The Lindsell Train Investment Trust (LTI) has just released its Anuual Report for the year to March 2014 (available from their website here). The NAV increased by a healthy 13.1%, which brings the total return for the last five years to 133.8%. March 2009 was approximately the time that markets began to turn after the Financial Panic and so this is a flattering starting point, but it is still a good effort with the MSCI World Index up only 103.4% over the same period (figures from the March LTI factsheet).
There is, however, one elephant in this particular room: by far the Investment Trust’s biggest holding is now its stake in Lindsell Train Limited, the investment management company that manages the trust, amongst other mandates. This holding now makes up a substantial 24% of the trust’s net assets after it appreciated in value by a terrific 71% last year. While the valuation of the position looks conservative (7.7x earnings), there now, to me, look to be some unusual risks associated with the trust:
- Market risk
General market falls, were the bull market to finish, might punish asset managers, especially relatively undiversified boutique asset managers severely. Given the trust’s large exposure to Lindsell Train Ltd., at 24% of net assets, this would have a substantial impact on performance. - Performance risk
If Nick Train’s investment performance malfunctions, the huge LT holding will presumably suffer even more badly than the equities in the trust portfolio, due to the impact of performance fee loss and redemptions on its range of mandates. - Key man risk
Nick Train is not just the irreplaceable brain behind the trust, but also one of the partnership behind what is by far its largest holding. It would be like making Warren Buffett CEO of Burlington Northern, as well as Berkshire Hathaway. - Concentration of ownership risk
If Lindsell or Train ever decide to start selling their interests in the Ltd or the IT, then there will be substantial pressure on the respective prices (Nick Train is listed as the fourth largest holder of LTI shares on Digitallook, with the Lindsell Train managed Finsbury Growth & Income Trust and Michael Lindsell following not far behind). - Unit trust risk
In addition to the holding in Lindsell Train Limited, the Trust’s fifth and sixth biggest holdings are positions in other LT funds–namely, the Japanese Equity Fund and the Global Equity Fund. One of the advantages of an investment trust over a unit trust is that it does not have to sell out of positions to meet untimely redemptions. Why expose the trust to this risk by voluntarily investing in unit trusts? Given the trust’s insight into the Japanese and Global Equity funds’ strategies, is it necessary to buy into the unit trusts, rather than just some of their key holdings, to achieve the diversification required? - Premium to discount risk
The trust currently stands at a premium of about 5% which, although less than in the past, does still leave the share price vulnerable to a move to a discount if the general market does turn downwards.
I do not hold any LTI shares and, despite my admiration for Nick Train and respect for the Chairman in highlighting the key man risk, I do not think the trust at its current price and with its present circular composition would be for me. While the holding in Lindsell Train Ltd. was not 24% of the trust’s net assets at cost, and has risen to this allocation only because of its own success, for prospective new investors it must surely give pause for thought? The trust itself now looks more of a special situation investment that is best left to experts in Asset Management company valuation.
For new investors, perhaps the UK Equity Fund or Growth & Income Trust would be a more straightforward way to access the considerable talents of Lindsell Train? Long-term holders, on the other hand, must be enjoying their shot of Lindsell Train squared.
Disclosure: I hold no position in the Lindsell Train Investment Trust.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.