There are plenty of examples of well-known fund managers striking out on their own, only to fall flat a few years later. Nick Train isn’t one of them.
The veteran stock-picker has been investing in UK companies for more than 40 years, and established Lindsell Train in 2000 with Michael Lindsell. The pair had previously worked together at GT Management.
His track record has made him one of the UK’s best-selling fund managers, with his £3.8bn UK Equity fund and £1.7bn Finsbury Growth & Income trust long-standing favourites with British retail investors.
However, investment performance has taken a hit more recently. Train’s UK Equity fund appeared in Bestinvest’s Spot the Dog report for the first time in March, having lagged its benchmark over the past three years by 3.9%.
Performance has also waned at his investment trust, which boasts many of the same big name holdings, including Diageo, RELX, London Stock Exchange Group and Experian.
“I’m not happy with our performance over the past three years. Essentially since Covid our UK strategy has struggled to generate returns and generate relative performance,” said Train, referring specifically to the investment trust.
“We don’t have any exposure to oil. Looking back not just over the past quarter, but over the last few years, not having any exposure to the oil sector has been challenging. It is completely self-inflicted.”
Time to up tech stock exposure
Aside from the absence of oil and energy companies — among the best-performing companies over the past three years — Train pointed to a lack of exposure to “critical technology or technology advantaged companies” leading up to the pandemic.
Finsbury Growth & Income had around a quarter of its portfolio exposed to data and software firms in 2020. By the end of March 2024, that had grown to around 55%.
“By our standards, that is a meaningful strategic shift,” said Train. “I ask myself is that 55% enough? I don’t know yet. The relative performance of the strategy is saying maybe it isn’t enough yet, and maybe we’ll increase those exposures.”
According to Train, there are a “huge number of substantive UK businesses” that have an opportunity to take advantage of artificial intelligence.
He pointed to data giant RELX, the investment trust’s largest holding, as an example.
“It is one of, if not the preeminent data and analytics company in the world. It happens to be listed on the London market,” said Train. “In industries where the potential for value creation from large language models is so obvious, like science, medical, [and] legal — RELX has the leading position in those industry verticals.”
Train added that London Stock Exchange Group is another key holding that will benefit from the accelerating AI trend, pointing to its 10-year strategic partnership with Microsoft for data analytics and cloud infrastructure solutions.
“To us, it is absolutely not an accident that LSEG is the business that Microsoft chose to joint venture with,” said Train. “If you take what [Microsoft] said at face value, they partnered with LSEG because of its global reach and the market-leading collection of data they have.”
Credit ratings firm Experian, another top holding across the investment trust and UK Equity fund, is the only firm among its peers “that offers customers both data and software and analytics tools, which its competitors don’t have”, said Train.
“As a result, it is not the biggest, but arguably the best-positioned credit bureau in the world. It also happens to be listed on the London Stock Exchange — thank goodness.”
Why the future is bright for UK companies
Despite UK shares currently being out of favour among investors — UK equity funds suffered their worst year on record in 2023 with £14bn of outflows — Train remains bullish on the future.
The FTSE 100 recorded its highest-ever close on 22 and then 23 April. However, long-term performance severely lags that notched up by the S&P 500 in America.
“One has to confront the reality that for whatever reason, there isn’t an Nvidia or an Arm or an Apple on the UK stock market,” he said. “It’s maybe not a surprise the [FTSE 100 index] has struggled to match markets that do contain such extraordinary businesses.”
While the UK is not home to some of the world’s biggest tech giants, Train said some companies are posing serious competition to their US peers. He points to Sage, which last year posted a 60% increase in its share price.
“It is winning in the US against Oracle, which is a remarkable thing for a UK company,” said Train. “When you look at the share register, there has been a big increase in non-UK institutional investors in Sage who recognise this is a world-class business. Sage is not the only one where you can see share prices prone with opportunity.”
With the UK currently grappling with an IPO drought and dwindling pension fund allocation to domestic companies, Train is wary of attempts by the government to encourage more investment from heavyweight British institutions.
Chancellor Jeremy Hunt announced last year that some of the UK’s largest defined contribution pension schemes had agreed to allocate 5% of the assets in their default funds to unlisted equities by 2030. Currently, they allocate less than 1%.
“I would be very cautious about politicians mandating what pension funds should invest in,” said Train.
“You could argue the decision to reduce exposure to the UK market over a 20-year view has been a rational thing to have done. A combination of US equities and index-linked gilts over the sweep has probably delivered better returns with lower risks. Who is to say those asset allocators for pension funds are wrong?”
