I feel like I’m in quite an embarrassing situation, especially given the subject I write about and have done so for more than three years now. 
Basically, I cannot work out whether I want to buy a certain fund because I believe in the manager, I rate and know the process and I know exactly what role it would play in my portfolio – or because it has just been on a phenomenal run of performance.
Putting it another way, would I still like this fund as much if it hadn’t just outperformed in each of the last eight years? Am I turning into one of these herd investors who sees safety in strong past numbers – a group which is constantly berated by most of the wealth managers we speak to.
The portfolio in question is FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity fund – which we at FE Trustnet have written at length about over the past couple of years given the fact it has beaten the FTSE All Share in every year since 2007 and outperformed its IA UK All Companies sector in every year since inception in July 2006.
On top of that, it is outperforming once again in 2015 with double-digit gains.
Source: FE Analytics
I was drawn to the fund early on in my time at FE Trustnet largely because Train was one of the first ‘big name’ managers I interviewed and because his now £1.8bn fund was littered with companies that someone like me, who had very little idea about finance, knew and recognised.
Since then, though, the main reason why I have written about Train is due to his barnstorming outperformance which surely has to come to an end at some point.
So, why am I having crisis of conscience about investing in a fund?
Having cleared a few debts and feeling a bit more comfortable about the world, I want to start putting together an investment portfolio again and I want a core UK fund which will act as an anchor for all my other holdings over the next 10 to 20 years.
In my head, there are only a few funds that could play that part for me – CF Woodford Equity Income, one of Mark Barnett’s Invesco Perpetual offerings and, of course, Train’s portfolio.
From my point of view, though, there are a number of reasons why Train (pictured) fits the bill.
Firstly, I like his style. He has a very high conviction, low turnover approach which is focused around buying UK companies with strong franchises, reliable earnings, healthy balance sheets and should be resilient to economic shocks.
He is also very active, but not in a trading sense. I don’t have his active share figures to hand, but the fact he owns just 25 stocks and holds close to 70 per cent of his assets in his top 10 positions would suggest it is very high.
Train also doesn’t try to overcomplicate things (which I feel many try to do) as he bought just one new company in the past four years.
The way the portfolio is set up is, with a large chunk in defensive mega-cap names but also a decent weighting to mid and small-caps, means it has the ability to perform well in most market conditions.
There are other reasons as well, of course. My plan is to have a fund like his to anchor the rest of my portfolio for the next 10-plus years. Train is still relatively young in fund managers terms; he and Michael Lindsell set-up the group together and therefore have (excuse the old fund manager term) a great deal of skin in the game and shouldn’t be going anywhere for a long-time.
The fact it is very cheap in comparison to most of its peers with an OCF of 0.7 per cent is an added bonus.
But I can’t get past the idea of whether I would give such gushing praise to a manager who has lagged over the past few years.
Thanks to the consistency of the fund’s performance in both rising and falling markets, CF Lindsell Train UK Equity sits comfortably in the sector’s top decile since its launch with returns of 189.89 per cent – meaning it has more than tripled the gains of the FTSE All Share in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
On top of that, it is top quartile for its alpha generation relative to its benchmark, its annualised volatility, maximum drawdown and risk-adjusted returns (as measured by its Sharpe ratio) since inception.
No other fund in the 270-plus strong peer group has achieved the consistency of returns over the years, but we have written a number of articles on why a strategy like Train’s may no longer be as fruitful as it has been.
A lot of what Train holds have been dubbed as ‘bond proxies’ – ‘safe’, mega-cap dividend paying equities which have received a huge amount of capital from tourist fixed income investors who have been forced up the risk spectrum by central bankers’ quantitative easing and ultra-low interest rates.
The most obvious ‘bond proxies’ have been consumer goods companies, which have hugely outperformed over the past five years or so which has certainly helped Train and others such as Terry Smith.
Performance of indices over 5yrs
Source: FE Analytics
Now I’m not calling Train a one-trick pony by any stretch of the imagination (as I said, his mid and small-cap weightings have also helped him comfortably outperform in years such as 2013) but he does holds a hefty 25 per cent in Unilever, Diageo and Heineken.
The major concern is, however, that if interest rates rise (I say ‘if’ because many feel it is nothing more than a pipe-dream), bonds will start to look far more attractive from a yield perspective, meaning these stocks would struggle from relative point of view.
Certainly, the likes of FE Alpha Manager Henry Dixon have talked about the increasing correlation between stocks like Unilever and government bonds and how this will seriously hurt investors such as Train.
“Bond yields could rise from the lows of 1.5 and potentially double because of inflation data that we could get in December/January. It would then follow that shares that have enjoyed ratings of 25-30 times could see five of their P/E points disappear very quickly,” Dixon said.
Therefore, he says investors could be looking at 20 per cent downside in these types of bond proxies.
Now, I’m not sure how much I believe that as I can’t see a situation where these sorts of companies collapse, but I certainly get where he is coming from.
On top of that, another reason why Train has performed so well is because he has had nothing in oil & gas or mining, two areas which have massively struggled. In fact, one of the only times Train did struggle was in 2006/2007 during the height of the commodity ‘super cycle’.
From a private investor point of view, though, I think I can let Train make the stock calls as he knows far more about markets than I do.
One thing I can be in charge of, however, is when I buy a fund and the fact CF Lindsell Train UK Equity has performed so well makes me inherently concerned about putting money in. But I want to own the fund, I know exactly what it will do within my portfolio and I don’t want to sit on the fence anymore. 
I therefore went to Mark Dampier, head of research at Hargreaves Lansdown, for some help and he duly obliged – making me feel far more comfortable about the situation.
“He has massively outperformed, I get that, but who knows how markets are going to play out?” Dampier (pictured) said. “There will be times when his style will struggle and there will be some tough times, but if you are looking to hold the fund for the next 10-plus years, is that really an issue?”
“The question I would ask you, like we ask all of our team, is given he is a non-benchmark hugger, will you have conviction to stand by him if he is underperforming? Yes, I’d rather buy it if it was out of favour but when is the best time to invest – I would say it is when you have the money to do so.”
“If you have that conviction in Train, I’d suggest you add to the fund when it is struggling.”
Certainly, I feel I would add to my holding in Train’s fund during weaker periods because I want to hold it for a long time, I understand the style and should know exactly why it is lagging the wider market.
Therefore, I’m going for it – but I understand why many of you may think I am indeed an idiot.
But CF Lindsell Train UK Equity isn’t going to be my only fund of course and I want a portfolio which will dovetail with it nicely to give my portfolio a more insulated and well-round return profile.
Therefore, in an article over the coming weeks, I’ll look at the funds I’m looking to hold around Train’s offering.
I’d love to hear from our readers about this. I am buying at completely the wrong time? If not, which funds do you think would make a perfect companion to CF Lindsell Train UK Equity?
