The Lindsell Train Investment Trust has rocketed to a premium of above 30% forcing manager Michael Lindsell to warn investors that buying shares at this level has the potential for them to see “significant losses”.
According to Association of Investment Companies data, the trust was trading at a 33.5% premium as at 24 August. The latest factsheet for July stated the premium as 25%, up from 15.8% in June.
Writing in the July factsheet, Lindsell (pictured) noted the premium had exceeded 30% which he said some investors believe is due to the undervaluation of Lindsell Train Limited, which is far and away the portfolio’s largest holding.
He added: “We caution this opinion and think the trust’s board of directors do a good job at valuing the shares given the information at their disposal and their deep knowledge of the company as a longstanding significant minority investor.”
Lindsell Train Limited represents 46% of the LTIT portfolio. Last month the trust saw a pick-up in performance thanks to what Nick Train said was a turnaround in the fortunes of Lindsell Train Limited.
But in the latest update Lindsell warned investors of buying shares when the trust trades at such a high premium.
“As the chairman reiterated in his statement in the recently released annual report, buying shares in the trust at a premium could lead to a significant loss if stock markets fall and/or LTL’s funds under management decline,” he said.
Paypal, Nintendo and LSE drag on performance
The trust returned -1.2% on a net asset value basis in July compared with a 1.1% return for the MSCI World index. On a share price basis, however, it returned 6.6% during the month.
The three biggest detractors were Paypal which was down 5% during the month, Nintendo, down 13%, and the London Stock Exchange, down 6%.
On Nintendo, Lindsell said he understood why the share price is weak because the easing of lockdowns is likely to result in a moderation of the “extraordinary demand for video games”, but he believes the shares look undervalued.
He said this cyclicality is captured by the current valuation which is trading on P/E ratio of 13x and a dividend yield of 4%, according to Bloomberg. But looking beyond the imminent dip in profits the company has sufficient initiatives to drive growth over the long term.
These include the Switch console which is “probably only half way through its tenure” and a strong line up of software titles. In addition, there is the launch of smartphone games and the potential to monetise its IP in theme parks, movies and merchandise, as well as beginning sales in China – the world’s largest market for video games.
“There remains no more valuable owner of entertainment intellectual property in our view,” he said.
Paypal has been affected by eBay customers switching to alternative in-house payment options and Lindsell noted eBay marketplace transactions now represent 4% of total payment volume, down from 9% a year ago.
But he pointed to Paypal’s total payment volumes rising 40% over the year, a 17% increase in active accounts, a 32% rise in merchant volumes and an 11% rise in payment transactions per active account as “all very encouraging”.
On LSE, Lindsell said the firm had seen a 28% share price fall following the acquisition of Refinitiv but this had started to reverse on the back of the company’s half-year results which showed “satisfactory performance from all perspectives”.
“There is however an overhang of potential sellers arising from the deal – Thomson Reuters and ultimately Blackstone,” he added. “Thus the proof of successfully integrating and growing the combined company will battle with the overhang that these potential sales represent.
“The share price may be up today but it still languishes 20% below its peak and trades at a discount to the price of other exchanges and data aggregators.”
