Lindsell Train shines spotlight on its ‘obvious’ succession risk

Michael Lindsell ponders his own mortality as trust hits 90% premium

Michael Lindsell has highlighted his own mortality in an update for Lindsell Train Investment Trust shareholders in an effort to shine a spotlight on risks in the portfolio.

The Lindsell Train Investment Trust was trading at a staggering 88.6% premium at the end of May. Its net asset value has risen 19% in the year to date compared to 55% in the share value.

Lindsell said that premium could value Lindsell Train Limited, which he co-founded with Nick Train, as high as £1.1bn putting it at odds with the universe of quoted competitors the board of the trust monitors.

Lindsell Train Limited accounts for 46.7% of the portfolio.

In the wider industry, valuations average 2.2% of assets under management, 14x earnings and a 5.7% yield. The corresponding figures for Lindsell Train Limited at a £1.1bn valuation would be 5%, 26x earnings and 3.1% yield respectively.

Succession risk is ‘obvious’ at Lindsell Train

“Investors must weigh up this valuation against the obvious succession risk at Lindsell Train,” Lindsell said.

“Nick and I hope to be involved in the business for many years and have been taking important steps to ensure that the rest of the investment team are motivated and incentivised to take on significantly more responsibility, as they have been increasingly doing in the last five years; but, faced with the unlikely scenario that Nick or I will not be around for whatever reason, it’s clear that we have some way to go to engineer a smooth and seamless transfer of responsibilities.”

Share price could fall 60%

The monthly update for the trust highlighted AUM at Lindsell Train Limited has risen from £15.6bn to £20.8bn between the end of 2018 and the start of May.

But Lindsell warned declining markets, underperformance or client withdrawals could all contribute to a fall in AUM.

He noted a 25% drop in AUM could result in a corresponding 25% drop in Lindsell Train Limited. The trust’s premium fell to zero during the financial crisis and could do so again, he warned.

If that was the case, 60% could be wiped off the investment trust’s valuation.

Willis Owen head of personal investing Adrian Lowcock said Lindsell Train is right to warn investors of the risks in the share price.

“Nick Train’s reputation and investment style are very high at the moment and it is this that is supporting the share price. The style will have a period of underperformance and investors buying at such a premium are likely to suffer more if there is a sell off,” Lowcock said.

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