Lindsell Train Global Equity

Johnnyboy11

I took an executive decision today to throw Lindsell Train Global Equity under a bus. Sell orders will be placed over the weekend.

Main reasons being....

- 1% return over the past 12 months is rubbish relative to the market sector it purports to operate in (and will be mostly wiped out by fees)

- It's an obvious laggard in my portfolio, with my preference now to stick with global equity trackers which have done much better

- Concentration of the fund into a handful of European/ UK stocks in sectors that are obviously struggling

- Poor outlook for the UK/ Europe due to COVID mishandling, whch I don't see improving any time soon

- Getting out before the stampede.

Any thoughts?

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/lindsell-train-global-equity-class-d-income

Moe_The_Bartender

The fund hasn’t changed in any significant way in the last 12 months and if you wound back a year, you'd be pretty pleased with it. It holds a number of stocks that I'd be more than happy to own and the big detractors from performance have been holdings in the entertainment sector such as Walt Disney. In normal circumstances, who would want to own Disney?

I used to have a big holding in this fund but fortunately sold out at the start of the year when I was rebalancing. The one clinching factor that persuaded me to sell was Train's stubbornness is sticking with Pearson despite the doubts that he himself had expressed in several of his monthly reports.

Linton

Buying funds after they have peformed well and selling after they perform badly is not likely to produce the best returns.  Better to buy funds as required to follow your overall strategy and keep them until the funds change or your strategy changes.  As Moe_The_Bartender points out, Lindsell Train Global Equity has not changed.  Its highly focussed approach and the allocation of its investments are well publicised on the net.

 - If you bought LTGE in error you should sell it.
 - If you do not have an overall strategy then you would be well advised to stck to global trackers.
 - If you bought the fund as it did fit into your strategy and it still does then you should keep it.  Different sectors will perform well at different times, for a while the major US techs and more recently Emerging Markets have been outperforming.  But that wont last forever.  Sadly one never knows until after the event which sectors are going to perform well in the future.

I cannot imagine a hole in my portfolio for which LTGE would be a good fit, so I do not hold it.

Prism

To try and answer your points..

Its return over the last 12 months has been poor compared to a world equity tracker but over 2 years it has beaten a tracker. To be expected really, 12 months is a very short period of time.

We have a smallish percentage in our portfolio but its not a laggard for us since it has done very well over the last few years.

Its sector allocation is not struggling especially since it is pretty consumer staples focused, however it has a high allocation to drinks companies like Diageo and Heineken both of which have taken a fall this year and were probably a touch on the expensive side last summer when the fund began to lag. US holdings are mixed  - Paypal, Ebay up with Disney, WWE down. A lack of exposure to tech hasn't help this year.

UK, Europe and Japan has a better outlook for equities than the US if regions are concerning you. Not sure why you think government level handling of Covid has anything to do with future returns or why UK and Europe is in a worse situation than the US.

If there was a stampede out of the fund it would have little effect on the price you get since it would have little effect on the holdings.

Overall I use the fund to get a bit more exposure to Japan and UK staples and defensive stocks. Not particularly wedded to it but not selling any. 

bowlhead99

There are some obvious counterpoints here:

1% return over the past 12 months is rubbish relative to the market sector it purports to operate in (and will be mostly wiped out by fees)
It's an obvious laggard in my portfolio, with my preference now to stick with global equity trackers which have done much better

I wouldn't read too much into one-year performance. Sure, this year was quite an exceptional year with certain sectors badly hit. Those sectors are now currently priced for the market's assessment of what they are worth, in some cases at quite a low price/earning ratio compared to how they had historically been trading. So, that doesn't imply that the positioning is generally wrong for what lies ahead. 

Out of 251 funds in the IA Global sector with a five year track record, it was positioned 24th.
Out of 285 with a three year track record, it was 54th. Vanguard's FTSE Global All Cap Index product was 157th.  So, 'global equity trackers have done much better' only works for the last 12 months and isn't true for the usual timeframes that  someone would assess an investment product.

If a 1.4% reported net performance for the year is 'mostly wiped out by fees', I would question why (or how) you have decided to use an investment platform charging half a percent or more; rather than the 0.25% you can get from a general mainstream platform or much lower rate from a fixed fee platform if the amount you're investing is substantial.

Concentration of the fund into a handful of European/ UK stocks in sectors that are obviously struggling

The fund's ethos is to be concentrated in a focused portfolio of stocks listed in developed markets that have the potential for outperformance. So, having bought it for a concentrated, conviction driven strategy there is no obvious reason to suddenly decide that concentrated funds are bad, when held as part of a portfolio among other fund types. It simply was not (with hindsight) as good as holding a tracker fund which had a quite different sector allocation (e.g. MSFT, AMZN, GOOG, FB, AAPL booming under lockdown) in the last year. If you already hold such equity trackers, that isn't a great reason to dump this investment and buy more of the same

If we take a look at the 'handful of European / UK stocks' which you say are struggling, the four EU listed ones within the fund's top 10 holdings at end of August are:

- Unilever: a £50bn global consumer products company whose share price only fell 20% during the worst of the pandemic compared to its February price, due to being a resilient provider of consumer staples worldwide; share price now higher than February and it has maintained its March, June and September dividend payments at the same value as prior year, representing a decent yield. Unilever appears to be a decent company, with strong exposure to emerging markets but would only represent less than 0.2% of a global tracker such as iShares MSCI ACWI.  I would have no qualms about being invested in it, and do hold it directly in my own pension. Doesn't seem to be a sector 'obviously struggling'. 

When Unilever's 2019 results were reported (showing revenue growth of just under 3%, but underlying earnings up over 8% and improved dividends), LT made the observation that the company "struggles to grow fast, because of its diversity", but the diversity "also brings with it tremendous resilience and predictability. Gilt-Edged resilience and predictability, as it were. Its P/E of 20x equates to an earnings yield of 5% - a stream of earnings that continues to grow in real terms, as it has for Unilever for many decades. Of course, there are no highly rated government bonds around the world that offer a yield of anything like 5% - it is 1% if you are lucky - and index-linked redemption yields are often negative."

So, I wouldn't say this sort of company is struggling or is a bad thing to hold. Seems decent value, even if the PE might be relatively large for a slow-growth holding, with its dividend being a good slice of the total return.

- London Stock Exchange: This business is now valued by the market 23% higher than a year ago, surpassing its February pre-covid peak. It paid its final dividend from last financial year on time, and this year's interim payment was increased. LT have held it a while and it has almost quadrupled in value over the last five years. Markets are not unaware that Covid is still happening and Brexit is on the horizon, yet analysts ratings as of mid-September were 2 underperform, 4 hold and 8 outperform. This doesn't seem to be a sector 'obviously struggling'.

- Diageo and Heineken: these are currently valued at 17-20% lower than a year ago, for obvious reasons. A large portion of their sales will come from the on-trade which is has come back in some parts of the world but is only returning slowly in some places (like the UK), while people buying whisky or vodka via supermarkets to fuel their 'quiet nights in' has been hit rather less.   Diageo has a presence in over 180 countries from its operations in 150+ sites, and less than 20% of its sales volume is in Europe. Heineken has 300 brands and shifted 240m hectolitres of beer last year. We can imagine that while travel and tourism and hospitality is slow or shut, and people aren't partying as hard in their student union bars, these companies will be short of profits. So, you can buy the shares more cheaply than when profits were higher. 

It seems likely that it could take a couple of years for 'business as usual' to return and in the meantime they may need the support of financial markets to keep them well positioned for growth opportunities - certainly there will be smaller businesses in their sectors that may struggle which could benefit these giants, much as a high street retailer doesn't have the economies of scale and marketing to keep going through lockdown and survive competition from Amazon.  If you are investing for 'the long term' as we all do, and exceptional current economic conditions have created an opportunity to buy Heineken or Diageo shares for a Q4 2018 price (being 20% lower than their Q4 2019) price; with the expectation that the businesses will not be so badly managed that they will go out of business in the next recession; it seems prudent to perhaps be a buyer rather than a seller of the shares.

You could understand why LT do not want to dump them from the portfolio when there is clear potential for their sector to have better revenue and profit in 2021,22,25, 2030 than it has in 2020.

Poor outlook for the UK/ Europe due to COVID mishandling, whch I don't see improving any time soon

From the examples above, the businesses (global consumer staples, a stock exchange group, global beverages) are not going to live or die by how well Covid has been handled in the UK.  If the market thinks UK or Europe's handling of Covid will be a drag on global profits for the businesses, then the businesses will have dropped to lower share prices, and if you choose to now sell out at that lower price you will take the 'loss'; you can't avoid it, because it's already happened.

Looking at the other businesses in the top 10 holdings, I expect Nintendo, Paypal, Disney, Mondelez, Intuit, Pepsi would like the UK/Europe handling of Covid to be better, but they are resilient companies. Nintendo is up almost 50% in JPY over the last year, Paypal up 90% in dollars, Intuit about 25%; Disney and Pepsi flattish. Outside the top ten, they have other businesses like the Japan stock exchange also doing fine. Clearly there will be some investments that have not done so well in the face of restrictions on live entertainment, such as WWE or Juventus. But they are perhaps not terrible things to hold going forward, and you won't get any exposure to them in a global tracker (Japan Exchange Group is 0.03% of an ACWI tracker and Juve and WWE won't feature at all).

Getting out before the stampede.

It's an open ended fund and not listed on a stock exchange, so its value is the value of its underlying holdings and if some investors want to sell, that will not create a disconnect between the price available to you as a seller of the fund and the underlying value of the shares. There is no obvious reason to go diving for the exits, as the companies it holds are generally fine. If sentiment did cause a lot of people like you to dive for the exits due to short-termism, you can see that 60% of the value of the fund is in its largest 10 holdings, but they are all big companies worth several tens of billions, and are not illiquid. 

If this was previously a fund you were happy to hold due to its track record, and the ethos hasn't changed, don't see a fundamental reason to 'throw the fund under the bus' even if it makes you feel big and powerful for having made such an 'executive decision'. Some investors are impatient and due to FOMO they always want to be holding the funds that have just gone up the most, so that they can say they are backing winners. However, for a long term investor, the time to buy a fund is not after it has just gone up the most in its class due to a sector allocation that served it well during economic conditions that already happened.  So taking back all your LT money and buying more of a global index with a high allocation to US markets and technology at relatively high P/E ratios will not necessarily help your cause, given we know certain sectors can be volatile.

With hindsight, you should have taken some of your LT Global money off the table in the middle of last year after it had been outperforming for yonks, to rebalance into other holdings within your portfolio. Now it has had a year of plateauing while other funds caught up. That doesn't mean it's correct to dump it on the grounds that it will inevitably continue to be held back; as there aren't any obvious market forces that will be holding it back on a 5 or 10 year view which couldn't go the other way instead. After another 5 or 10 years it will be worth checking how the succession planning is going at LT because perhaps L or T will be looking to retire. 

Prism said:

UK, Europe and Japan has a better outlook for equities than the US if regions are concerning you. Not sure why you think government level handling of Covid has anything to do with future returns or why UK and Europe is in a worse situation than the US.

Linton said:

Buying funds after they have peformed well and selling after they perform badly is not likely to produce the best returns.  Better to buy funds as required to follow your overall strategy and keep them until the funds change or your strategy changes.  As Moe_The_Bartender points out, Lindsell Train Global Equity has not changed.  Its highly focussed approach and the allocation of its investments are well publicised on the net.
 - If you bought the fund as it did fit into your strategy and it still does then you should keep it.  Different sectors will perform well at different times, for a while the major US techs and more recently Emerging Markets have been outperforming.  But that wont last forever.  Sadly one never knows until after the event which sectors are going to perform well in the future.

I would generally agree with those comments.

ChesterDog

I've long held LTGE as partner to Fundsmith Equity (and Blue Whale) in the actively managed portion of my global equities tranche, balanced by VWRP on the passive side.

I have seen people make a case for not holding both LTGE and FS because they have generally been extremely well correlated. However, that case seemed flawed to me and recent comparative performance has reinforced my view, which is that they are well correlated until they are not.

Holding both has meant that if one of them encounters a rough patch (as now), the other may not.

True, there are holes one could point to (like holding onto Pearson), but I am sure Nick Train's capability exceeds my own, so I am content to leave things as they are, knowing that all of this is a demonstration of my reason for splitting the allocation.

Moe_The_Bartender

Looking at it in the short term, the fund is actually up by 17% over the last six months.

Thrugelmir

Johnnyboy11 said:

- Poor outlook for the UK/ Europe due to COVID mishandling, whch I don't see improving any time soon

Be interested to know how you view the US then. 

Sailtheworld

Johnnyboy11 said:

Any thoughts?

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/lindsell-train-global-equity-class-d-income

Good decision. Exceptional performance followed by pedestrian performance looks like coin flipping.

Prism

How long have you held  Lindsell Train Global Equity? Surely you must be happy with your overall return from it?

Johnnyboy11

Many thanks for all the comments and views, all valid and genuinely appreciated.

Anyhow, for the reasons I posted, I don't rate this funds prospects or it's fit into my portfolio, so it's time to sell and look for something less concentrated and more global.