Last week was a bit nuts. The financial press became hysterical headline after headline warned of the end of Britain post-Brexit. On the evidence of a couple of days, they were mostly convinced that outside the European Union (EU) our ability to trade globally will disappear; the City will decamp en masse; living standards will collapse; politics will change forever; and, of course, those of us who aren't already will soon be racists. Boris Johnson mirrored some of our feelings in The Daily Telegraph when he compared it to "a contagious mourning of the kind that I remember in 1997 after the death of the Princess of Wales".
But the EU and the reaction to it is also a little Louis XIV: his court too was strangled with expensive and pointless regulation (mostly about fashion) designed to maintain control of his nobles by keeping them too poor and busy to rebel. He also made proximity to the court representative of a higher form of existence than that available elsewhere. "Hors de vous, on n'existe pas," as one courtier is said to have said to the King. (Away from you, one doesn't exist.) The EU is Louis. The courtier is the Financial Times. You get the picture.
The wisdom of a calm approach
Anyway, after a few days in London (in Scotland, only the core SNP does referendum hysteria these days the rest of us are over it), I needed to hear from some people with the mental resilience to ignore the short-term noise. So I went to Lindsell Train, a fund-management company set up in 2000 by Nick Train and Michael Lindsell. It does all the things we like such companies to do: it is majority-owned by its founders; it has a simple organisational structure; and it has a clear investment method that it sticks to. They look for quality, cash-generative businesses that they view as undervalued by the market, and they hold them for the very long term (which keeps the ongoing charges down at 0.8%). Crucially, they deliver long-term performance for investors via their UK, global and Japanese funds. Regular readers will know that MoneyWeek's investment trust portfolio holds the Finsbury Growth & Income fund, run by Train (see below for a portfolio update). They will also know they've made a lot of money if they've been holding it: 98% over the last five years, 41% over the last three years and 8% over the last year. Those numbers for the average UK equity fund are 52%, 18% and -2%.
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I start by asking them about Brexit. "Every five minutes spent thinking about the investment implications of Brexit," says Train, "is a wasted five minutes." Before the vote, it was wasted on the basis that even if you had known what the result would be, you couldn't have known how much of that was priced in, and how the market would react anyway. So it wasn't worth doing anything. The wisdom of that approach is now obvious: who could have guessed that, less than a week after the vote, the FTSE 100 would end higher than before the vote? All that macro and geopolitical analysis done at such huge cost before the vote? All that commission bet on an outcome? "Think how redundant it all is."
The longer Train does this (fund management), the "less susceptible" he sees capital markets as being to research into macroeconomic outcomes. Lindsell agrees that the market reaction to Brexit is irrelevant 3% here, 3% there isn't that unusual and "in the very long term it is not significant for the companies that we own". There is good news, of course, in the fall in the pound: anyone holding US stocks has just seen their dividend payments go up by 10%. The same goes for dividend payments from Japan a rising yen means rising income.
Technology is the real driver of change
That takes care of Brexit but if that doesn't matter, then what does? Technological change matters, says Train. James Anderson (the manager of Scottish Mortgage, also in our model portfolio) said last year that more than half of today's FTSE 100 companies won't exist in a decade. Train agrees: there are "existential threats to oil companies, to utility companies, to car companies and banks". That makes the big dividend streams the UK investor has come to expect from these companies less secure than many think. Even this year, says Train, his team has spent much more time looking at the effect of this on companies they've invested in than they have on Brexit. Of particular concern are the media firms he is invested in Pearson, for example. This may benefit from technology changes, says Lindsell. If it can make the transition to digital (as Reed Elsevier has) and as a result provide goods and services to its clients at a lower cost it could entrench its market position. "We think that's going to happen that's why we are invested. But it isn't absolutely certain... that keeps us awake at night."
What do we watch?, I ask. How will we know it has succeeded? Look for rising digital revenues as a percentage of overall revenues, and declining working capital as a proportion of sales, says Lindsell. The other media company the firm holds in its funds and worries about is the Daily Mail and General Trust. It is possible, says Train, that one day the Daily Mail Online "could be worth multiple times" what the print paper is currently worth. But that isn't apparent yet: the Daily Mail has yet to show clear evidence that its digital advertising revenues can replace its falling print revenues.
That moves us on to a firm that the two hold in which they seem to have complete confidence: Burberry. It is a "resonant brand... unlike any other" in the East, says Lindsell. There are six British-owned brands in the top 100 brands in the world (according to Interbrand): "Burberry is one of them." This makes it a "very, very rare asset", says Train. "Unique." You can mention it in the same breath as Herms or Prada. "It isn't absurd to do so... and from the perspective of the UK investor there simply isn't an equivalent quoted in the UK." It also has high profit margins (despite manufacturing in Yorkshire) and is "redolent of London".
Will Brexit enhance the brand? (Fashion puts itself about as liking independent minds.) "Yes, I think it will, actually." Do you wear it? "Certainly not," says Train. He doesn't drink Irn-Bru either despite holding shares in AG Barr. That takes me on to Scottish independence. Would that bother these two more or less than Brexit does (or doesn't)? "It'll be fine." No hysteria here. Thank God.
Japan's surprisingly tasty dividends
We move on to Japan a market where good stock-pickers, such as the Lindsell Train team, tend to do well. One interesting thing going on in Japan, says Lindsell, is that the companies in which they invest (admittedly a "narrow range" of around 4% of the index) have surprisingly good corporate governance, "especially on the compensation issue", and are exercising their share buy-back powers they have tended to buy back at rather better prices than is common in the West, something that is good for the remaining holders of the shares.
I wonder if he is seeing rising dividends. Actually, he says, dividend growth from many has been just fine for a while: Kao has seen payouts rise at an annualised rate of 9.5% for the last 27 years: given how low inflation has been in Japan, that suggests it has seen a better dividend growth rate than peers in the West. "Get the right businesses and you can access fantastic real dividend growth in Japan." The yield on the portfolio in Japan is about 2.2% around the same as that on the company's global portfolio. Twenty years ago, says Lindsell, the numbers would have been very different.
We finish on the subject of the dividend growth in the Finsbury Growth and Income Trust given how many MoneyWeek readers hold this and given how important income is to us, this matters. It is slowing, says Train. But the dividends across the board are still growing at around 7% a year. With inflation at near-zero, that's "all real" and unprecedented. "I don't think I have ever owned a portfolio at any time in my career when real dividend growth has been 7%... it makes me viscerally feel very, very bullish." So ignore the hysteria and the panic and from an investor's viewpoint, post-Brexit Britain looks a bit like pre-Brexit Britain. And that's not bad at all.
Fact file: Nick Train & Michael Lindsell
Nick Train and Michael Lindsell co-founded Lindsell Train in 2000. Train who is the lead manager on the highly successful Finsbury Growth and Income Trust started out at City fund manager GT Management in 1981, after graduating from Queen's College Oxford with a BA in modern history. He spent 17 years at GT, before joining M&G as head of global equities in 1998. Lindsell graduated from Bristol University with a BSc in zoology. He started his investment career at Lazard Brothers in 1982, then joined Hong Kong-based Scimitar Asset Management. In 1992 he moved to GT as chief investment officer for the Tokyo office. He manages Lindsell Train's Japanese funds, which have substantially outperformed their rivals over the last decade.
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