Train (pictured) is commonly regarded as one of the best fund managers in the area of UK equities, having delivered very good returns to his investors over the short, medium and longer term. Although the manager is still confident that he can replicate that performance over the long-term, he says his investors can expect a period of underperformance as his emerging markets-facing stocks come under pressure.
As FE Trustnet recently highlighted, large blue chip companies that sell into the emerging markets such as Unilever and Diageo are facing downward pressure on their earnings as growth in the developing world begins to slow.
Train thinks the market has overreacted to this week’s profit warning from Unilever – one of the largest holdings in both of his portfolios. Diageo is also a top 10-position while the manager has been keen to invest in the theme of the emerging market consumer.
He says this long-term story is still very much intact and the stocks will remain in his funds. However, he does expect a drop-off in performance.
"Listen, I have been saying to my shareholders that this investment trust has beaten the market in the past five consecutive years. It has outperformed very strongly and I know, and hopefully they know, this won’t go on forever," he said.
"One day there will be a scenario where that changes. This could be it."
"It re-emphasises what I have been saying to shareholders. I have been flabbergasted by how much this trust has outperformed, but investors should realise that this will not go on forever," he added.
The board of the Finsbury Growth & Income Investment Trust appointed Train as manager in December 2000.
According to FE Analytics, it has returned 239.84 per cent since then, meaning it has been the third-best performing portfolio in the IT UK Growth & Income sector over that time. The trust has also beaten its FTSE All Share benchmark by a considerable amount.
Performance of trust vs sector and index since Dec 2000
Source: FE Analytics
Investors in his five crown-rated CF Lindsell Train UK Equity fund have also been well rewarded.
Launched in July 2006, the £700m fund has been a top quartile performer in the highly competitive IMA UK All Companies sector over one, three and five year periods, beating the FTSE All Share over each of those time frames
On top of that, it is the only portfolio in the sector that boasts top quartile performances in 2008, 2009, 2010, 2011, 2012 and so far in 2013.
Performance of fund vs sector and index
| Name | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 |
|---|---|---|---|---|---|---|
| Lindsell Train - CF Lindsell Train UK Equity | 23.11 | 21.38 | 1.14 | 30 | 34.86 | -25.76 |
| FTSE All Share | 14.19 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 |
| IMA UK All Companies | 17.72 | 15.05 | -7.04 | 17.53 | 30.4 | -31.96 |
Source: FE Analytics
Despite the fact that he feels his exposure to the likes of Unilever and Diageo – which combined make up close to 18 per cent of each of his portfolios – will hinder returns over the short-term, he says there is no reason to sell out and has in fact bought more of their shares over the last few days.
"I don’t think these concerns have made a difference to my long-term view of the companies," he said.
"None of these companies are just about emerging markets, of course. Obviously those assets are a big driver of revenues and the investor perception is that the likes of Unilever and Diageo have this incredible opportunity in emerging markets."
"But anyone with a small understanding of financial history will know that emerging markets are cyclical and volatile areas that will face periodical road bumps along the way."
"1997 was a big crisis year as Russia went first and then all of the Asian countries followed. During that year, I was asked similar questions about the longevity of the emerging markets story," he added.
Train says that Unilever in particular has been singled out for its exposure to the developing world. However, he warns all investors that if the emerging markets surprise on the downside, then there will be few places to hide in the UK equity market.
"We did a bit of work last year looking at the sources of business for UK quoted firms," he explained.
"As we all know, the UK stock market has little to do with the UK economy. However, last year the average quoted company in the UK – I know it doesn’t exist but bear with me – did more business in emerging markets than in the UK."
"They also did more business in those regions than in any other place in the world," he added.
Given those concerns, some market commentators have warned that there may be a divergence between equity valuations and underlying earnings growth, meaning that the recent rally has been built on shaky fundamentals.
However, Train is not concerned with the state of his portfolios.
"I look at things a bit differently, which may be a bit limited," he said.
"I think 80 per cent of my portfolio has increased its dividend by at least 5 per cent and with an underlying rate of dividend increase for our portfolio of 11 per cent per year. That’s encouraging, I think."
"Earnings are more volatile and get manipulated so I concentrate on the rate of dividend increase instead. That is because if a company can increase its dividends, then it is signalling to the market that it can continue to grow."
"If I can pick up a dividend increase of 10 or 11 per cent each year, I will be very satisfied," he added.
The Finsbury Growth & Income trust has a dividend yield of 2.2 per cent. It is currently trading on a slight premium to NAV, though the board can use a discount control mechanism if its discount were to widen to 5 per cent.
It uses gearing, with leverage making up 3 per cent of its assets, and has ongoing charges of 0.94 per cent.
Although his CF Lindsell Train UK Equity OEIC is primarily used by institutional investors, private investors can gain access to it via a number of fund platforms.
Tune in next week as Train tells FE Trustnet why you would be fool to sell out of Unilever, despite the company’s profit warning.
