Lindsell Train has notched up considerable success by focusing on a few core stocks. Merryn Somerset Webb talked to Michael Lindsell about his strategy.
MoneyWeek readers will mostly know of Lindsell Train because of Nick Train – manager of the Finsbury Growth & Income trust, which we held in our investment trust portfolio for many years.
But the firm also runs four other funds which use a similar method: it invests in a small number (25-30 per fund) of durable, highly cash generative businesses with strong market positions. It trades in and out of those businesses very rarely on the basis that transaction costs act as an effective “tax” on returns. And just as important to the running of these funds as Nick Train is his co-founder Michael Lindsell – with whom I met last week.
We start by talking about Unilever – which he and Train are so fond of that it makes up around 8% of the global fund they co manage. Can it really be that good? It has always been undervalued, says Lindsell. And it still is. If you had been able to see what kind of cash it would have generated 20 years ago, you would happily have paid 50 times earnings for it (nuts as that might have seemed to anyone without your knowledge). The situation isn’t that different now: most market participants hugely underestimate the volume of cash it will generate.
It is, in that sense, a little like the “Nifty Fifty” stocks of the 1960s and 1970s. They looked super-pricey at their 1970s peaks, but work done since (by Jeremy Siegel) on their long-term performance suggests that many of them were actually cheap at the price.
Unilever has had a great run but it is still a “fantastic asset” – partly because 60% of its business is in emerging markets. That’s been built up over decades and is “irreplaceable”. If you can find something that will just keep compounding at a high return “because the competitive moat is so big” there is no need to “fuss” about price/earnings ratios. If the product is good and the moat wide, there also isn’t that much reason to be too fussy about management, says Lindsell.
The firm bought Japanese skincare firm Shiseido back in 2013. It had poor management but fantastic products, and it is those that have provided the value since (management can be changed; products are harder). I ask if the buying of Shiseido was connected to the changes in corporate governance in Japan? Not really. It was just a well priced asset at the time. Lindsell also reckons that the shift in governance in Japan has been going on for 15 years or so – Abe has drawn attention to it rather than actually instigated it.
You can see those changes in the companies in the Japan fund he runs (Lindsell Train Japanese Equity) – 15 years ago almost all the companies he held shares in paid low, stable dividends. Now they mostly pay dividends based on how well the business has done in any one year. “That isn’t a recent thing.”
We move on to other top holdings in the fund. I will, says Lindsell, know about Kao Corporation because of its Biore skin cleanser. I’ve never heard of it (which probably explains all sorts of things) but I was a broker in Japan in the 1990s so I do at least have some historical knowledge of Kao (mainly its number – 4452). But Kao fits the bill as a cash-generating stalwart beautifully: it has increased its dividends in real terms faster than either P&G or Unilever over the last 20 years. It might have come from a slightly lower base that the others, but it has done this in Japan’s flatlining economy when it isn’t a particularly international business. That’s “fantastic.”
The other big Japanese holding is Nintendo – which holds “some of the most valuable media content we know”.
Lindsell is super-enthusiastic about all these companies. I wonder if he is bullish on Japan in general? He isn’t interested in Japan in general – or in trying to work through the ramifications of the Bank of Japan’s mad intervention in the market. He is bullish on the 20 companies in his fund (seven of which are also in the global fund) – which only make up 4% of the index as a whole. But that’s it.
We move on to the subject of the value of media content, something that takes us straight from Nintendo to Nick Train and his latest purchase for the Finsbury Growth and Income fund: Manchester United, bought direct from the Glazer family. This is exciting partly because Train so rarely buys anything and partly because it makes such a compelling investment story. Football clubs are “really unique assets” in the way in which they give shareholders direct ownership of sports assets, says Lindsell. All sports franchises in the US are private (“for good reason – they are very profitable”) and there are very few listed vehicles in Europe.
But as the big tech companies continue to disintermediate TV and bid for media rights directly, they are going to get even more valuable. We know that Netflix has a content budget of around $6bn and Amazon has one of $4bn. It is “just a matter of time” before one of these firms comprehensively outbids traditional media. Everyone wants content – and the best content there is is sport. So while Manchester United doesn’t look cheap in absolute terms, if you look at it through the prism of what big tech can afford to spend on content, it is cheap.
That’s also why the global fund holds a big chunk of Celtic and of Juventus – bought despite its various rights issues and scandals. What if Manchester United stop being a top team? I ask. “Oh, that doesn’t matter”, says Lindsell. It hasn’t been the top club for years. What matters is that it provides “top quality entertainment year in, year out.” And it does.
That argument also holds good for World Wrestling Entertainment, he says: it is all about providing entertainment.
I move on to Hargreaves Lansdown – a big holding in the funds. Lindsell loves this one for the way in which it controls the platform market and its ambition in the wealth management market. Does it worry you that HL’s service is expensive and that there are so many cheaper options on the market? I ask. It doesn’t. Partly because of the strength of the brand (people need to feel brand confidence in investment providers), partly because of the strength of the service proposition and partly because the price-sensitive can use the company inexpensively (it turns out we both use HL largely to hold investment trusts). “Given what you get, it’s good value.”
On the subject of value, we move on to the fees. The fees on their funds average around 0.65% says Lindsell. Equity returns are unlikely to be more than 6%-8% a year and “you don’t want to be taking up more 10% of that”. Indeed you do not. I can’t agree with Lindsell and Train on everything. I can’t think that sport is the best of content, for example; and I could quibble rather a lot on the matter of what is cheap and what isn’t. But given that the Lindsell Train Global Fund is up 163% in the last five years (against an MSCI World return of 120%), I think I won’t.