FE Alpha Manager Nick Train has no plans to abandon the quality-growth stocks that led to his fund’s underperformance last year, arguing to those writing off such holdings as ‘bond proxies’ are missing the long-term picture. 
Train’s £3.1bn CF Lindsell Train UK Equity fund has been one of the IA UK All Companies peer group’s strongest performers since launch on the back of significant gains in his preferred sectors such as global consumer brands and leisure.
But the fund failed to beat its FTSE All Share benchmark in 2016 after making an 11.31 per cent total return – making it the first calendar year it has lagged the index since 2007. This return was enough to put the fund in the sector’s second quartile, however.
As the below chart shows, the underperformance really took hold in the latter half of the year. This was when value started to race ahead of the growth style of investing as attention turned to the signs of higher inflation in the global economy.
Performance of fund vs sector and index over 2016
Source: FE Analytics
In his latest update, Train said: “Your strategy has begun to underperform over the last six months, as other investors anticipate a period of higher inflation and sustained upswing in commodity prices.”
“This anticipation has encouraged a rally in the ‘value’ and ‘cyclical’ sectors of the UK stock market to which we have little or no exposure and never have had.”
“We have no particular view as to whether this ‘new’ economic outlook will prevail, but would not change the current disposition of the portfolio even if we did.”
The FE Alpha Manager is known for a strict investment approach that focuses on durable, cash-generative business franchises and results in a highly concentrated portfolio that rarely changes. His approach means holdings tend to be in areas like consumer brands, leisure, media companies and capital market proxies, rather than cyclical sectors such as mining, construction and transport.
He argues that there are “far more fundamental and powerful reasons to be bullish on UK equities” than a resurgence in inflation, meaning he sees no reason to overhaul his portfolio.
These reasons are linked to the steady increase in spending power of consumers around the world and faster corporate growth and increased profitability delivered by technology change. Train says that whether the price of copper or coal goes up or down in the past six months is “actually of little importance” when put next to these factors.
Source: Lindsell Train
“Instead we look for a continuation of the current secular bull market – a bull market we think will be best captured by investing in those companies best exposed to these fundamental and powerful trends,” he added.
“Sometimes other investors designate the companies we like to invest in as ‘defensive’, with the presumption that you would only invest in, for instance, Unilever or RELX because you are cautious about stock markets and feeling, therefore, ‘defensive’.”
“This is absolutely not the way we look at it at all. By contrast, we are very optimistic about the outlook for the global economy and stock markets and, crucially, believe the companies we are invested in will continue to do what they have done in the past – which is to offer participation to those reasons to be fundamentally bullish.”
“If you are bullish on global growth – and we are – then investing in Unilever makes at least as much sense, probably more, than owning a coal mine, for instance.”
Some of the biggest detractors to CF Lindsell Train UK Equity’s performance in recent months have been Diageo, Heineken, RELX, Sage and Unilever.
Companies such as these have been labelled ‘bond proxies’ by some as their prices were bid up as ultra-loose monetary policy forced investors out of fixed income and into areas of the ‘safest’ areas of the stock market.
Critics warn that these areas will suffer as the 35-year bull market in bonds draws to a close but Train says the above stocks now look more attractive than ever to him after their recent price falls.
“In our opinion the five are better understood and valued as ‘growth’ companies, not government bond proxies,” he said.
“In support, consider that their most recent dividend increases, when averaged across the quintet, were over 14 per cent. It can’t be said often enough – government bonds do not do this, ever.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Since launch in July 2006, the CF Lindsell Train UK Equity fund has made a 234.69 per cent total return, ranking it in seventh place out of the 188 IA UK All Companies funds with a long enough track record.
The fund has achieved this return while sitting in the top quintile for metrics such as annualised volatility, alpha generation, maximum drawdown and Sharpe ratio.
CF Lindsell Train UK Equity has a clean ongoing charges figure (OCF) of 0.75 per cent and is yielding 2.02 per cent.