Lindsell Train

LookingForTheSun

Thanks bowlhead, from my perspective relatively safe is a potential loss of about 20% in a particularly bad market (which is hopefully unlikely). Looking at the Fund manager's performance since 2000 (data provided by TrustNet), even during the crash of 2008, he's managed to weather the storm reasonably well (as a bench mark I've used the ftse 100 during this period which lost almost 40%)

Alexland

LookingForTheSun wrote: »

Thanks bowlhead, from my perspective relatively safe is a potential loss of about 20% in a particularly bad market (which is hopefully unlikely). Looking at the Fund manager's performance since 2000 (data provided by TrustNet), even during the crash of 2008, he's managed to weather the storm reasonably well (as a bench mark I've used the ftse 100 during this period which lost almost 40%)

Not all crashes are the same as the events of 2008. Interest rates have been very low for a long time which has created a different backdrop to the next crash were it to happen tomorrow. If you are invested in a concentrated global equities fund then you should be braced for paper losses in excess of 20% depending on the circumstances.

Still in the long term it might not matter much unless the situation causes the companies in the portfolio to unexpectedly fail. For example maybe millennials and subsequent generations will be so hard up they stop paying a premium for the precious brands in the LT portfolio. Maybe the market will just accept 'own brands' as equivalent...

Alex.

rathernot

It's concentrated but I think that's where it comes down to the fundamental choice of whether you want to just "buy everything" or believe that a fund manager can understand a small number of businesses and invest in them.

There's enough info out there on how past a certain point just adding more stocks doesn't buy you that much protection.

20-30 stocks might be acceptable, but if those 20-30 stocks are all in pork belly companies that's the time to worry as clearly you're dependent on a single market.

Alexland

rathernot wrote: »

It's concentrated but I think that's where it comes down to the fundamental choice of whether you want to just "buy everything" or believe that a fund manager can understand a small number of businesses and invest in them.

I think that's fine but to believe a fund manager's conviction in a concentrated equities portfolio can limit your paper loss exposure to 20% in any market conditions is unrealistic. I accept that these holdings have almost bond-like characteristics in their historical reliability but sometimes things fundamentally change and you have to accept that risk when buying into this type of strategy.

Alex.

rathernot

Alexland wrote: »

I think that's fine but to believe a fund manager's conviction in a concentrated equities portfolio can limit your paper loss exposure to 20% in any market conditions is unrealistic. I accept that these holdings have almost bond-like characteristics in their historical reliability but sometimes things fundamentally change and you have to accept that risk when buying into this type of strategy.

Alex.

Agree entirely, I think the best word I'd use is "hope" as I hold most of my ISA in similar funds.

I also look for holdings where the fund manager has substantial amounts of their own money invested in that fund.

If you're running an active fund but putting your own allocation that should go into that fund into a world tracker that would concern me massively.

bowlhead99

LookingForTheSun wrote: »

Thanks bowlhead, from my perspective relatively safe is a potential loss of about 20% in a particularly bad market (which is hopefully unlikely). Looking at the Fund manager's performance since 2000 (data provided by TrustNet), even during the crash of 2008, he's managed to weather the storm reasonably well (as a bench mark I've used the ftse 100 during this period which lost almost 40%)

The fund in which you are proposing to invest (the global equity fund income class D priced about £2) did not exist during the crash of 2008. It was launched in March 2011. So, you can't have been looking at how that particular fund performed since 2000.

When you say you were looking at the manager's performance since 2000, you shouldn't be looking at Lindsell Train Japanese Equity versus your benchmark, because that's not at all comparable with the UK FTSE100 or a global equity fund.

Similarly, you shouldn't look at their Lindsell Train UK Equity fund against your benchmark, because a UK-focussed fund like that is not comparable with the Global Equity Fund that you're talking about investing in, as the latter has greater exposure to world shocks and exchange rate movements. But you can note that their UK equity fund lost 40% in value from 5 June 2007 to 28 October 2008 (less than a year and a half).

Maybe you are thinking of the Lindsell Train Investment Trust, which is a globally-investing product like the Global Equity Fund - though as described in earlier posts it is a quite different and more complex product. If you had invested into it on Thursday 18 October 2007, and then looked at it again on Thursday 17 July 2008, you'd see its value being more than 30% lower than what you paid, after only 9 months. That seems out of kilter with your idea of a 'relatively safe' fund with potential loss in a particularly bad market of only 20%. Its temporary losses were over one and a half times your target.

If you were to buy into that Investment Trust, which is currently priced on the stockmarket at over £10 for only £7.50 of assets at their latest valuation, and we have a global stockmarket crash... the assets of the Trust could easily drop in value by about half (to about £3.30) and if nobody was willing to pay much more than the declared asset value in a depressed market, you'd perhaps find the shares trading for £3-3.50 when you had perhaps paid £10-10.50, which is a drop in value of 65-70%.

So, if you are a cautious investor, don't touch the Investment Trust, because if it repeats the 30% drop of the last crash you will perhaps be quite scared that it is going to go all the way to a 60% drop (which is quite a feasible drop), which will cause you to sell it in a panic and then you will have lost 30% of your money.

The Global Equity Fund is less complex than the Investment Trust but you're still looking at loss potential of 50%+ as it has a highly concentrated portfolio and if one or two of its 20-30 holdings go bust, that can be 10% of the value in one hit, and if the others simply decline in value by half (as can happen in a global market crash) you will be out over 50%.

That's not to say it is a bad fund or that it won't perform well over the long term. It is just to guide you that all the LT products have loss potential of *well* over 20% and so if "a potential loss of about 20% in a particularly bad market (which is hopefully unlikely)" is what you are looking for as a relatively safe investment, you could not call any of their products relatively safe on that criterion.

If you are looking to have a 'relatively safe' portfolio you could of course buy the higher risk products from Lindsell Train to hold in one hand and some much lower risk products from somewhere else to hold in the other, and then periodically rebalance your holdings between the two. You would then get a lower averaged/blended risk and volatility (and lower long term performance, typically).

AnotherJoe

LookingForTheSun wrote: »

Thanks bowlhead, from my perspective relatively safe is a potential loss of about 20% in a particularly bad market (which is hopefully unlikely). Looking at the Fund manager's performance since 2000 (data provided by TrustNet), even during the crash of 2008, he's managed to weather the storm reasonably well (as a bench mark I've used the ftse 100 during this period which lost almost 40%)

The FTSE100 is a shockingly bad index to pick as a benchmark though.

ArchBair

dividendhero wrote: »

Three simple points to answer that one...

(1) Longevity - IT's have been around since 1868, about a century before UT's appeared on the scene
(2) Performance - the average IT outperforms the average UT.
(3) Governance - IT's have external directors on their boards..and yet you claim they're "opaque"

I tend to agree, if you stick with the mainstream IT's that have been well established for decades with good active management teams then I prefer to hold IT's in preference to OEIC's.

Alexland

bowlhead99 wrote: »

That's not to say it is a bad fund or that it won't perform well over the long term. It is just to guide you that all the LT products have loss potential of *well* over 20% and so if "a potential loss of about 20% in a particularly bad market (which is hopefully unlikely)" is what you are looking for as a relatively safe investment, you could not call any of their products relatively safe on that criterion.

It might also be worth nothing that "a particularly bad market" is quite likely to happen eventually in the lifetime of the average long term investor.

Alex.

bowlhead99

I use investment trusts and investment companies within my own portfolios and those of my family (though not exclusively). However, I don't think the following 'simple' counterpoints to the accusation of complexity and opacity are particularly good.

dividendhero wrote: »

bostonerimus wrote: »

I really think people should avoid investment trusts. Their discount/premium, high fees and freedom to use borrowing make them a bit opaque for the average investor.

Three simple points to answer that one...

(1) Longevity - IT's have been around since 1868, about a century before UT's appeared on the scene
(2) Performance - the average IT outperforms the average UT.
(3) Governance - IT's have external directors on their boards..and yet you claim they're "opaque"

(1) Back in 1868 when the financial sector was in its infancy and the UK and US were 'emerging markets' in today's parlance, it was perfectly possible to form a company, buy other companies within it, and hold yourself out as an investment opportunity to investors as a closed ended investment scheme.

The fact that such companies existed 150 years ago as the only practical 'fund structure' (because there was no such thing as a UCITS regime or transparent regulated daily-priced OEICs/UTs or ETFs) has no bearing on whether they are the best product to meet the needs of the typical retail investor today. Though personally I do use them, but it's not because the concept existed 150 years ago. Around 1850, the first geared wringer mangle was available in the UK. I do not choose to use one to dry my clothes, because now I have a washing machine with a spin setting, and a tumble dryer if the mood takes me.

(2) Performance of the 'average' IT versus the 'average' OEIC or mutual fund is perhaps not very useful - as on 'average' they will invest in different things, in terms of the asset classes that might be more suitable for access through one or the other, or the risks that might be taken (gearing etc). And the fact that there are loads of poor open ended funds offered by banks or insurance companies which are terrible value for money in terms of fees and will skew the average performance of the open ended funds downwards even though a savvy investor choosing between an IT and OEIC would eliminate them fairly quickly.

(3) The accusation of them being opaque is because when you buy one you are buying something of a 'black box' of assets: a package of holdings, wrapped up in a strategy and controlled by a manager.

- where the terms allow, the manager will change the level of borrowing as it sees fit from time to time to leverage the returns of the IT to exaggerate the ups and downs in value of the underlying holdings;

- in some ITs there will be performance fees which can restrict upside performance for the investor without restricting downside performance and the hurdle rates to trigger the performance fees are not always set at a particularly high hurdle level;

- whether or not gearing or performance fees are allowed, due to market forces the whole package you buy may trade at a significant discount or premium to the underlying value of the 'sum of its parts' which can lead to investors getting gains or losses which differ substantially from the returns on the underlying assets depending on the timing of when they happen to buy or sell.

Clearly these factors mean that the 'average' IT is not as transparent as an OEIC where you only buy in or sell out at the value of the net assets owned by the OEIC at the point you buy or sell (perhaps with some small adjustment for the likely impact of your new subscription or redemption on the value of those assets).

Having an 'independent' or quasi-independent non exec sit on the board and ask questions of the fund manager from time to time does not remove any of that stuff, so it doesn't stop the IT from being somewhat opaque from the perspective of the retail investor who is proposing to invest. The investor has to take whatever price is available on the market based on market perceptions of what the manager will do with the assets going forward, rather than what the current holdings are objectively worth today, which can be quite different numbers. You can get out whenever you like if you will accept a low enough price for someone to take it off your hands, but if the manager or sector is out of favour at the time, your sale price might be 20% lower than 'your share' of the aggregate value of the assets.

So in summary I agree with Bostonerimus and many IFAs in concluding that ITs can be less suitable than open ended funds for a 'typical' retail investor. The 'typical' investor comes from a position of low knowledge and does not necessarily have much experience in the world of investment management, nor hang out in investment forums such as this. Personally I find ITs quite simple to understand but I have 20+ years of finance experience and read lots of company and transaction structuring documentation through the course of my career. If you are just going to buy and hold indefinitely, one vehicle is not necessarily better than the other; the suitability of a closed-ended or open-ended structure (and the ultimate performance) depends on what they actually do.