Lindsell Train (LTI) reported its annual results to 31 May 2021, with the following performance highlights:
- Share price total return – 38.9%
- NAV total return – 29.0%
- Benchmark return – The annual average running yield on the longest-dated UK government fixed-rate bond currently UK Treasury 1.625% 2071, calculated using weekly data, plus a premium of 0.5%, subject to a minimum yield of 4.0%
- MSCI world index total return – 38.4%
- UK RPI Inflation (all items) – 1.5%.
LTI has recently changed its benchmark, which we covered here earlier this month. This morning’s announcement added the following on the benchmark: “Since its inception the company has benchmarked its performance against an absolute return measure that was originally designed as a market-based proxy for inflation. It specifically captured the company’s minimum objective to protect the real value of Shareholders’ capital from year to year. In its first ten years the company successfully modified its asset allocation between equities and other asset classes in order to meet this objective. However in the more recent ten years the rise in the value of LTL to now almost 50% of NAV, together with the lack of asset allocation alternatives (particularly bonds) offering comparable value to equities, means that the portfolio is now predominantly invested in equities and likely to remain so for the foreseeable future. The board and the Investment Manager have concluded that, in light of this reality, it is more appropriate to change to an equity benchmark – the MSCI World Index total return in sterling – from the beginning of the company’s current financial year. Although changing the benchmark may seem fundamental, in practice we think it formalises the increased orientation to equities. In communications with Shareholders over the years we have increasingly referenced this index as the equity component of the company has risen.”
LTI’s chair, Julian Cazalet, noted that “the performance of the company’s unquoted holding in Lindsell Train Limited (LTL) (in which it owns a 24.21% minority shareholding) once again contributed most to this year’s NAV increase. Underlying this was a 26% increase in LTL’s funds under management (‘FUM’) over the 12 months to 31 March 2021, from £18.2bn to £22.9bn. The board’s valuation of LTL, based on a formula which the directors amended at this time last year, now captures the immediacy of FUM changes on LTL’s earnings. The increase in LTL’s FUM was largely attributable to market movements, although net inflows amounted to £1.1bn over the year. Particularly pleasing was the growing support from US-based investors for the US-domiciled Lindsell Train Global Equity , which garnered net new assets of over £940m. This reflects the work that LTL has undertaken with North American based institutional investors and their consultants over a number of years. Its patient approach is paying off and we see this diversification in its client base as an encouraging development. North American sourced FUM now make up nearly 11% of LTL’s total, up from 6.5% a year ago.”
A review from Nick Train
“The chairman notes in his statement that the recent investment performance of the company’s quoted portfolio and of Lindsell Train Limited’s other client portfolios has been disappointing. Although we are cautious about drawing conclusions from returns over just a few months, particularly given what an extraordinary period those months have spanned, we admit that we too are disappointed. Let me address what has happened.
Our portfolios can usefully be understood as being constructed around three strategic ideas; three ideas that have remained constant over the 20-year life of Lindsell Train. First, investing in companies that use technology to inform or entertain their customers or make their customers’ lives more convenient. For instance, the direct holdings in the Company that represent this theme are the London Stock Exchange Group (now even more of a data and technology company after the acquisition of Refinitiv), Nintendo, PayPal, Pearson and RELX. Second, companies that own beloved and trusted consumer brands – in the expectation these brands will continue to deliver inflation-protected cash flow growth, as they have for decades. The Company’s holdings here are A.G. Barr, Diageo, Heineken, Laurent-Perrier, Mondelez and Unilever. Finally, we have been long-term investors in the wealth management industry, believing this industry offers an attractive proxy participation in wealth creation around the world. For our other clients we own stakes in companies such as Hargreaves Lansdown or Schroders, but in your portfolio this theme is represented by the 24.21% stake the Company holds in LTL.
Looking back over the history of Lindsell Train and The Lindsell Train Investment Trust plc we have been gratified by how effective sticking to these three simple, but powerful strategic ideas has proven. We have benefited from good capital appreciation from most of our technology-exposed investments, while the consumer brands have proven reliable money-makers, delivered growing dividends and been resilient during tough periods (like last year). And the wealth managers have by and large done well too. This portfolio mix has allowed us to deliver competitive absolute and relative returns, from the inception of Lindsell Train in 2000 pretty much all the way through to June 2020.
Very recently though the strategy has not been so successful. In particular, over the last nine months to end March 2021 all Lindsell Train’s portfolios lagged their respective benchmarks. All investors are prone to such episodes – certainly Michael and I have experienced similar periods several times over our careers. In such circumstances, one must first establish what isn’t working and why. Then determine whether a change of strategy is necessary to improve investment returns.
The reasons for our recent lacklustre performance are easy to find. Since mid-2020 global equity markets have risen strongly, driven by two dominant trends. First, the bull market in Technology has continued, with investors willing to pay ever higher prices and increasingly willing to back new and sometimes untested companies. Second, as the world emerges from the pandemic there has been a big recovery in the cyclical and economically sensitive industry sectors that were so hard hit during the first half of 2020. We must admit to being under-represented in our global portfolios to both these trends. Although holdings like LSE, Nintendo and PayPal did well in 2020, we are not natural investors in young technology companies and have always avoided cyclical sectors. Meanwhile, the steady reliability of beer, chocolate and personal care brands is currently less highly prized. This means our brand owners, like Heineken, Mondelez and Unilever have been left behind in this phase of the bull market.
What will we do in response? The answer is not much – although we are always working to increase the value in our portfolios, by adding to existing holdings when depressed or, occasionally, initiating new ones. That is because we remain optimistic about the thematic ideas and companies we are invested in and think their recent underperformance is indeed an opportunity to add, not a reason to sell. Submitting client portfolios to surgery incurs transaction costs which need to be justified; and certainly reinvesting in the areas of global stock markets that are currently booming would not only be costly but could also expose our clients to the risk of joining a party late.
Returning to the company’s portfolio, we hope the consumer companies will offer accelerating sales growth, as lockdowns ease across Europe and Emerging Markets. In addition, efficiency measures announced by portfolio companies such as A.G. Barr, Heineken and Unilever should make that resumption of sales growth, even more profitable. Of particular significance, Diageo is one of the biggest holdings we have across LTL, with c.£1.9bn invested and its shares have rallied over 30% from the lows of last year, as consumption of premium spirits picks up pace around the world. We hope there is more to come for Diageo and peers. Meanwhile, the prospects for LSE, Nintendo, PayPal and RELX seem better than ever, as technology enhances the utility of their products and services.”
LTI’s chair on considerations for the future as the investment team grows to six
LTI’s chair had this to say on succession management: “Increasingly a crucial part of the board’s assessment of the ongoing valuation of LTL is our judgement of whether LTL can manage a seamless succession beyond the involvement of its two founders. It is encouraging to see the investment team, now numbering six in total, maturing and to observe that the more recent members are increasingly taking on responsibility and contributing to the decision-making process. In addition, a new generation of executives is beginning to take on vital responsibilities for running other important parts of the business. The founders remain as committed as ever to the long-term success of LTL but recognise the necessity to plan ahead and to ensure that these key individuals have the right incentives in place. As significant minority shareholders the board is working with the founders closely to arrive at the right outcome for all stakeholders.
With vaccinations rolling out worldwide the future looks a little clearer than it did in the midst of the pandemic at this time last year. On the other hand, the unprecedented economic measures enacted by governments and monetary authorities that have been such a support to markets are likely to have secondary effects, the implications of which we cannot predict but could be material. We take reassurance from the strength and quality of the franchises and market positions of the quoted companies the Company owns and we expect them to survive and thrive in the future in the same way as they have done over the 149 years that the average investee company has endured.”
LTI: Lindsell Train’s Nick Train recaps on factors behind disappointing last few months