JEFF PRESTRIDGE: Could star investment manager Nick Train’s runaway funds hit the buffers?
Nick Train has had two of his company’s five funds downgraded by scrutineer Morningstar
Nick Train is the latest ‘star’ investment manager to have funds popular with investors downgraded by scrutineer Morningstar, amid concerns about his ability to deal with continued investor inflows into his business.
Train, who set up Lindsell Train in 2000 with investment partner Michael Lindsell, has had two of the company’s five funds downgraded – £6.6billion fund Lindsell Train UK Equity and £1.8billion investment trust Finsbury Growth & Income.
These two funds have near identical portfolios, investing primarily in companies comprising the FTSE 100 – such as the London Stock Exchange, publisher of technical manuals RELX and drinks giant Diageo – and have outstanding investment records.
Over the past five years, UK Equity has delivered investor gains of 82 per cent, compared with a 42 per cent return from the FTSE 100 Index and 45 per cent from the wider FTSE All-Share. Finsbury Growth & Income has produced a five-year return of 87 per cent.
But such strong performance has caused investors to pile fresh money into UK Equity, substantially increasing the size of the fund’s assets.
Since the beginning of 2017, the fund’s assets have increased by £3.5billion while Finsbury Growth & Income’s assets have grown by £800million.
Unlike the Finsbury trust that is stock market listed and where investors buy shares in it, UK Equity is set up as an open-ended fund. This means any new money from investors has to be absorbed into the fund – and invested.
Morningstar is now concerned as to whether Train’s investment strategy can cope with the continued strong inflows into UK Equity and the burgeoning size of both funds.
This is because Train prefers to invest in a small pool of companies with the top ten holdings in both funds accounting for more than 80 per cent of assets.
As the funds get bigger, Morningstar says it will ‘restrict Train’s potential investment opportunities’, making it almost impossible to invest in companies with smaller market capitalisations.
Peter Brunt, analyst at Morningstar, says: ‘We are concerned that the group has not taken action to manage capacity’, implying that it might be a wise move for Lindsell Train to restrict future inflows into UK Equity through a process called ‘soft closure’.
He also says the boutique nature of the London-based firm means it does not have in place ‘the most sophisticated risk systems’ if markets turn down sharply and UK Equity is hit by a flood of requests from investors wanting back their money.
Morningstar is not the first fund analyst to raise concerns about Lindsell Train funds.
Last month, investment consultant Square Mile also downgraded UK Equity, stating: ‘We believe there could be significant issues should the fund experience a prolonged period or sizeable level of redemptions.’
Investment platform Interactive Investor has put the fund under ‘review’ as a result of the downgrades although it remains on its best buys list – the so-called ‘super 60’ funds.
Investment trust analysts at Investec have also recommended that investors sell shares in Finsbury Growth & Income.
Among the issues it raises in its recent ‘sell’ note is that although the trust is categorised as a ‘UK equity income’ fund, the annual dividend on offer is just 1.8 per cent, compared with more than 4 per cent from the FTSE All-Share.
In its latest monthly commentary on UK Equity, Lindsell Train acknowledges that questions have been raised about the concentrated nature of the portfolio.
But it argues that its investment approach ‘leads us to invest very predominantly in well-established multi-billion pound valued companies’.
It adds: ‘Just for absolute clarity, the fund has no unquoted, unlisted holdings and never has had.’
It also says the fund could grow to £12.5billion without experiencing capacity issues.