Fair Isaac Corporation (Fico) has replaced troubled academic publisher Pearson in the Lindsell Train Global Equity fund, its latest factsheet has revealed.
Co-managers Nick Train (pictured), Michael Lindsell and James Bullock took advantage of the data analytics company’s share price weakness to initiate their first new holding in the fund in three years.
Founded in 1956, the Silicon Valley-headquartered company’s creditworthiness scores are a fixture of the consumer lending landscape in the US.
It now makes up a little under 3% of the £6.4bn Lindsell Train Global Equity fund, and has also been added to the fledgling Lindsell Train North American Equity strategy.
“As signalled last month, we have been building a new position that now unveiled will, I hope, excite few eyebrows,” Bullock began the update.
“Fico strikes us as so apt a Lindsell Train holding that the real surprise might be why we didn’t own it already. That Fico, a US-listed, and domiciled company should also have a home in our newer North American equity portfolio will I trust make similar sense.”
‘The S&P and Moody’s of consumer credit rolled into one’
Bullock described Fico as a rare example of a company with a “solid, time-tested model that already works” and benefits from a “self-reinforcing economic moat – one where its supporting dynamics strengthen with both time and testing”.
“Think of them as the S&P and Moody’s of consumer credit rolled into one,” he told shareholders.
Half of revenues and nearly all the firm’s profits are derived from its “eponymous scores,” which Bullock pointed out have almost no direct competition, with 98% of US securitizations using Fico as their sole risk measure.
“As with the rating agencies, the scores’ moat derives from the sticky integration of brand, analytics, and semi-secret formula, which feeds on disparate data from the three US credit bureaus (Equifax, Experian, and TransUnion), distilling them into an understandable, incontestable, industry-and-regulator-approved three figure sum for lenders to base decisions upon.
“This has stayed core to the credit granting process for decades: US banks and other lenders buy billions of scores with Fico’s IP embedded into the process with little incentive for anyone to switch.
“As an antitrust lawsuit protesting the perceived monopoly once complained, more Fico scores are sold per day than McDonalds hamburgers or Starbucks coffees.”
Rebel AI companies spook Fico shares
But recently, Fico’s share price has been on the decline, as AI lending platforms have burst onto the scene and threatened to disrupt the traditional credit granting process.
Upstart “perhaps the noisiest such rebel” has seen its share price increase 20-fold since listing in December 2020, Bullock pointed out.
By comparison, Fico’s shares have fallen 31% over the same timeframe. Year-to-date they are down 17% at $362 a pop.
On top of this, Fico is trading on 25-30x earnings, which Bullock admits is a “clear premium” to the MSCI World’s “high teens rating”.
However, Bullock argued these fintech disruptors, which also include Sofi and the Lending Club, are unlikely to “disturb Fico’s role as underlying provider”.
“As the company put it, if you want to know whether someone will pay you back, the best data to look at is whether they did in the past – and at low cost, FICO delivers the only universally accepted assessment of this.”
See also: Nick Train initiates stake in Experian as investors fret over ‘expensive’ stocks
Pricing power
Additionally, the company has shown to have good pricing power, having survived a decision to pursue double-digit price hikes in 2018 “after decades of flat fees,” Bullock said.
“In an inflationary world, the resultant inelasticity this demonstrated, coupled with top-line and margin/return on-capital expansion has been motivating.”
Finally, Bullock said there is potential for Fico’s software, which generates the other half of its revenue, to extend into “market leading positions” in areas such as fraud detection and next-gen customer relationship management (CRM).
“This is a roughly break-even amalgamation of established cash-cows alongside ‘intentionally loss-making’ but fast growing (40%+ year on year for each of the past ten quarters) platformed products.
“At worst this provides divestment optionality, at best it hints to significant earnings upside should some of management’s more ambitious plans come to fruition.”
Lindsell Train Global Equity’s stellar performance run has been broken by the recent cyclical rally, driven by rising inflation and higher interest rates.
The fund is now one of the worst performers in the IA Global sector over one and three years, returning -5.1% and 9.1% compared to the average fund’s 1.4% and 34.5%, according to Trustnet.
