Train invests in blue chips with a global reach and steady long-term growth prospects, which is a part of the market that has had an exceptionally good run over the past five years.
This has helped the £347m trust make 119.23 per cent over this period, easily the best results of the 22 UK growth and income trusts on the market.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Many commentators have started to warn that such companies are trading at high valuations, which could compel investors to look down the quality scale, but Train says this does not detract from his appetite for them.
The manager insists that despite rising valuations in his portfolio, he will not change his investment strategy one bit, even if his stocks fall out of favour. "As a generalisation we claim that the portfolio comprises 'quality' companies. Of course this is a subjective term; nonetheless, identifying quality is the first and most important filter in our research effort," he said.
"It is a defensible proposition, then, that the reason for our strong recent performance is because quality companies have done well."
"Certainly the big winners for the strategy over the period are fine businesses – Heineken, Unilever, Diageo, Daily Mail and Schroders – all long established and high profit-margin companies."
Schroders, Diageo and the Daily Mail and General Trust have all more than doubled in value over the past five years, according to data from FE Analytics, while Unilever has grown by 85.79 per cent.
Performance of equities over 5yrs
Source: FE Analytics
"We imagine shareholders must be asking themselves the same questions we ask – when will this period of strong absolute and relative performance by quality companies come to an end and, not necessarily the same, are they now overvalued?" Train said.
"Our answers are as follows, though they are necessarily statements of opinion, rather than certain, verifiable fact."
"First, we imagine that what will bring an end to our outperformance will be a shift in other investors’ appetite to lower-quality companies than we choose to invest in."
"These lower-quality companies could be cyclical or, perhaps, speculative (another mining boom? a biotechnology boom?)."
"During such episodes, as we experienced in 2007 (mining) or 1999/2000 (technology), even the highest-quality companies can go through extended periods of dull or poor returns."
Data from FE Analytics shows that Train’s trust underperformed in the period 1999 to 2000, making just 15.32 per cent while the FTSE All Share returned 16.87 per cent.
Performance of trust vs benchmark 1999 to 2000
Source: FE Analytics
In 2007 it lost 10.3 per cent as the FTSE All Share made 5.32 per cent.
"There will certainly be another, of whatever stripe, and the portfolio will certainly perform less well through its duration," Train continued.
"But what is important for us to convey to shareholders is that even if we were smart or lucky enough to recognise a change in the investment weather, which meant lower-quality companies were likely to outperform for a period – we would not act on that recognition."
"This is because our approach is based on the conviction that long-term investment in high-quality companies is a winning strategy."
"And for that strategy to work, one has to stick to it. So let me here assert that we have no intention today to alter the shape of the portfolio; we are not about to sell any part of any existing holding and that, at today’s prices, we have no actionable new ideas – although when we receive additional cash-flow into the portfolio we are enthusiastic about adding to many current holdings."
"And, to be clear, there are several candidate quality companies not yet in the portfolio that we would invest in, given an attractive entry point."
"As to when quality companies become overvalued, we say that when or if price/earnings ratios (P/Es) of over 30x are accorded, there is a risk that even the most exceptional companies may have become strategically overvalued."
"Now a P/E of 30x equates to an earnings yield of circa 3 per cent and it is, surprisingly, still possible to regard this level as fair – after all, a 3 per cent inflation-protected running yield delivered by a great company looks like a bargain compared with government bond and cash yields today."
"But we acknowledge that at 30x, any margin of investment safety, even for a business as durable as, say, Unilever, becomes too low."
"However, our portfolio stocks are far from being valued at 30x or more earnings, even after their recent good returns."
"So, while it is quite conceivable that some of the positions may have a rest for a quarter or two, we dismiss the proposition that, for example, Diageo, on a P/E of 19x is dangerously overvalued."
"Indeed, we have found that there are always members of a portfolio 'resting' at any given point in time and, pertinently, Pearson has been a dull share now for some quarters."
Our data shows that Pearson has made 108.43 per cent over five years, although performance has tailed off in recent months; over one year the stock has risen just 5.95 per cent.
The company is rumoured to be considering divesting itself of the Financial Times, and Train has been a vocal advocate of keeping hold of the well-established brand.
However, its main business is in education services, in which it is increasingly using the internet, and the company is one of the leaders in this field.
"We happily add to Pearson as its price drifts (on a lowly 13x earnings, by the way, not 30x), because it offers pure access to what we still regard as the most important thematic opportunity in the whole portfolio – namely companies with a credible strategy to grow and improve profitability by exploiting developments in digital technology," Train said.
"This remains the big bull market idea of the next decade, in our opinion, and Pearson, Daily Mail, Euromoney, Fidessa, Reed and Sage are probable participants."