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Bag a seat on the value Train

INTERVIEW: Value investor Nick Train looks for good consumer brands that have the potential to be "baggers" - and has delivered more than a few
Bag a seat on the value Train

Value investor Nick Train beat the market by 14 per cent in 2010, putting in his best year since he began managing investment trust 10 years ago. But he puts this performance down to "random events", modestly saying "it was a relief to put in a decent year".

"Luck does play a part for any fund manager, business man or politician," he says. "Trying to increase our chances of having good luck rather than bad luck is the way we think about the portfolio."

His commitment to the value strategy means he doesn't concern himself with market timing issues. "We have no idea what is going to happen next," he says. "It is not even part of the way we think about the challenge. We simply ask: are they good companies and are they intrinsically undervalued by other investors? If the answer is yes, then sooner or later we think something good is going to happen."

The two "random events" that had a big impact on his performance in 2010 were his big holding in Cadbury, and his not owning BP. "We didn't own Cadbury because we know it was going to be bid for. It was just one of those random things that periodically gives a boost," he says.

Similarly, he didn't see BP's Macondo disaster coming, but points out that "we haven't owned it for years. We thought its dividend was less secure than other investors."

, trying to replicate Buffett's investment strategy for the UK. He quotes Charlie Munger, vice chairman of Warren Buffett's Berkshire Hathaway, who said that if you own shares in bad businesses the surprises are always bad surprises. "But if you own a good company good things tend to happen," says Mr Train. "Definitely, that is an effect we are trying to capture. The effort is to only try and invest in good companies."

Nick Train

Young's, the south London brewer, is an example of a good company. In December, its shares rose 16 per cent, which Mr Train attributes to a "random bit of good news": it was able to acquire a collection of London-based pubs at a good price that enhances the profitability of the company. "It's a nice illustration of randomness," says Mr Train. "But in a sense I'm not so surprised. We knew there were conservative balance sheets." But just because something has done well doesn't mean it is a sell. As a buy and hold investor, Mr Train continues to hold these companies for more good luck.

Lindsell Train was set up Mr Train and Michael Lindsell in 2000, and from its appointment as manager of Finsbury Growth & Income in the same month up to the end of Q3 2010, Finsbury delivered double the return of its benchmark - 6.2 per cent per annum (NAV total return, net dividends reinvested) compared to the FTSE All-Share's return of 3.1 per cent per annum.

Seeking to convey how he has been able to deliver this performance through a period that contained two disagreeable bear markets, Mr Train finds that a single word suffices: "Baggers."

"Ten bagger" is a term coined by Peter Lynch, the legendary US investor, in his book One Up On Wall Street. This refers to an investment that is worth 10 times its original purchase price, and was adapted from baseball where "bag" is a casual term for "base". Mr Train modifies this to use bagger to apply to a share that at least doubles on its book cost since investment. To become a bagger a share must offer both undervaluation and a long-term growth opportunity. "Happily, over the last 10 years we have unearthed a few of them," he says.

"The effect of bagging is a challenge to Modern Portfolio Theory. It is a challenge to the way academics think about capital markets. Certain companies carry on doubling or trebling over periods of time - why is this? They do so because the surprises tend to be positive surprises. We are terribly humble about this - it is just a working hypothesis. Although it has worked for 10 years, most statisticians would say that is just an anecdote."

Nick Train spent the first 17 years of his career at GT Management. He joined M&G in 1998 and was appointed head of global equities in June 1999. He left M&G in April 2000 to co-found Lindsell Train Limited and was appointed investment manager of Finsbury Growth & Income Trust in December 2000. Mr Train has a second class honours degree in Modern History, from Queen's College, Oxford.

Like Warren Buffett, Mr Train builds his . This means that he had his one bad year in 2007 when the mining sector had a blow-out year on the upside and nothing much else went up. "Mining shares don't fit for us. We love investing in brands. You can't brand a lump of coal or an ingot of iron," he says.

"Investors should ask what is it that you own? If you own a share then you own something," he says. Rather than looking at his holdings as pieces of paper being traded back and forth on a stock exchange, he thinks of his holding in Diageo as "a foaming pint of Guiness or a nip of Johnnie Walker Black Label", and with Unilever "the key to my heart is Marmite".

The portfolio is highly concentrated. As at October 2010, it consisted of 24 holdings Diageo, AG Barr, Unilever, Pearson, Fidessa Group, Sage, Schroders, Rathbones, Reed Elsevier, Kraft Froods, Marston's, Euromoney, Daily Mail & General, Burberry, Dr Pepper Snapple, Lloyds Banking preference shares, Thomson Reuters, London Stock Exchange, Fullers, Hargreaves Lansdown, Youngs, Lindsell Train, Celtic and Celtic preference shares.

Past baggers

Of that list, eight are already 'baggers', as follows:

■ AG Barr (5.0x)

■ Thomson Reuters (3.5x)

■ Young's & Co (3.5x)

■ Burberry (3.0x)

■ Fuller, Smith & Turner (3.0x)

■ Fidessa (3.0x)

■ Lindsell Train Investment Trust (2.0x)

■ Dr Pepper (effectively infinite, as a free share).

Future baggers

Mr Train thinks his future baggers are likely to include Celtic FC, Daily Mail, London Stock Exchange, Reed Elsevier, Sage, Schroders and Unilever.

Celtic FC?

Celtic has not been a particularly successful investment to date. But Mr Train still has high hopes. "Entertaining people is terribly important and men live for sport. I have always been interested globally in the passion and excitement that sport engenders. The rights to televise sport have been a bull market for years and we expect sporting events to increase in value," he says.

"Celtic is not the world's purest play on this, but in the UK there aren't many ways to invest. It is an idle prediction. If it works it would be a bagger but I'm not tipping it to the average person - it is very small (£39m) and very risky exposure."

London Stock Exchange

"At the abstract level I would ask anyone to say why invest in the shares of any company. You do because in the final analysis you believe that capitalism is going to carry on working and will create more wealth and prosperity," he says.

"As soon as you presuppose that wealth will continue, why wouldn't you want to invest in a company that gives you more direct exposure to the mechanism of creating wealth - ie, one of the world's largest stock markets. The number of shares traded on the London Stock Exchange has carried on increasing and is intimately connected with the creation of capitalism.

"The LSE is a fantastic business - the most global of all exchanges around the world. Increasingly, companies around the world choose London as their primary listing. So it is a source of additional growth. Some time you assume there will be a global stock exchange. We've seen combinations of stock exchanges recently and bids for the LSE. The global stock exchange will either be the LSE or the LSE will be part of it."


"If you are in a default sunny disposition (I have trained myself to be in this when I get out of bed as you have to be optimistic as an investor), isn't owning shares in a fund management company a wonderful way to participate in it?" he says. "Stock markets went up 10 per cent in December. Schroders didn't have to do any spending to participate. They are a conservative, well-established, family-branded investment management company."


He has recently been buying more Unilever, based on "nothing more sophisticated than reading Unilever's website", which states that 2bn people use Unilever's products in 170 countries around the world. This means Unilever is centrally exposed to the emerging markets story, which Mr Train believes will run 30 to 50 years and into which we are only 10 years along. "I wouldn't worry about a bubble," he says. "Emerging markets have been volatile and will be volatile in future. But there will be billions more people participating in a capitalist economy."

"Unilever is talking about doubling sales between now and 2020. If that happens, Unilever's shares will bag from here. It is 11 per cent of our portfolio."

Technology and media: A new bull market?

"People think the internet finished in 2000," says Mr Train. "But that was the birth of it all. It is still incredibly early to identify winners and losers in the internet. Investors ought to be looking at how technology is changing things. Certainly it is not too early to invest. The Apple share price shows how easily growth can be created out of technology."

CompanyFrom post 2000 low (%)From all-time high (%)FGT weighting (%)
Reed Elsevier26-354.9
Daily Mail & Gen Tst266-583.4
Thomson Reuters40-402.9

Source: Lindsell Train

Capital only return, 29 October 2000