Wealth managers reckon Nick Train’s concentrated portfolio over his growth style is to blame for outflows at the Lindsell Train UK Equity fund reaching record levels.
In September, investors pulled £374m from the fund, the largest monthly outflows ever.
Around half (47%) of Portfolio Adviser South West Congress delegates believed concentration risk was the biggest reason Lindsell Train UK Equity has been haemorrhaging cash compared with 37% who thought his style showing signs of falling out of favour was to blame.
The remainder thought the redemptions were the result of star manager backlash following the implosion of Neil Woodford’s investment empire. Thirty people responded to the poll.
A concentrated portfolio
The top-10 stocks in Lindsell Train UK Equity account for 82.9% of the portfolio with the largest holding information and analytics publisher Relx making up 10%.
Train has made no secret of the fact that what he does is much riskier than the average portfolio and has defended his high concentration in a few stocks as one of the secrets of his successful returns.
Lindsell Train UK Equity top 10 portfolio weightings
| Relx | 10.0% |
| London Stock Exchange | 9.9% |
| Unilever | 9.5% |
| Diageo | 9.5% |
| Mondelez | 9.0% |
| Burberry | 8.3% |
| Hargreaves Lansdown | 8.1% |
| Schroders | 7.1% |
| SAGE | 6.1% |
| Heineken | 5.4% |
Source: Lindsell Train UK Equity factsheet as at 30 September 2019
The concentration of stocks in Lindsell Train Global Equity is slightly lower with the top 10 holdings making up just 60.3% of the fund.
But recently Train has ramped up the warnings about the level of risk in his portfolios. In June he told investors of his Finsbury Growth & Income trust, a mirror of his UK equity fund, that it would not be a surprise if the highly concentrated trust suffers from a period of underperformance “at some point”.
Lindsell Train’s conviction significantly higher than peers
The Lindsell Train UK Equity fund has the highest weighting towards three companies in its top-five holdings compared to peers in the Investment Association universe.
These are Unilever, Mondelez and London Stock Exchange.
Aviva Investors UK Equity has slightly more exposure to Diageo, with a 9.59% stake, while Janus Henderson UK Absolute Return fund owns 13.21% of Relx putting it considerably above Lindsell Train UK Equity’s 9.9% position.
All of his top five largest holdings, including Relx and Unilever, are over double the average weighting from rivals.
| Company | Lindsell Train UK Equity weighting | Average weighting |
| Relx | 10.0% | 3.8% |
| London Stock Exchange | 9.9% | 3.6% |
| Unilever | 9.5% | 3.5% |
| Diageo | 9.5% | 4.0% |
| Mondelez | 9.0% | 3.6% |
Source: FE Analytics
‘One company can cause a considerable drop in value’
Train’s highly concentrated portfolios is one of the main reasons GDIM investment manager Tom Sparke steered clear of his funds.
“I would be concerned at the level of specific risk taken by the funds,” says Sparke.
“Over 80% in its top ten holdings means that a disappointment in one company can cause a considerable drop in value.”
The so-called quality growth consumer staples that dominate Train’s portfolios like Dove soap maker Unilever and alcoholic beverages company Diageo are popular holdings among many UK-based stock pickers.
Fundexpert managing director Brian Dennehy says just because Train’s strategy of backing a small smattering of companies has worked well before doesn’t mean it will work well in the future.
“Concentrated portfolios work brilliantly in two conditions – a sustained bull market because that creates the firepower and when the manager makes the right calls.
“Nick has succeeded on both counts. However, he clearly has a problem when he wants to change tack – assuming he gets the timing right at all. Woodford made a huge and successful bet from the 1990s, and then lost the plot and the evidence for his failing was already clear in 2014.
“It’s an easier matter for advisers and clients – have a tight stop loss and use it.”
Stock specific risk over style risk
But Morningstar has awarded the Lindsell Train UK Equity fund a gold rating with his global fund landing a silver rating.
Peter Brunt, associate director at Morningstar, says having a concentrated portfolio doesn’t necessarily mean Train’s funds will slump if there is a more meaningful rotation away from growth into value stocks.
“Assuming the manager has a clearly defined investment style bias, a more concentrated portfolio typically increases the level of stock specific risk rather than style risk,” says Brunt.
“Both Lindsell Train and Fundsmith Equity have strong stylistic biases to their portfolios (growth tilt, quality metrics) but they have also demonstrated an ability to add value above all of these factors through superior stock selection.”
Lindsell Train flows show slight signs of improvement
Data from October shows Lindsell Train UK Equity returned to net positive flows with investors adding £19.9m to the fund bringing total assets back up to £6.6bn.
In a reversal of fortunes Lindsell Train Global Equity ended last month with net outflows, the only time it has done so this year. Clients yanked £8.1m from the fund in October though this pales in comparison to the £569m Train’s UK equity fund leaked from June to September.
But Adrian Lowcock, personal head of investing at Willis Owen, thinks investors shouldn’t get complacent especially in the short-term.
“Investors should be prepared for any fund with strong investment style bias to have periods of out-performance and under-performance and not get lulled into the view that the risk is low just because past performance has been strong and much better than the market,” says Lowcock.
“As the UK is usually a large part of British investors portfolio I would expect this fund to sit alongside 2 or 3 others, such as an equity income fund, smaller cos and value or recovery fund. In that situation your exposure to the concentrated fund and a specific investment style are reduced through diversification.”
