Lindsell Train has seen two funds managed by Nick Train downgraded by Morningstar due to the research house’s concerns about capacity management at the boutique asset manager.
The £6.7bn Lindsell Train UK Equity fund has been downgraded from gold to bronze, while the closed-ended version of the strategy, the £1.9bn Finsbury Growth & Income Trust, has been downgraded from gold to silver.
The downgrade, announced over the Christmas period, came a month after Square Mile downgraded the Lindsell Train UK Equity fund due to concerns about how significant outflows could hit the strategy.
Capacity management concerns at Lindsell Train
Morningstar associate director of equity manager research Peter Brunt blamed the downgrades on concerns over capacity management at Lindsell Train and the ability for the strategies to maintain purity of process.
Sizeable inflows into the Oeic had prompted Train to take significant stakes in companies, Brunt said.
In a statement explaining the downgrades, he said: “While such large ownership levels do not conflict with the long-term investment approach, they could make the fund far less nimble to respond to adverse circumstances (including a significant liquidity event). The large asset base also precludes Train from building sizeable positions in opportunities further down the market-cap scale.
“While this has not had a large impact on performance so far, allowing assets to continue to grow will only further restrict his potential investment opportunities. In light of this, we are concerned that the group has not taken action to manage capacity.”
Investment trust faces smaller downgrade
Morningstar also downgraded the investment trust version of the strategy.
Brunt again pointed to the significant ownership stakes in portfolio companies held by Finsbury Growth & Income.
“Given its closed-end nature, this trust is less vulnerable than the Oeic in this respect; however, the large asset base also precludes Train from building sizable positions in opportunities further down the market-cap scale.”
The Finsbury Growth & Income Trust downgrade was only to a silver rather than bronze, like the Oeic, due to its closed-ended structure, he told Portfolio Adviser.
In November, attendees of the Portfolio Adviser Autumn Congress said in a survey outflows from Lindsell Train were most likely due to the star fund manager’s highly concentrated portfolio rather than his growth style tilt falling out of favour.
Lindsell Train UK Equity suffered its largest ever monthly outflows in September 2019 with investors pulling £374m.
