Morningstar analysts have downgraded the Lindsell Train Global Equity Fund to a Bronze Rating.
The £8.9bn fund, run by veteran investor Nick Train, has been praised for its “small but highly experienced team that sticks to a well-defined process”. But Morningstar analysts said: “Although its fundamental strengths are unchanged, increased competition from within the peer group sees its move to a rating of Bronze from Silver.”
Nick Train and Michael Lindsell launched the fund in 2011 and are known for their buy-and-hold investment strategy, which can see them go years at a time without adding any new names to the portfolio. They also run very concentrated portfolios with this fund holding just 25 names.
Morningstar manager research director Jonathan Miller says: “The managers’ unwavering adherence to their investment process has resulted in considerable long-term success.”
He adds: “We believe a key strength lies in Lindsell and Train’s deep understanding of company strategies and their ability to see through the noise and buy stocks that are best placed to defend their business over the long-term.”
That can be see in the proportion of moaty stocks in the portfolio – some 48.6% of the portfolio has a Wide Economic Moat rating, and a further 31.3% a Narrow Moat. The investment duo are known for backing consumer brands with a loyal following, and top holdings include drinks giants Diageo, Heineken and PepsiCo, as well as confectionary stalwart Mondelez.
Long-Term Performance
The fund has been a strong performer over the long-term, delivering annualised returns of 16.73% over the past decade. Such a concentrated approach and its deviation from the benchmark does, however, mean the fund can underperform at times and a recent rally in value style stocks has seen the fund lag. Last year, it gained 11.9%, some 11.8 percentage points behind the average fund in its category, Global Large-Cap Growth Equity. The fund has been in the bottom decile of its peer group over the past two calendar years and the manager said last year had been the toughest 6 months of his career.
Train has spoken openly of his disappointment in performance. In the fund’s most recent monthly report, the manager said: “From a relative perspective, 2021 hasn’t started well…The storm continued with pressure to our consumer staples names.” But Train said the second quarter of the year has been “more optimistic” and that beverage names in the portfolio did particularly well in the period, with Diageo up 16%, Brown Forman 11%, and Heineken by 13%. He's also spoken of the potential for luxury stocks to do well this decade.
He added: “But given the Q1 slump, halfway through the year we find ourselves still lagging the index by 6.5%. Is this cause for concern? Certainly any period of underperformance requires analysis and investigation … Serious concern arises if we see evidence that our companies have lost their competitiveness … As far as we can tell, this hasn’t happened. So while the relative drop in performance is both unwelcome and unhelpful, we remain firm holders of all our companies.”
Following a routine review of the fund, Morningstar has downgraded it from a Silver to Bronze Analyst Rating. Last year, all but the cheapest share classes in the fund were moved to a Bronze rating, but the cheapest D share class retained Silver. This move brings all the share classes in line.
The fund is rated as Above Average for its Process and People pillars, but the Parent pillar of the Morningstar analyst rating methodology is ranked as below average. None of the pillar ratings have changed. Morningstar’s Miller explains: “Lindsell Train does not have the most sophisticated systems. This is somewhat mitigated by the highly prescriptive investment approach, but it has left the group behind the curve in assessing capacity. [We have] concerns over the firm’s ability to keep a handle on the asset base and risk oversight function.”
