The Black Monday stock market sell-off provided a rare opportunity to add a new stock to the popular CF Lindsell Train UK Equity fund and the Finsbury Growth & Income investment trust.
Nick Train, manager of the £1.6bn fund and the £643m trust, has one of the best track records in the UK equity space of recent years and is seen as the epitome of the long-term investor thanks to his habit of holding onto to stocks for the very long term.
Until very recent he had not bought a new stock since 2011 but has just added French stock Remy Cointreau to his portfolios.
Train (pictured) said: “This is the first addition in over four years – a circumstance that was beginning to embarrass me. Patience and commitment to an existing portfolio is one thing, but at some stage you begin to worry sclerosis has set in.”
“I don’t drink the stuff myself, but if this encourages fund holders to sample a bottle of Remy’s iconic Louis XIII cognac, at circa £2,000 a pop – this the brand referenced by Rihanna in her 2015 hit single ‘Bitch Better Have My Money’ – then I’ll have done my bit for the share price.”
His high conviction, very concentrated approach of buying quality businesses with reliable earnings and strong franchises has meant both his five crown-rated CF Lindsell Train UK Equity fund and Finsbury Growth & Income trust, which are almost mirrors of each other, have dominated their respective sectors.
Train’s fixed portfolio of recent years has not obstructed his fund and trust from consistent outperformance.
The CF Lindsell Train UK Equity fund is top decile over one, three and five years and since it was launched in 2006, over which time it is the seventh best portfolio in its sector having more than tripled the FTSE All Share’s gain.
Finsbury Growth & Income, which Train has managed since 2000, has a similarly strong track record of performance, being the best portfolio in the its sector over five years, the second best over 10 years as and top since he took over more than 15 years ago.
Source: FE Analytics
Train, while benchmarked against the FTSE All Share in both portfolios, has been making use of freedom to have up to 20 per cent exposure to non-UK listed stocks.
The last stock he bought for both portfolios until the sell-off was Amsterdam-listed brewer Heineken, which since he bought in 2011 has doubled its share price since as well as paying out substantial dividends.
Also, most of his largest holdings are mega-caps with highly diversified global businesses such as Unilever, Diageo and Burberry, often in consumer sectors, and the newest edition to the portfolios is no exception.
The addition of upmarket cognac distiller Remy Cointreau brings his allocation to non UK-listed equites to 20 per cent, up from 16 per cent last month.
Train says there is still nothing that is listed in the UK he wishes to buy and the reasons for adding the firm, whose brands include Rémy Martin Cognac, Mount Gay rum, Cointreau liqueur and Bruichladdich whisky, to the portfolio are the same for buying Heineken.
“The previous ‘new’ holding – from four years ago – was also non-UK and I have to acknowledge what that signals to investors in our fund; that I have been unable to find a new UK candidate for a UK fund in a long time,” he said.
“There are other similarities. The stock I bought in 2011 was also a drinks company – Heineken – and was also accessed during a period of intense investor macro-economic worry; at that time the first wave of Grexit concern.”
“The further appeal of Heineken and Remy is that they both give access to a brand or theme not directly represented in the UK market. Respectively, a global lager brand and a premium cognac. They’re both venerable, founded in 1864 and 1724 and they are both controlled by a family with a majority shareholding.”
Trains says the investment approach at Lindsell Train “tends to chime well” with firms run by families or with large family shareholdings, rather than the typical modern mature corporation.
“A family’s concern for dynastic survival often means making appropriate long-term investments, even at the expense of short-term earnings at the same time families are unlikely to sanction the type of balance sheet engineering that boosts short-term value while putting a company’s survival at risk.”
European consumer goods have been broadly a good place to be over the past year, compared to the broader equity market, as the graph show below.
Performance of indices over 1yr
Source: FE Analytics
However, they have not recovered as well from the recent China sell-off. Like its big rival Diageo, the firm has been hit since around May 2013. Its share price has lost about 40 per cent of value although this is much more than Diageo’s fall.
Performance of indices since 25 August 2015
Source: FE Analytics
Train said: “I don’t know whether Remy represents an extraordinary opportunity at the price I first paid. This was in the low €50s and, by the way, on the market’s recent rally, which has pushed Remy back to €60, I have stepped back from buying.”
Remy’s shares have halved from their peak in 2013, losing 30 per cent over the summer of 2015.
“Of course the reason for that is China. In 2013/4 Remy made over 35 per cent of its operating profit selling mostly ultra-premium cognac in China,” Train added.
While its business in the US continues to see growth, its China revenue has been hit a double whammy: a crackdown on the ‘gifting and hospitality’ by the ruling communist party in China and the more recent economic slowdown that has devastated some industries such as gambling and luxury alcohol.
“Earnings [for Remy Cointreau] look unlikely to return to 2013’s peak of €2.95 [per share] for some time - 2015’s were €1.95. Certainly my entry P/E of 27x does not represent an obvious bargain and I can’t think of any reason the shares won’t fall further if the fears of macro-investors, China meltdown, US rate hikes, are validated,” he said.
“On the other hand, Remy is not the most easily-traded stock, with a free float about half its market value of €2.8bn and I reasoned if I were ever to build a meaningful position in this wonderful collection of then I needed to start accumulating when others were willing to sell.”
“The holding currently stands at just under 1.5 per cent, giving plenty of scope to add if the shares consolidate or drift.”
Hugh Yarrow, manager of the £300m Evenlode Income fund, also has a large bias to the likes of Diageo and Unilever. He says they have come under pressure in their core businesses as well having seen a rally in their share prices come off recently after they reached high valuations.
While he says this presents a conundrum for investing in them – despite their quality they are expensive, but he thinks they are in fact good at changing when it is needed.
“One of the nice things about owning good-quality shares operating in mature, rational industries is that they tend to be successful at incrementally adapting to changing conditions in the economy, the political environment and in their own sector,” he said.
“Indeed, they must to avoid being rendered obsolete. International expansion is also something we like – it helps to mitigate political and economic risk at the national level.”