The Lindsell Train Investment Trust has bagged its managers £14.5m in performance fees over a decade by comparing the stellar performance of its equities portfolio to a benchmark linked to UK government bonds, analysis by Portfolio Adviser reveals.
LTIT’s interim results this month revealed the investment trust could fail to earn any performance fees in 2022 following its adoption of the more appropriate MSCI World index as its benchmark this year. In the six-month period to the end of September, LTIT’s shares rose 5.6% and its net asset value was up 5.9%, while the MSCI World returned 10.2%.
Chairman Julian Cazalet announced over the summer that the strategy would be dropping its controversial benchmark, the “annual average running yield on the longest-dated UK government fixed rate bond (UK Treasury 1.625% 2071), calculated using weekly data, plus a premium of 0.5%, subject to a minimum yield of 4.0%”.
As such, all eyes are on how Nick Train’s portfolio will now perform on a relative basis and how this will affect performance fees, which are based on whichever of LTIT’s share price or NAV has the lowest value and are calculated at 10% of the differential with the benchmark.
‘The measure of success should be fair’
“For any investment trust that has a performance fee, the measure of success should be fair,” says AJ Bell head of active portfolios Ryan Hughes. “I think people would be hard pressed to say that for the last 10 years, charging a performance fee against that benchmark was a fair representation of what the trust was trying to achieve.”
QuotedData head of investment companies James Carthew agrees. “It is important to set a performance benchmark that has a similar risk and return profile to that of the portfolio.”
Since its inception in January 2001, LTIT’s minimum investment objective has been to “maintain the real purchasing power of sterling capital”.
This is the basis on which the board benchmarked the investment against UK fixed interest for the last two decades. What the board was slow to acknowledge was the changing shape of Train’s portfolio over the lifetime of the investment trust, with Cazalet even admitting as much in the 2021 annual results, in which the announcement was made that MSCI World would become the portfolio’s new benchmark.
He noted in the investment trust’s first 10 years it modified its asset allocation between equities and other asset classes. In LTIT’s first monthly briefing, published in December 2001, just 35.1% was allocated directly to equities with an additional 24.4% in Lindsell Train equity funds. A further 30.9% was in bonds and 7% in preference shares.
But Cazalet acknowledged the portfolio had not looked like that over the last 10 years. “The portfolio is now predominantly invested in equities and likely to remain so for the foreseeable future,” he said.
MSCI benchmark would have resulted in lower performance fees
Portfolio Adviser asked Lindsell Train whether they felt the £14.5m it had received for outperforming a gilts benchmark represented a good deal for shareholders. A spokesperson pointed to the annualised NAV performance of 21.4%, noting even the MSCI World had trailed that with returns 11.5% annually over the same period.
Nevertheless, in all but three of the last 10 years, using the MSCI World would have resulted in lower performance fees for investors, according to LTIT’s annual reports.
Lindsell Train Investment Trust performance over the last decade
| Share price | NAV | Benchmark* | MSCI World | Performance fee | |
| 2021 | 38.9% | 29% | 4% | 38.4% | £2,661,702 |
| 2020 | -26.5% | 9.8% | 4% | -5.8% | 0 |
| 2019 | 45.7% | 23.2% | 4% | 12% | £2,433,000 |
| 2018 | 29.6% | 30% | 4% | 1.3% | £2,827,000 |
| 2017 | 43.7% | 35.1% | 4% | 31.9% | £2,820,000 |
| 2016 | 35.6% | 11.9% | 4% | -0.3% | £362,000 |
| 2015 | 23.9% | 27.9% | 3.8% | 19.7% | £1,533,000 |
| 2014 | 16% | 13.1% | 4.3% | 9% | 0 |
| 2013 | 32.9% | 27.2% | 3.8% | 18.5% | £1,697,980 |
| 2012 | 9% | 10.2% | 4.2% | 1.6% | £127,000 |
Source: Lindsell Train Investment Trust; benchmark is the annual average running yield on the longest-dated UK government fixed rate bond (UK Treasury 1.625% 2071), calculated using weekly data, plus a premium of 0.5%, subject to a minimum yield of 4.0%
To take one of the most extreme examples, in the year ended March 2017, LTIT increased its level of outperformance by a factor of almost 10 by using its gilts benchmark rather than the MSCI World. That year, LTIT shareholders paid 2.7% in performance fees, triple the 0.90% ongoing charges figure, off the back of 35.1% returns on the NAV and 4% in the benchmark. That resulted in a £2.82m payday for Lindsell Train.
Over the same period the MSCI World returned 31.9%, still trailing Train’s portfolio, but by a much smaller amount.
By contrast, on the few occasions when the MSCI World underperformed LTIT’s official benchmark it was by a much smaller amount. For example, in 2016 the MSCI World fell 0.3% compared to a 4% gain in the official benchmark. That year Lindsell Train earned a relatively meagre performance fee of £362,000 after the trust’s NAV returned 11.9%, while its share price stormed up 35.6%.
Should performance fees be charged on Lindsell Train Limited?
Responsibility for the benchmark falls squarely on the board, which should have addressed the anomaly years ago, says Hughes.
“What we would prefer to see is that when the investment strategy evolves and shifts that the benchmark is updated to reflect that change. So, good that they’ve done it, but they should have done it a long time ago.”
Additionally, 48% of the portfolio’s NAV is allocated to Lindsell Train Limited, which Hughes argues isn’t managed in the traditional sense. “Those guys aren’t going to sit there and say ‘well, we don’t like Lindsell Train anymore so we’re going to reduce our exposure’.”
He adds: “When Lindsell Train’s performance was amazing and money was absolutely flooding in hand over fist obviously this was a very interesting way of getting exposure to Lindsell Train Limited. For those people that understand that, that’s brilliant, but there’s a risk that some people don’t.”
The allocation also doesn’t sit well with Carthew. “I’m uneasy with it,” he says. “The principal beneficiaries of the LTIT fee also benefit when the management company does well.”
A Lindsell Train spokesperson told Portfolio Adviser the board retains ultimate discretion over the holding in Lindsell Train Limited and Lindsell Train managed products “although decisions on these holdings are based on advice and information received from the investment manager”.
LTIT had opportunity to adopt new benchmark in 2015
In 2015 the board did have the opportunity to change its existing UK bond benchmark, the average annual yield on the 2.5% consolidated loan stock, when the government announced it would be redeeming it at par.
The portfolio had no bond exposure at that point with 28% of the portfolio in Lindsell Train Limited and the remaining 72% in funds and quoted securities. Nevertheless, another gilt benchmark was adopted, the annual average running yield of the longest-dated UK government fixed rate bond plus a premium of 0.5%.
At the time, then-chairman Donald Adamson acknowledged the MSCI World was a useful benchmark for shareholders, stating the investment trust would continue its practice of referencing the index “especially when exposure to equities is high”. Bonds remained absent from the portfolio in the six-year period that followed before the benchmark was changed.
Performance fees soared as Lindsell Train performance stuttered
Lindsell Train’s actions over the last couple of years suggest the managers believed the performance fee structure was inappropriate, says Hughes.
In 2020, the investment manager deferred a performance fee in a year in which the share price fell 26.5%, because performance was based on the 9.8% return from the NAV. The structure of the performance fee means it is based on whether the NAV or share price finishes the year lower, and in 2020 the NAV was £956.65 compared to a share price of £1,060.
In the 2021 financial year, the performance of both years were combined to deliver the managers a whooping fee of £5.32m – the largest fee earned in the 10 years analysed by Portfolio Adviser. In this instance, Lindsell Train offered to waive half the fee, instead taking £2.66m.
“If you concluded it was a fair and representative benchmark, and you’d outperformed it, that’d be a situation of well done, pat yourself on the back,” says Hughes. “Everyone knows there’s a performance fee, so they should have been happy to take it.”
