Lindsell Train valuation raises eyebrows

JP Morgan analysts flag key-man risk and valuation method for fund boutique

JP Morgan Cazenove has picked the Finsbury Growth & Income Trust as the best way to access Nick Train’s stockpicking skills via a closed-ended fund due to concerns about exposure to Lindsell Train Limited in the asset manager’s Lindsell Train Investment Trust.

The £1.4bn Finsbury Growth and Income Trust contains many of the same holdings as the £166.6m Lindsell Train Investment Trust, although not the Lindsell Train Limited, and trades around NAV, said UK investment company analysts Christopher Brown and Adam Kelly.

The Lindsell Train Investment Trust trades at a 45.1% premium to NAV, according to the analysts, compared to an average 0.2% discount to NAV for the AIC Global sector. The Finsbury Growth and Income trust trades at a 0.4% premium, according to the Association of Investment Companies.

Lindsell Train Limited was among the biggest contributor’s to the Lindsell Train Investment Trust portfolio in October alongside open-ended vehicle Lindsell Train Global Equity and Irn-Bru manufacturer AG Barr.

However, in the investment trust’s half-year report, chairman Julian Cazalet highlighted the board’s concerns that the premium and share price could be at risk if they are hit by more volatile stock markets. Lindsell Train Limited represented 24.23% of the investment trust, according to its half-year report to the period ended 30 September 2018.

JP Morgan Cazenove currently takes a neutral view on Finsbury Growth & Income and an underweight recommendation on Lindsell Train Investment Trust.

Lindsell Train limited valuation method

The analysts questioned whether the perpetuity calculation to value Lindsell Train Limited was appropriate.

The holding is valued based on the average of 1.5% of assets under management and a perpetuity calculation based on an adjusted earnings stream.

Succession planning at Lindsell Train Limited was also highlighted as a concern. The analysts said: “There is, in our view, a risk that the LTL business might not endure beyond the retirement of its founders, clearly there will be a direct flow through to the valuation from any decline in the value of LTL funds.”

Complicated cross holdings

The JP Morgan Cazenove note coincided with a portfolio update from the Lindsell Train Investment Trust, whereby Train highlighted “complicated structure of cross holdings”.

In the investment trust’s October update, he highlighted the performance of the Finsbury Growth and Income trust, which has delivered annualised NAV total returns of 10.1% since Lindsell Train Limited was appointed investment manager in December 2000. This was relevant to Lindsell Train Investment Trust shareholders due to its longstanding investment in the other investment trust, which represented 0.89% of the portfolio at 30 September 2018.

Train highlighted how asset growth at Finsbury Growth and Income, which has grown from circa £70m at appointment to a current market capitalisation of £1.3bn, has helped push up the value of Lindsell Train Limited within the Lindsell Train Investment Trust.

“Skin in the game is an important factor in helping people make the better decisions (even if they won’t always necessarily be the right decisions, of course) and we believe LTIT’s holding in FGT remains a meaningful signal that we are still highly motivated to do the best we can,” he said.

Finsbury Growth and Income also holds Lindsell Train Investment Trust with a 0.8% allocation, according to its last report for the period to 31 March 2018.

Finsbury Growth and Income Trust represents Train’s sole exposure to the UK equity market in his own portfolio.

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