The star fund manager says he prefers to describe his portfolio holdings as “undervalued growth companies”, pointing to companies such as eBay, the London Stock Exchange, Nintendo and PayPal as examples.
“It is not obvious that the course of interest rates is relevant to how these companies perform as businesses or as share prices. In short, our portfolio is more diverse – despite the focus on a few themes – than we are sometimes given credit.”
Train’s comments came in the monthly update for the Lindsell Train Investment Trust, which has returned 27.7% over the last year compared to the Global sector’s 13.4%. Over three years it has returned 143% compared to 46.8% in the sector.
Defining bond proxies
There is no strict definition for the term bond proxy, but Train suggests it refers to companies that are less sensitive to interest rates, meaning they maintain performance during looser monetary policy, but fail to keep pace with cyclicals or value stocks during periods of rising rates.
Architas investment director Adrian Lowcock says the term bond proxies became popular about a decade ago, but it isn’t a technical definition. “Post financial crisis when bond yields were effectively on the floor and investors were looking for fixed income alternatives it was effectively a way of selling equities to bond investors.
“If you speak to 10 different people you’ll get 10 slightly different explanations of it,” Lowcock says. “If I was to define it loosely I would call it a low-risk company that is paying a growing dividend.”
He listed Unilever and Reckitt Benckiser as examples. Unilever is the largest holding in the Lindsell Train Global Equity fund accounting for 7.8% of the £4bn fund. It is the second largest holding in the UK Equity fund, despite the consumer goods giant announcing this month it was moving its headquarters to the Netherlands, accounting for 9.2% in the £4.7bn portfolio, just behind Diageo, which accounts for 9.6%.
Lowcock says Train’s description of “undervalued growth companies” is a better description of what the star fund manager is trying to achieve. He points to Manchester United as an example, saying it is a growth company and, arguably, undervalued. “He doesn’t buy those companies because they are so-called bond proxies.”
Morningstar associate director for equity strategies manager research Simon Dorricott points to the fund yield as a reason why describing Train’s holdings as bond proxies is too simplistic, noting it is “well below the market”.
Defensives vs cyclicals
Premier Global Alpha Growth manager Jake Robbins says a lot of money has come out of consumer staples, tobacco, beverages, utilities and property as yields on the 10-year US treasury have neared 3%.
Robbins says stable, defensive names in the US were “exceedingly expensive” before the Federal Reserve began raising rates in December 2016. However, Robbins says those names have significantly underperformed over the last year and valuations are now more in line with their long-term average.
“Given there’s a lack of clarity around tariffs, trade wars and what-have-you, we are beginning to add more of those names back into the portfolio,” Robbins says. The fund is top quartile over one and three years returning 6.7% and 38.5% respectively compared to 2.4% and 27.3% in the Global sector.
However, Lowcock says they still consider value an “interesting area”.
He says bond proxy stocks won’t benefit as much as companies geared towards interest rate rises, like banks. However, he argues their potential underperformance could equally be attributed to their lower sensitivity to stronger growth than the way they react to rising interest rates.
Lowcock says Train has good stockpicking skills and therefore they still like him, despite bond proxy stocks falling from favour.
AJ Bell CIO Kevin Doran defines bond proxies as any investment that has a combination of interest rate, credit and liquidity risk.
“The problem with that at the moment is that interest rate risk is horribly miss-priced and so the only true bond proxies that make sense are those that seek to manage out this risk through derivatives overlays,” Doran says.
