Lindsell Train fund manager Michael Lindsell has reassured investors that salaries at the asset manager will take a hit from falling revenues.
In the monthly Lindsell Train Investment Trust update, Lindsell revealed the valuation of the asset manager, Lindsell Train Limited, which accounts for 46.8% of the portfolio, had been hit. Assets at the firm had fallen to £18.2bn at the end of March.
The board of the investment trust therefore modified the earnings component of its valuation model for the holding.
The net asset value of the total portfolio fell 6.9% over the month, although the investment trust returned to a premium 10.8% by the month’s end.
Lindsell said: “We hope it is some reassurance for shareholders (both direct and indirect) in LTL that the company’s biggest cost, salaries, automatically falls as revenues decline due to the salary and bonus cap. As fixed costs are only circa 5% of revenues, when revenues fall profit margins hold up despite falls in FUM.”
Lindsell Train Limited had “substantial” net cash on its balance sheet, he added.
Lindsell, and fellow fund manager Nick Train, had been buying up shares in the £212m investment trust as it traded at a rare discount during the coronavirus sell-off having hit a premium high of 99% in 2019.
The biggest discount on the investment trust during the sell-off was -16.58% on 18 March, according to Morningstar data. It is now trading at a premium of 24.5%, according to the Association of Investment Companies.
> See also: Nick Train and Michael Lindsell vow to keep buying trust shares at discount
Nintendo among quoted holdings that could benefit from Covid-19
Lindsell also informed investment trust shareholders about how he expected the quoted companies in the portfolio to perform.
“Of all our companies Nintendo is uniquely positioned to take advantage of the necessity to remain at home given the focus on home entertainment,” he said.
“Nintendo particularly specialises in multi-player family based games. The recent release of its popular ‘Animal Crossing: New Horizon’ game has coincided with the confinement of families in much of the developed world.”
Although he noted supply issues with consoles following China’s lockdown had limited the company’s ability to fully capitalise on the game’s release to date.
Lindsell Train bets on champagne sales once lockdown ends
Falls in on-premise sales at drinks companies, such as Diageo, Heineken and Laurent-Perrier, would be partially offset by increasing off-premise sales, he said.
“Given constraints on consumer incomes and the negative wealth effect from declining markets, premium sales might suffer more than more mainstream products.
“Arguably this will be particularly the case for Laurent-Perrier’s champagne but we wouldn’t mind betting that there may be some extraordinary celebrations boosting sales once all this is over.”
Mondelez, Unilever and AG Barr might be more affected than previous recessions because of disruption to normal distribution channels, he added. “It’s good for snacks, chocolate and cookies but bad for gum and neutral for drinks perhaps.”
PayPal also seemed “relatively immune from events” other than a slowdown in transactions and payment volumes, he added.
Ebay’s lack of permanent CEO had worried Lindsell Train
Ebay should benefit from increased online activity while physical retailers are closed, but Lindsell had been worried about the lack of permanent chief executive “at a time when the company requires clear direction”. The fund update was dated 8 April, five days before Ebay announced it had tapped Walmart ecommerce chief operating officer Jamie Iannone to become CEO. Devin Wenig stepped down in September due to differences with Ebay’s board.
Lindsell added that the planned sale of the classifieds business, part of a repositioning of the group, could be delayed and its value impaired. He was also worried about the health of the small business sellers that were core to the online website.
Pearson could benefit if there is a greater take up of its online courseware, which the company has been investing in over the last three years. “If new products and services pass muster, sales here should grow,” he said.
But the business will lose revenue from the closure of it Vue testing and certification centres and from US state testing contracts now that exams have been cancelled.
The subscription business that underpins Relx’s scientific and legal publications business provides repeatable revenues although its exhibition business would suffer, he said. “We rather wish there was less debt but given the predictability of the cash flows it should not present a problem.”
Endurance counts during threats like Covid-19
But Lindsell concluded the team believed its companies had “every chance of coming out of this crisis stronger than ever”.
“It is important to highlight the risks our quoted companies are currently facing but it is equally important to remind you that these are companies that on average have endured the vicissitudes of life – wars, economic depressions and other threats at least as bad as today’s – for more than 130 years.
“And it’s in those difficult times when endurance counts and weaker competitors falter or fail.”
