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Nick Train: Why equity investors are entering a golden age

25 October 2013

The FE Alpha Manager says it is obvious that even his expensive stocks are good value once the long-term themes driving equities are taken in to consideration.

By Alex Paget,

Reporter, FE Trustnet

We are now entering a golden age for equity investment, according to FE Alpha Manager Nick Train (pictured), who says an unprecedented number of opportunities are currently available from the asset class despite high valuations.

ALT_TAG Train, who runs the Finsbury Growth & Income IT and the open-ended CF Lindsell Train UK Equity fund, is known for taking a long-term approach to investing.

He says that rapid improvements in technology, decreasing global poverty and the ability of top-quality equities to grow faster than inflation means that now is the best time ever to be invested in the asset class.

"I am bullish and I would go as far as saying that we are in a golden age of equity investment," Train said.

He adds that the first reason why he feels investors should be buying any equities they can get their hands on at the moment is because of the pace of technological developments.

"We are in a record era for changes in technology. Research has shown that the amount of patent applications for computing products hit an all-time high in 2012."

"On top of that, data shows 1.8 billion smartphones have been sold to individuals around the planet. The opportunities that come with that are unprecedented," he said.

"The second point is the amount of people that have been lifted out of poverty, which is also unprecedented."

The manager points to a study carried out by Yale Global that showed in 2005 there were 1.37 billion people around the world that were living on less than $1.25 a day, while in 2011 that figure had fallen to 820 million.

He says this means companies such as Unilever, which is one of the biggest positions in his portfolio, should do extremely well over the long-term.

"That is why I love businesses like Unilever. The management team pointed out that last year 2 billion people around the world used a Unilever product every day and they have predicted that that figure will continue to rise."

"Being the simpleton I am, I put that into the context of share prices."

"I bought shares in Unilever 20 years ago at £6 and now they are more than £25. I think that by 2033 it will have four-bagged [multiplied by four] again and those shares will be £100," he added.

FE Analytics data shows Unilever has seen returns of 451.43 per cent since January 1995. The wider FTSE All Share has returned 286.64 per cent over this time.

Performance of stock vs index since Jan 1995


Source: FE Analytics

Train’s final point is that good-quality equities not only keep up with inflation, but can also deliver a much higher rate of return.

He uses the price of the Financial Times, which he views as a top-quality product which has longevity and a huge readership, to illustrate this point. The FT is owned by one of his other holdings, the FTSE 100-listed Pearson Group.

"The cost of the FT in 1888 was one old penny. If it were to simply keep pace with inflation, its price would now be 39p [in today’s money]. However, its actual cost is £2.50. That is what quality equity can do for you," he added.

Train has managed the Finsbury Growth & Income trust since December 2000.

Our data shows that over that time the closed-ended fund has returned 286.64 per cent, beating its benchmark – the FTSE All Share – by more than 170 percentage points.

Performance of trust vs index since Dec 2000


Source: FE Analytics

The trust has also beaten the index over one, three, five and 10 years.

His five crown-rated CF Lindsell Train UK Equity fund is a top-quartile performer in the highly competitive IMA UK All Companies sector over one, three and five years. It is also a top-quartile performer in each of the last five calendar years.

Some of the stocks Train owns, such as the Diageos and Unilevers of this world, have attracted a lot of capital due to the fact they are seen as safe businesses with reliable earnings and a good dividend. Because of that, however, some experts now think they are overvalued.

Train understands that view to a point, but says the market will always pay a premium price for quality.

"You get something like Diageo, it is trading on 18 times earnings which is certainly towards its upper range," he said.

"However, would I say they are fundamentally overpriced to the point where if you bought now you would lose money over one, three or even five years? No, in fact I would say they are giving them away."

The manager quotes legendary investor Ken Fisher to back up his argument that worrying about valuations can be counterproductive.

"Ken Fisher said that 'a price to earnings ratio of 20 times is scary, but a forward-earnings yield of 5 per cent is good'."

"Do you see the point? They are both the same thing. Yes, for low-quality companies 20 times is scary and high but for a good-quality company it should make little difference, especially in the current low interest-rate world we live in," he added.

Finsbury Growth & Income IT is 3 per cent geared and is trading on a slight 0.2 per cent premium to NAV. Ongoing charges are 0.94 per cent.

Train’s open-ended fund is primarily geared towards institutional investors, however retail investors can gain access to it via a number of fund platforms.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.