Quality-growth manager Nick Train said he is “encouraged” that his portfolio companies across the Finsbury Growth and Income trust and Lindsell Train UK Equity fund were caught up in the selling of growth stocks earlier in the year.
So far in 2021, growth stocks have endured a notable correction as markets started to digest stubbornly higher inflation and the withdrawal of monetary support from central banks.
The MSCI World Growth index is down more than 11% year-to-date versus just a 6.5% decline from the broader MSCI World index. The high-growth, technology-orientated Nasdaq index was also down more than 12% year-to-date.
Some of Train’s UK holdings also fell broadly in line with the sell-off in the growth and technology indices, despite missing out on the broader market’s gains over the past two years.
Train said: “It almost seemed the better the trading news the companies delivered, the worse the share price hit.”
He pointed to Experian (a top-10 holding for both of his UK strategies) which declined 15% in January despite an earnings upgrade for the year and its organic revenues up 11%.
Elsewhere, Diageo – the largest position across all of his strategies – fell 8% in January despite better-than-expected interim results that reported net sales up 20% and earnings up 24%.
Amidst these share price declines, Train said he was “encouraged that such a high proportion of the portfolio is perceived to be ‘growth’, because I certainly intend it to be”.
He explained: “Deliberately the portfolio is constructed around companies with strong franchises, strong intellectual property or strong brands, all with the potential for strong profitability and secular growth.”
Although UK growth stocks fell in sympathy with the US Nasdaq index in January, Train said there is an important distinction to be made between the two.
“UK growth stocks had not obviously been caught up in a speculative mania, as increasingly seems possible as regards the US. We have been pointing out for months that there was a deep value gap between UK and US growth stocks,” he said.
“This in part explained by the lacklustre performance of the overall UK stock market in recent years, that has prompted asset allocators to divest from the UK, even at modest valuations.
“As a result, we hope our growth stocks will fall less, recover more quickly and go up correspondingly further, as global investors are inspired to find compelling growth stories in neglected markets.”
Despite a “dismal 2021”, the 4% rise in the shares of London Stock Exchange Group during January shows the potential for undervalued UK growth stocks in 2022, Train argued.
Performance of LSEG over 2yrs
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Source: FE Analytics
When it comes to his global equity mandate, Train acknowledged that he has lagged the global market over the past few years.
Although his holdings in companies like Mondelez and Pepsico have increased notably over the past decade, he said “any satisfaction derived from their ownership has to be tempered by the brutal acknowledgement that Nasdaq is up more than five-fold over the past decade”.
“Again objectively, you might argue that, actually, every dollar invested in Mondelez and Pepsico over the past decade and not invested in Amazon or Tesla, say, was a wasted dollar,” he continued.
Train suggested that owning companies like Mondelez and Pepsico was a partial explanation for his failure to beat the global benchmark over the past few years. Modelez and Pepsico are up 55% and 54% respectively, versus 140% from the Nasdaq index over the past five years.
Despite the Nasdaq’s “epic wobble”, Train said he isn’t tempted to ditch his 20th century franchises to “get with the new millennium” and reiterated that his fund approach will remain the same as it has for the past decade.
“Specifically, we will continue to place the highest investment value on our analysis of the durability of the businesses we choose to invest in,” he said.
“The Nasdaq’s bull market has been a warranted celebration of technological innovation, novelty and rapid growth. But innovation can be quickly superseded, novelty does not guarantee an enduring business model and rapid growth can attract crushing competition.”
Although he admitted there are great, enduring corporations on the Nasdaq, he said it does not necessitate investing solely in the “new and untested”.
“The futures of Diageo, Disney, Heineken, London Stock Exchange Group, Nintendo, Prada, RELX and Shiseido look to us as exciting as their already richly rewarding pasts,” he said. “Perhaps the past really can be a guide to the future.”
Performance of Lindsell Train Global Equity over 10yrs
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Source: FE Analytics
The Lindsell Train Global Equity fund has been a top-quartile performer over the past decade, but fell to the bottom quartile over the past few years. It has however come ahead in recent months, up to the second quartile in the IA global sector over the past three months.