with the high dividend yield providing an additional contribution to total returns.
That said, during periods where stylistic biases are driving market returns, the idiosyncratic makeup of the portfolio means it can underperform equity markets. We are also aware of the high degree of specific risk which comes from the now very valuable stake in LTL—which could be heightened given the unlisted nature of the company.
The Lindsell Train strategy has delivered strong long-term returns. LTI allows investors to double down on their confidence in the strategy, by having exposure to the success (or otherwise) of the management company. This is a relatively closely held, and illiquid trust which only adds to the discount volatility. Now that the premium has turned to a discount to NAV, it could present an opportunity. However, the risks in our view are significantly greater than with traditional investment companies with diversified portfolios, and so LTI’s investors need to be happy about those risks. In our view, a discount to NAV is clearly preferable to the historically very large premium to NAV, however, the biggest influence on future returns is likely to be the trajectory of LTL, which depends on good investment performance not to mention, over the longer term, the key man risk inherent in such a business.
- High-conviction portfolio with additional exposure to LTL
- Strong dividend growth and significantly higher yield compared to peers
- Discount significantly wider than the long-term average premium rating
- Higher degree of specific risk in holding in LTL, the management company
- High allocation to UK equities means portfolio is arguably less global than peers
- Performance fee structure layered onto stake in management company may raise eyebrows