A pair of funds run by Nick Train and his business partner Michael Lindsell have run afoul of Ucits rules around owning large stakes in companies.
Analysis from the Financial Times revealed that the Lindsell Train Global Equity and Japanese Equity funds violated the so-called 5/10/40 rule a total of 11 times last year.
The rule states that fund holdings that make up more than 5% of the portfolio should total no more than 40% of total assets. It also restricts single holdings from exceeding 10% of the fund’s assets.
The Lindsell Train Global Equity fund, which Train co-manages with Lindsell and James Bullock, overstepped the Ucits rule on at least six occasions last year, according to the FT, while the Lindsell Train Japanese Equity fund, which Lindsell is the sole manager on, breached the rule five times.
Lindsell Train Global Equity breaches 5/10/40 rule at least six times
The most concentrated positions in Train and Lindsell’s £6.6bn global equity fund accounted for over half of the fund’s assets last October. But in 2020 holdings above 5% have stayed under 40% of the fund’s NAV, at the end of March making up 36.4% of total assets.
Lindsell’s ¥6.1bn Japan fund was in breach of the Ucits rule this February, with its holding in chemical companies Kao accounting for 10.1% of the fund.
The Lindsell Train UK Equity fund is not subject to the same constraints as it is a non-Ucits retail scheme (Nurs) UK-domiciled fund compared with the other two funds which are Dublin-domiciled Ucits.
But Lindsell Train UK Equity has breached UK rules that limit single companies to no more than 10% of the portfolio. The fund’s largest holding Unilever was 10% of net asset value at the end of March, while Relx, the next largest holding, made up 9.9% of the portfolio. London Stock Exchange, Mondelez and Diageo stood at 9.8% each at the end last month.
Passive breaches unsurprising
AJ Bell head of active portfolios Ryan Hughes said the breaches aren’t surprising given Lindsell Train as an investment house is known for running concentrated portfolios with big stakes.
“The difficulty is, if you get market moves you will get an element of passive breaches,” said Hughes. “As the value of those holdings increases relative to the value of other holdings, it’ll tip you through the limits.”
Seven Investment Management senior portfolio manager Peter Sleep agreed that the fund breaches were likely inadvertent and one of the risks that comes with running concentrated portfolios.
“If Lindsell Train had bought stock in error and breached 11 times there would have been all sorts of stewards’ enquiries,” he said.
Inadvertent breaches have become more common during the coronavirus sell-off, Sleep added.
“All fund managers would have had to deal with massive volatility, delays in fund pricing (because big day to day price swings have to be checked), larger than normal fund inflows and outflows and slow communications because we are all working from home.”
Lindsell Train responds
A spokesperson for Lindsell Train stressed to Portfolio Adviser that the breaches were inadvertent and caused by circumstances outside of the portfolio managers’ control, adding that the firm has automated trading controls in place to ensure no breaches are caused as a result of trading activities.
They said that Lindsell Trains funds’ product literature clearly spells out the concentrated nature of the portfolios.
“Equally important to understand is that the regulations governing all three funds recognise that such breaches can occur,” the spokesperson continued.
“The requirement is to resolve them as soon as reasonably practicable and in the best interests of investors. In practice, this means avoiding unnecessary trading costs whilst still ensuring timely correction.
“Lindsell Train follows strict protocols to resolve the breaches within a timeframe agreed and monitored by the relevant independent management companies of the funds.”
Train has made no secret of the fact that what he does is much riskier than the average portfolio and has defended his high concentration in a few stocks as one of the secrets of his successful returns.
But recently his preference for owning a small handful of investments has made investors jittery since the blow-up of Neil Woodford’s flagship equity fund thrust liquidity concerns into the spotlight.
Both the Lindsell Train Global Equity and UK Equity funds have seen a spike in outflows with each fund shrinking by more than a quarter since August when they stood at £9bn and £7.4bn respectively.
Morningstar downgraded Train’s UK equity fund in December over capacity concerns, following hot on the heels of research house Square Mile which demoted the fund due to “increasing concerns” over its liquidity profile.
Lindsell Train UK equity managed to survive Interactive Investor’s liquidity review, however, and remains on its Super 60 buylist.
