Train, one of the UK’s most highly rated stockpickers and manager of the Finsbury Growth & Income trust, admits that he focuses more on long-terms trends than most of his rivals, which makes worries over the end of quantitative easing and rising interest rates less relevant. However, he argues that current concerns are overly short-sighted, and points to the increasing willingness of company management teams to invest as a big tick in the box for equities.
“What I would say is that the value of global M&A deals are up something like 70 per cent year to date,” said Train (pictured).
“An associated statistic is that these deals taking place on the stock market are, on average, at a 30 per cent premium to the undisturbed share price.”
“People might interpret this as the cycle reaching its peak believing that companies are becoming over confident. This may just be me being typically optimistic, but these management teams have the clearest understanding of their businesses and the conditions they are operating in.”
“For me, this shows that they believe there is still substantial value left to develop and grow their businesses. I would take that as a real positive,” he added.
The biggest M&A news of the year was US healthcare giant Pfizer’s attempted buy-out of AstraZeneca, which eventually proved unsuccessful. However, there have been some very large successful bids such as Facebook’s acquisition of Whatsapp and Comcast Corps’ takeover of Time Warner Cable.
Train’s optimism is in direct contrast a number of fund managers, who have been de-risking their portfolios in recent weeks and months.
One such example is Mike Felton, manager of the M&G UK Growth fund, who told FE Trustnet he was concerned about a developing “bubble in complacency”, and likened the current environment to period witnessed prior to the financial crises.
Just today, the multi-asset team at Russell Investments warned that a market correction of at least 10 per cent is a matter of when – not if.
Most of the worries are centred on valuations. According to FE Analytics, the FTSE All Share and the S&P 500 have returned more than 35 per cent over the last two years.
Performance of indices over 2yrs
Source: FE Analytics
Market sceptics say these strong gains are largely a function of central bank intervention via money printing and ultra-low interest rates. Another cause for concern is the lack of earnings growth to justify these valuations.
While Train understands why certain managers are becoming twitchy, he says these are short-term fears and that investors should feel comfortable holding equities for a long-time to come.
“Short-term market calls are very hard to call and I’ve made a point during my career to avoid making them,” Train said.
“Yes, there are clearly concerns about interest rates, inflation and politics and maybe people who like to trade are getting slightly nervous. But, I still think there is still value for long-term investors and the upturn in M&A is a very encouraging sign.”
Train has managed his Finsbury Growth & Income IT since November 2000 and launched an open-ended counterpart, CF Lindsell Train UK Equity, in July 2006.
According to FE Analytics, the £923m fund has been the seventh best performing portfolio in the highly competitive IMA UK All Companies sector over that time with returns of 148.56 per cent, beating its benchmark – the FTSE All Share – by 88.58 percentage points.
Performance of fund vs sector and index since July 2006
Source: FE Analytics
Outperformance has also been very consistent.
Our data shows that the fund beat the sector in 2007 and then delivered top quartile returns every year between 2008 and 2013.
Train warned earlier in the year that was expecting much flatter returns over the coming 12 months or so. Then fund remains marginally ahead of its peers however, with returns of 1.25 per cent year-to-date.
“It’s interesting because out of all the outcomes that I would have expected this year, I would say this was the least likely. I was expecting our relative performance to be far more marked either way,” Train said.
“I think it comes down to the fact that some of our important holdings have done well this year and some of our important holdings haven’t done so well.”
The manager says the first six months of the year have been somewhat strange as the stocks he holds within the portfolio to gain access to broadly similar trends have performed very differently.
One of the best examples is Unilever and Diageo. Both are large-cap consumer staple companies with recognisable brands, giving him exposure to the emerging market growth story. However, as the graph below shows, the two stocks have had differing starts to the year.
Performance of stocks vs index in 2014
Source: FE Analytics
Unilever is his largest holding, making up 9.2 per cent of his fund and 9.3 per cent of his trust while Diageo is his second largest holding, making up 8.6 per cent of his fund and 8.5 per cent of his trust.
Though the CF Lindsell Train UK Equity fund sits in the IMA UK All Companies sector, it has an attractive yield of 2.36 per cent. Its clean share class has an ongoing charges figure (OCF) of 0.8 per cent.
His trust has a slightly lower yield at 2.1 per cent and is currently trading on a 1.1 per cent premium to NAV. It is geared at 4 per cent and has ongoing charges of 0.85 per cent.
