After declaring the fall in oil prices a “gift for UK stocks” in March, Train said in the firm’s latest fund update that because a number of the company’s holdings are “clear beneficiaries of cheaper energy”, the rally in energy seen in April was unhelpful.
However, Train highlighted the sensitivity to oil prices as a reason to be cautious of the company’s strategy in the short term, he dismissed the notion that rising inflation and falling bond prices are a threat to the stocks he owns.
He said, while investors consider a number of the stocks he owns (like Diageo, Heineken and Unilever) to be bond proxies, in that their share prices are dictated by the rise and fall of bond prices, he has two profound issues with that argument.
“If a share is really a bond proxy it must have qualities similar to a bond. The most notable characteristic of a conventional government bond is that it has a fixed, unchanging coupon,” he said. However, while the firm’s holdings have a history of inflation-beating dividend growth, they do not have fixed dividends.
“If there is anything “bond-like” about such companies, then actually the bonds they most closely resemble are index-linked government bonds, not conventionals.”
Train’s second issue with concerns around the expected decline in bond proxies is that, historically, “the type of companies that suffer most operational damage during periods of rising inflation are capital intensive suppliers of commodity products”.
In the event of inflation, Train said, such companies often find they have not factored in sufficient depreciation to cover the escalating cost of capital replacement and their lack of pricing power means inflation “hits their costs in ways they can’t recoup at the revenue line”.
