Nick Train sounds ‘double jeopardy’ warning over trust

Lindsell Train Investment Trust could swing to discount if sentiment changes

The Lindsell Train Investment Trust returned 46% last year, but manager Nick Train (pictured) has warned investors of potential “double jeopardy” if his asset management company’s investment style falls out of favour.

Lindsell Train’s fund management business, Lindsell Train Limited, was the biggest contributor to the trust’s performance over the year adding about 11% to the NAV return, Train said in the trust’s monthly update for December.

Train acknowledged the success of the asset manager, which is 46.2% of the trust’s portfolio, is responsible for a large part of the trust’s performance.

“It happens that the fund management company has been extraordinarily successful over the last few years – or, at least, it appears extraordinary to us, the principals of the business,” he said.

Double jeopardy warning

However, Train warned both business and investment performance cannot be relied on to be continually successful or without relapse if sentiment towards the company should turn negative.

He said: “Both Lindsell Train’s investment and business performance cannot be relied on to be successful in perpetuity or without relapse.

“This probability of disappointing performance from the largest portfolio asset in your company might not matter so much, if it were not for the fact that your company’s shares trade on such a high premium to the NAV – meaning there is double jeopardy if and when things turn against Lindsell Train’s investment approach.”

‘Massive’ premium

The Lindsell Train Investment Trust sits on a 42.5% premium which has been pushed higher by sentiment-driven investors piling in. The average premium/discount position across the investment trust universe is a 3.7% discount, according to the Association of Investment Companies.

AIC communications director Annabel Brodie-Smith said the Lindsell Train Investment Trust premium is “massive”.

“A 42% premium shows how highly people have pushed the share price so highly above the asset value through sentiment and thinking it is going to do well,” she said.

Brodie-Smith explained if there is a sudden loss of sentiment and the value of Lindsell Train Limited plummets, that would have a significant knock-on effect on the investment trust performance given the company is such a large holding.

“When something which is trading extremely high plummets and trades below the NAV value moving to a discount, that really affects your performance,” she said. “Sentiment is so high towards this that when it falls it is going to have a nasty impact on performance because the share price will absolutely plummet.”

Optimistic for the year ahead

In November, analysts at JP Morgan Cazenove flagged concern over the trust’s exposure to Lindsell Train Limited.

However, Train tried to allay potential investors’ fear in the update saying that he and the firm’s co-founder Michael Lindsell remain optimistic about global equity markets, the companies they invest in and the future of both Lindsell Train Limited and the Lindsell Train Investment Trust.

“Although it is early in 2019, we think it instructive that deal-making has already got off to a hectic start, with massive activity in the pharmaceutical sector,” he said. “Forecasts about such matters are idle, but I would be very surprised if 2019 is not another record, or near one, for global takeovers.”

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