Square Mile has demoted Lindsell Train UK Equity over liquidity concerns, predicting the fund could see “significant issues” if investors continue pulling cash out over an extended period of time.
The £6.6bn fund, managed by star manager Nick Train, has fallen from a AAA to A rating in Square Mile’s hierarchy.
The ratings agency said it made the “difficult decision” to downgrade Lindsell Train UK Equity due to “increasing concerns” over its liquidity profile following an extensive review of the fund.
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%.
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
Fund could see ‘significant issues’ if redemptions continue
In a note seen by Portfolio Adviser Square Mile noted the fund’s strong performance in absolute terms and against its benchmark, the FTSE All Share index, coupled with Train’s low turnover approach had created a highly concentrated portfolio and allowed the star manager to amass a large body of assets.
But it said: “Given the current liquidity levels within the underlying stocks held, we believe there could be significant issues should the fund experience a prolonged period of and/or a sizeable level of redemptions.”
The firm added that the fund has consistently met its performance objectives and it retains conviction in Train’s abilities over the long-term.
Redemptions have been picking up speed as many of the portfolio’s quality growth names have taken a hit amid the recent global sell-off.
Investors have yanked £549m from Lindsell Train UK Equity since June, according to data from Morningstar, with the fund suffering its largest ever monthly outflows of £374m in September.
It is now fourth quartile over three months and six months compared with peers in the IA UK All Companies sector, racking up losses of 4.7% and 1.2%, according to Trustnet.
Year-to-date from the end of October Lindsell Train UK Equity has returned 19.4% compared to the FTSE All Share’s 12.8%. Over five years it has returned 78.6%, double the IA UK All Companies average return of 35.8%.
Research firms jittery since Woodford blow-up
Willis Owen head of personal investing Adrian Lowcock said fund researchers are on edge about liquidity risk following the collapse of Woodford Equity Income.
But Lowcock said “the risk of a prolonged sell-off in Train’s portfolio has always been present” and thus “should have been factored into any assessment of the manager a while ago”.
Neil Woodford’s fund continued to be rated by several ratings agencies on the day it was suspended despite a deluge of bad press over the UK equities manager breaching the Ucits unquoted limit, as well as the fund’s poor performance and heavy redemptions.
Woodford Equity Income had a bronze rating from Morningstar until it was downgraded to neutral in May 2019. It was downgraded again to a negative rating two days after the fund was frozen with the research group declaring it to be “structurally impaired”.
Lindsell Train UK Equity currently has a coveted gold rating from Morningstar, while Train’s global equity fund sports a silver rating.
Train should be able to manage outflows
But Lowcock believes given the structure of the portfolio and the liquidity of the top 10 positions, Train’s fund should be able to manage outflows in “most circumstances”.
“The concentration is very high though so it will be a cause of concern for some investors, but the underlying investments are primarily blue-chip companies,” he said. “A prolonged sell off could impact share prices of some of the holdings but the manager should be able to sell if needed.”
A spokesperson for Lindsell Train conceded Lindsell Train UK Equity has seen “notable underperformance” against the benchmark over the past two months given its bias toward ‘defensive’ companies which have generally underperformed.
“But in terms of the business performance of our companies – which after all is what will determine the success of the strategy in the longer term – we are happy with progress being made,” they said.
In his last portfolio update, Train touted revenue growth at Hargreaves Lansdown, Heineken, Relx, Mondelez and London Stock Exchange, which are all top 10 constituents of the fund.
The spokesperson added that while the fund “has not been immune to the trend of widespread outflows from UK equity funds this year”, fund flows for the year to the end of October were still “marginally positive”.
“It is difficult therefore to gauge whether flows are related to anything other than nervousness about the UK equity market in general,” they said. “We are aware however that some investors have taken advantage of strong historic performance to re-balance their portfolios and that some are making a call away from ‘quality growth’.”
