Manager Research

We have recently completed our review of Lindsell Train and have downgraded the Global Equity Fund and the BCI Feeder Fund to Tier 3. We detail our reasons for the downgrade below.

Rating View

In the past several years the business has taken steps towards transitioning key leadership positions in the investment team and business, away from its founding members – Nick Train and Michael Lindsell. We view these developments as positive in addressing succession risks, however, where we have concerns is that this transition is happening at a time when the business has had significant outflows of assets under management. This has the potential to create material complications and heightens the level of business risk. As a result, the future path of the business remains uncertain and difficult to assess with confidence at this stage to form a positive view.

Our other concerns relate to the construction of the portfolio and a potential mismatch in time horizon for the individual investor.

Lindsell Train adopts a ‘quality’ investment approach to investing with an emphasis on identifying companies with an enduring product or service that can compound earnings growth into shareholder return at a faster rate than the market. However, over their 15-year track record, we found mixed evidence of them being able to identify and invest in a portfolio of companies with consistently higher quality characteristics and earnings growth compared to the market.

They maintain that a 20-year holding period may be required for these theses to materialise, implying a long-term commitment from investors in the strategy to fully realise the potential return. While we acknowledge this approach and potential feature of their investment approach, in our view it raises the possibly of time horizon mismatch with the individual investors in the fund. An individual investor’s time horizon is typically much lower, which creates sufficient doubt in our minds that an investor will be able to hold onto the portfolio for long enough to realise the returns from this strategy if it does succeed.

In addition to the above, we believe that Lindsell Train has not taken advantage over dislocations in the price of assets at various points in time and have held a relatively unchanged portfolio for over a decade. While we believe that low turnover in global equity funds is generally preferred to high turnover, we question the extent to which they have fully taken advantage of the opportunity set available to them over time and whether this would have improved investment outcomes.

Considering all this information, we believe that a Tier 3 rating is appropriate.