Lindsell Train and Fundsmith hammering fails to spook investors

Heavy hitters Nick Train (pictured) and Terry Smith are among the managers that have been beaten down in the recent global sell-off but the bout of poor performance has not prompted investors to start heading for the exits.

Giants of the IA Global sector Lindsell Train Global Equity and Fundsmith Equity have seen a dramatic reversal of fortunes in the last three months and have landed among the sector’s biggest laggards after consistently being among the top performers.

Both funds are now in the fourth quartile on a three-month view compared with over one-year where they are both first quartile.

Train’s global equity fund is languishing at the very bottom of the 330-odd funds in the sector after one month, down over 6%, according to data from FE Analytics.

Fundsmith Equity is 23^rd from the bottom over one month having lost investors 4.2%, slightly better than Trojan Global Equity, run by Gabrielle Boyle and George Viney which lost 4.3%. It also beat Smith’s sustainable equity fund which fell 4.3% over one month.

Blue Whale Growth, backed by billionaire Brexiteer Peter Hargreaves, and several funds from long-term growth house Baillie Gifford have also been caught out in the sell-off.

Blue Whale manager Stephen Yiu, who once told Portfolio Adviser he would ban diversified portfolios if he were chief executive of the Investment Association, delivered negative returns of 4.6% over one month.

Baillie Gifford Global Discovery and Baillie Gifford Long Term Global Growth, which went “bonkers” riding the tech wave last year, also faltered, landing in the fourth quartile.

Source: FE Analytics

No style persists forever

“The growth style momentum has certainly slowed but that is not too surprising as it couldn’t continue at the same pace forever,” says Willis Owen head of personal investing Adrian Lowcock.

AJ Bell head of active portfolio Ryan Hughes notes there is a 12% performance differential between Schroder Global Recovery, a deep value manager, and Lindsell Train Global Equity since the end of August when the style rotation kicked off which is “a material change”.

“It’s an important reminder to investors in those funds that these funds have done well for a very long period of time, but no style persists forever,” he says.

“And a lot of the companies that Lindsell Train, Evenlode, Fundsmith and all these types of managers are buying are on pretty rich P/E ratios and it doesn’t take much of a change in sentiment in the market to see a performance differential like this in a very short period.”

Lowcock says a style rotation from growth to value could lead to negative quarters of performance and possibly longer term underperformance for Fundsmith, Lindsell Train, Baillie Gifford and Blue Whale. But he says “it wouldn’t be right to abandon growth completely”.  “It is more of a case of having exposure to both styles.”

Flows still pouring into Lindsell Train and Fundsmith

But this underperformance hasn’t translated into negative fund flows.

Data from Morningstar shows UK investors poured £121m into Train’s £8.4bn global equity fund in September, almost double the amount of net flows coming into the fund in August.

This is a far cry from Lindsell Train UK Equity which suffered its largest ever monthly outflows in September with investors pulling £374m.

Though the £6.9bn fund was among a handful of UK equity products that were hit by the risk-off environment and Brexit concerns, it has performed slightly better than Lindsell Train Global Equity with negative returns of 5.8% and 4.1% over one and three months.

Fundsmith Equity also ended September with net positive flows of £36m.

Morningstar data shows Smith’s fund has seen the third highest net outflows of global equity funds sold in the UK with £991m coming out of the fund year-to-date however this includes a circa £2.3bn transfer to Fundsmith’s Sicav at the end of March as part of its Brexit contingency planning. Excluding this Fundsmith Equity has seen net positive flows of £1.3bn so far this year.

Jupiter Merlin and HL fund of funds tumble

Turbulence for Train and Smith has also been bad news for certain fund of fund managers like Jupiter Merlin and Hargreaves Lansdown with chunky exposures to the star managers’ multi-billion-pound vehicles.

Fundsmith Equity makes up 19% of the £517m Jupiter Merlin Worldwide, the hardest hit fund in the fund group’s multi manager range, which is down 3.42% over three months.

Meanwhile, Hargreaves Lansdown’s Multi Manager Special Situations fund, which has also struggled in the wake of the growth sell-off, has 7% invested in Lindsell Train Global Equity. It was the second worst performer out of Hargreaves’ multi-manager range on a three month view (-2.6%), surpassed only by HL Multi Manager Asia and Emerging Markets (-4.2%).

Both funds also have big holdings in Findlay Park American, which makes up over a third of Jupiter Merlin Worldwide and is HL Special Situation’s largest holding at 11.6%.

Stay or go

Peter Brunt, associate director at Morningstar, says whether investors stick by Train and Smith during a rougher time for their funds depends on the nature of the underperformance.

Professional investors are more likely to stick with managers when poor performance is the result of natural causes like market rotations, provided those managers have a “very clear, disciplined and well-articulated, long-term investment approach”, he notes.

It’s when poor performance is unexpected – a result of a team change, style drift or persistent errors – that they are “more likely to head for the exit”.

For IFAs Brunt says it is down to the structure of the investment.

“If clients have their money invested in tax-wrapped products, then they will be more likely to make a change, whereas if they are in unwrapped products, they will likely prove more sticky due to not wanting to trigger capital gains tax,” says Brunt.

Jupiter Merlin sticks by Terry Smith

Despite the recent bumpy ride, Jupiter Merlin manager David Lewis says the team plans on sticking by its growth names on the basis that they will perform better in the late economic cycle and in an environment of a “reasonably strong dollar”, “pretty low bond yields” and softening PMI data.

Jupiter Merlin Worldwide holds only 11 funds in the portfolio, and less than 1% in cash, but Lewis says the fund is “significantly diversified”. He points out there are 450 underlying stocks in the fund’s 11 holdings, the largest of which is just over 3% of the portfolio. The top 10 stocks within the funds are all over 1% but the vast majority are less than 1%.

Taking big positions in active managers is “a part of our process and philosophy,” Lewis explains. “For us to make a difference to the performance, we’ve got to back our convictions and have significant weightings in the things we like because by the nature of what we’re doing, we are very diversified.”

Hargreaves head of investment analysis Emma Wall told Portfolio Adviser “the Multi Manager funds are highly liquid, well diversified portfolios” and the impact on one of these funds on performance is limited.

Hargreaves’ Multi Manager range has chiefly been in the spotlight for its exposure to the Woodford Equity Income fund, which is to be wound down later this year. Wall says since the fund was suspended exposure to the Woodford fund has fallen, including in the HL Multi Manager Special Situations fund.