The world is a different place than it was 18 months ago. COVID-19 and the ramifications of the lockdowns used to contain it have changed the investment landscape considerably. In a relatively short period of time, we have gone from concerns that we were approaching the tail end of a long bull market, to a flight to quality and growth, to a value renaissance and now worries about inflation. Navigating a path through this would test even the most experienced fund managers.
Bottom of the table
Apparent recent casualties of this have been Lindsell Train’s investment trust of the same name and Finsbury Growth & Income Trust. Lindsell Train Investment Trust’s NAV performance is second to last of the 17 funds in the global sector over the past six months. Finsbury Growth & Income ranks 20th of 22 UK equity income funds over the same time period.
In Nick Train’s manager’s report for Finsbury Growth & Income, written at the beginning of May but covering the six months to the end of March 2021, he said “there has been a lot for me and other shareholders to feel frustrated about over the last six months. It is an uncomfortable feeling when parts of the market we are not invested in are doing well. Or when longstanding and previously successful holdings are hit by profit-taking or their shares simply tread water. All investors will experience periods like this and during them it is important to understand what is causing the underperformance and then to judge whether change is required in a portfolio to improve its prospects.”
In Lindsell Train Investment Trust’s results, published this week, he said: “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.”
Resilient to the first wave of COVID
The “problem”, as Nick identified, is in large part because his portfolios were resilient in the face of the pandemic, there was little scope for a bounce back when the economic outlook started to look rosier in November 2020. Fixating on short-term performance is a mug’s game anyway. Perfect market timing is just about impossible to pull off. Creating and sticking to a long-term strategy that stacks up intellectually and sticking to his guns in the face of short term setbacks has gained him a justified reputation as one of the UK’s leading investors.
Does that mean that everything in FGT’s concentrated, high conviction portfolio looks like a great investment? For me, I suspect the answer might be no. Also, even though the Lindsell Train Investment Trust board addresses the issue head-on in its latest report, I fear that the key man risk attached to the trust’s largest investment – its stake in the management company – is pretty high.
The world isn’t the same as it was
A core part of the UK trust’s portfolio are holdings in consumer staples companies like Diageo, Unilever and Heineken. The rationale is that the strength of the brands that these companies own provides a strength to these businesses that justifies them trading on relatively high multiples despite their modest sales growth prospects. What if, however, the boom in online grocery sales and direct-to-consumer distribution that we saw last year has permanently undermined this brand strength?
Another large holding in FGT is Sage. Curiously, the stock doesn’t feature in either of the portfolios of the two largest technology investment trusts. I think that both Walter Price at Allianz and Ben Rogoff at Polar question whether Sage’s growth prospects merit its rating. The explosive growth delivered by Xero, an accounting software company based in New Zealand, demonstrates how cloud computing and software-as-a-service have reduced the barriers to entry in Sage’s markets. COVID accelerated the growth of these models as companies learnt to cope with home working.
Backing great businesses with solid defensible business models for the long term is a great strategy. My only worry is that, post-pandemic, some of the business models in Nick Train’s portfolios might not be as solid as they were.