Writing in the investment company’s annual report, Train said the portfolio is currently as highly exposed to equities as it has been at any time in the company’s history, reflecting the optimism he and Michael Lindsell currently feel.
As reasons for this optimism, Train points to three primary factors.
The first is his view that US profits may not have reached the peak many in the markets believe they have.
Quoting Berkshire Hathaway CEO, Warren Buffett who wrote in his own recent annual letter, that “At much of corporate America truly major gains in productivity are possible”, Train said, the view espoused contradicts both the “commonly expressed view that corporate profit margins have peaked” and reflects the beliefs of the CEOs of the firms in which Lindsell Train is invested.
“Recent meetings with Diageo, Heineken and perhaps most encouraging, Unilever, all revealed plans for substantive efficiency gains, often employing digital or “big data” tools unavailable to previous management teams,” Train said.
The second reason Train gives for his optimism is the fact that the ongoing fall in commodity prices is not as unusual as many investors believe it to be and, is by no means a bad thing for the global economy.
“Equity investors should be cheering. This inexorable fall in real commodity prices is what has allowed, for instance, the cost of feeding a US family to fall from 33% of the average household income in 1955 to 15% today. As humanity gets smarter at digging stuff out of the ground, or tilling the soil, or harnessing energy, more people in more places live longer and better and, ultimately and to cut to the quick of it, eat more of Unilever’s Magnum ice-creams,” Train writes.
The third reason is deflation, the bullish implications of which he does not believe investors appreciate.
While he agrees that deflation presents challenges to investors in those sectors adversely affected by falling prices, he says it also makes the ability to deliver ongoing nominal growth even more valuable.
Pointing to RELX (formerly Reed Elsevier) as an example, train explains: “The Company appears “stuck”, churning out c.3% p.a. growth in its sales. From a historic perspective, or crucially if we were in an inflationary period, such a growth rate does indeed look pedestrian. But in 2016, with, let us arbitrarily assert, global deflation of 2% p.a. – RELX’s revenue growth is actually 5% p.a. real and its nominal earnings growth of 7% is actually 9% real too.”
And, he added, while real growth rates of this magnitude are high by past standards Lindsell Train expects companies capable of sustaining them to prove very good investments, especially in a world where growth is hard to find in other areas.
