I saw a brilliant presentation recently, in which Lindsell Train joint founder and portfolio manager Nick Train characterised the equity investment market in the words of the poet Ogden Nash: “Shake, shake, shake the ketchup bottle! First none will come, and then a lot’ll.”
If Train (whom I had not encountered before in person) was not top of the bill at said event, he ought to have been. Wisdom dripped from him as he gave us some of his maxims for successful investment. And with , I gather, an enthusiasm for Bob Dylan said to be bordering on idolatry, he is clearly an idiosyncratic character in the otherwise altogether grey world of fund management.
What is more, it turns out his investment track record (notably with the Lindsell Train UK Equity fund and a string of others, including Finsbury Growth and Income trust) puts him and his colleagues in the vanishingly small category of active fund managers with a consistent performance over a number of years.
Nash’s pithy verse helped to explain Train’s optimistic approach to equity investment. He is always bullish about equities. He has given up trying to guess when the returns will come and accepts for much of the time “none will” but then “a lot’ll”.
He argues his optimism has a rational basis. Taking the US market since 1928, there have been positive returns in 55 per cent of trading days, 65 per cent of months and 75 per cent of calendar years. Only nine years have shown losses of more than 9 per cent. So the odds are on the investor’s side if he or she can afford to hang on.
In this context, he approvingly quotes investment guru Ken Fisher: “Being out of stocks is one of the biggest risks long-term growth investors can take.” He adds the greatest compliance risk is holding cash for clients looking for growth when markets are going up.
Train is especially keen advisers and their clients should not get hung up on trying to predict the outcome of things like the EU referendum or other big events such as interest rate movements, the future direction of the economy or stockmarket fluctuations. Even when you know the answer – which is not often, the future being one of the trickiest things to try to predict – you do not know the extent to which the outcome is already priced into the market. The market is a chaotic system that reacts to predictions about itself and so cannot be predicted.
His advice to investment managers is: look at the company, not the market. So how does he go about choosing stocks?
Train believes durable, cash-generative franchises are rare and most investors undervalue them. He mostly finds his target investments in a select group of industry categories, such as consumer branded goods, internet/media/software, pharmaceuticals and financials.
Old-style metal-bashers are anathema, with their low marks and thirst for capital. Another investment guru Train quotes is Leonard Licht, who said: “You should never buy any company that makes anything out of metal.” A bit over the top, perhaps, but one gets the point immediately.
Once Train and his colleagues have committed to a company, they are extremely reluctant to sell it, unless there is a significant breach of their valuation target or if they realise the premise for the investment has ceased to be valid. He believes long-term ownership of great companies is a sensible strategy, as transaction costs act like a tax on clients’ capital. They cannot avoid this leakage altogether but they aim to minimise it by dealing as infrequently as possible.
The upshot is their portfolios are characterised by unusually high concentration (20 to 35 holdings) and exceptionally low turnover, which is generally less than 5 per cent a year. Even fans of low-cost mutual funds and ETFs, like me, should applaud active managers of this stamp.
Right now the regulators of most European markets are concerned about closet trackers – funds that do little more than track their benchmark indices but charge full active fees for behaving in this herd-like manner. This is the very antithesis of closet tracking.
Danby Bloch is chief executive at Helm Godfrey