FE fundinfo Alpha Manager Nick Train has said it is “critical” that companies producing real assets have a long-standing loyalty with their customers if they want to pass on increased costs associated with inflation.
It comes as his £6.5bn LF Lindsell Train UK Equity fund suffered a small loss (-0.05%) in August compared with a 3.2% gain for the average IA UK All Companies peer and 2.7% gain for the FTSE All Share index.
In the fund's August factsheet, released today, the manager said there were two developments that had hit the portfolio during the month.
“First was investors’ reaction to proclamations by the Chinese authorities against conspicuous consumption,” he said.
Shares in luxury brands fell, including fashion brand Burberry and drinks firm Remy Cointreau, which are both held in the fund and lost around 10% each during the month.
For Burberry, it followed the announcement in July that chief executive Marco Gobbetti is stepping down at the end of the year. “The company just can’t catch a break at the moment,” Train said.
Performance of Burberry shares over the past three months
Source: FE Analytics
However, he noted that these companies can participate in global growth and would protect investors from inflation, as both have been able to pass on price increases to the consumer so far this year.
“The above has become an important credential for successful equity investment in the second half of 2021 because the other macro factor that has emerged through July and August is a spike in commodity and logistics costs,” Train added, which has led to higher inflation.
Although this increase could be a result of Covid-disruption – and therefore temporary – it could also be due to the “monetary experiment” undertaken by central banks over the past decade, he said.
All of the fund’s consumer stocks fell in August as a result, with drinks maker Fever-Tree and consumer brands company Unilever down 7% and 5% respectively.
“Longer term, whatever the outcome on inflation, we are sure it is critical for our investments in companies that produce ‘real’ stuff – as opposed to digital services – to be producing products customers actually aspire to consume or really can’t do without,” said Train.
The manager said that he has been building his holding in Fever-Tree, as he wanted more pricing power in the portfolio through premium brands.
“It is also why Diageo is so important for the fund – currently the second largest holding, just behind RELX. With each passing year more of Diageo’s growth and value is accounted for by its super-premium and premium brands,” he said.
Lindsell Train UK Equity has been a top-performing UK fund, despite the recent poor performance. The fund has been the third-worst in the IA UK All Companies sector over the past year as investors moved towards unloved value stocks, rarely invested in by Train. However, over the past decade it has returned 260.4%, a top-quartile performance among its peers.
Total return of the fund vs sector and benchmark over 10yrs
Source: FE Analytics
The manager employs a buy-and-hold approach, picking a small number of companies that have built up brands that cannot be replicated by rivals, or have similar intellectual property. The fund currently has a yield of 1.6% and has a clean ongoing charges figure (OCF) of 0.65%.