Nick Train: ‘It’s so cheap that even I’m finding it hard to resist’

With the FTSE in the doldrums for much of the past decade it has become common for UK equity managers to either trumpet the bargains on offer or lament the fact that investors are looking elsewhere. Few, however, have openly sympathised with those looking to find better opportunities in other markets.

Such an intervention by Nick Train, possibly the best-known UK equity manager, came as a breath of fresh air earlier this year. Train, who has delivered rich long-term returns via his £4.1bn WS Lindsell Train UK Equity Fund (GB00BJFLM156) and £1.6bn Finsbury Growth & Income trust (FGT), said he was “sympathetic” towards UK pension funds that had divested from domestic shares.

He lamented the UK market’s “dismal capital performance” and fixation on dividends. In a note, he wrote: “Several companies would command higher share prices if their boards had focused on maximising growth rather than diverting cash to shareholders.”

Speaking to Investors’ Chronicle earlier this month, Train remains frank about the challenges facing domestic shares. “From the mid-1980s to the financial crisis….investors got rewarded for buying ‘value’, which was defined by a high starting dividend yield,” he says. “In hindsight, that was a fool’s paradise: this idea that you can have a high starting dividend yield, growing dividends and share price growth.” 

He also makes no claim the domestic market will enjoy an immediate turnaround. “I don’t see any particular deus ex machina that makes the UK equity stock market not just undervalued but gives it the potential to make significant capital returns,” he says “The only circumstance is a global crisis where the oil price doubles. And I don’t think that’s good for anybody.”

UK investors are of course no strangers to such disappointing returns, especially when compared to the US market and its high-growth tech stocks, and that's partly reflected in an exodus from UK funds. Fund investors will also have noticed Train’s portfolios have even lagged the FTSE All Share in recent years, even if they do stand out over longer periods. Train acknowledges it has been a frustrating experience but does highlight some cause for hope, both for owners of UK shares and specifically those backing his funds.

One is the creeping influence of overseas investors. As Train noted earlier this year, UK pension funds’ retreat has been followed by US investors moving in. International buyers make up more than half of the UK share register and Train argues Americans, in particular, could spur domestic companies to focus more on growth plans and boost share prices.

US investors certainly seem prominent on the shareholder registers of some of Train’s holdings. Relx (REL), Experian (EXPN) and London Stock Exchange (LSEG) all have US names as major investors. Diageo (DGE), meanwhile, counts Warren Buffett’s Berkshire Hathaway (US:BRK.B) as a major shareholder. It also recently revealed the extent to which the US has become a major part of its considerations.

Train explains: “Diageo said it was changing its accounting currency from sterling to dollars. We, like a lot of other observers, asked why – is it considering leaving the UK stock market? Diageo assured us that isn’t the case….but did remark that 45 per cent of its share register is now dollar-based, US investors. It is by far the company’s single biggest geography.”

Asked whether an influx of US investors could also mean the arrival of more activists on UK company boards, Train makes no predictions. But he points to the fact activist Nelson Peltz joined the Unilever (ULVR) board last year. 

He said a recent Unilever update made reference to an aggressive reduction of its ‘stock keeping units’, effectively the number of products waiting to be sold. “Over the past 18 months, somewhat in coincidence with Peltz being on the board, Unilever has cut a quarter of its SKUs. That’s very similar to what Peltz persuaded Procter & Gamble (US:PG) to do a few years ago before the shares re-rated.”

What now for Train’s holdings?

Candid as he is about the challenges facing the market, Train does see the UK's malaise as an opportunity.

First, it has thrown up some bargains. Train is famous for building highly concentrated portfolios and holding companies for extremely long periods – with new purchases or outright sales very rare. He notes, however, that he recently initiated a new holding – which he would not disclose during the interview – adding that the new position “could have been any one of three ideas”.

“By my standards, this is hyperactivity. I’ve bought three new holdings since 2020 and there’s at least another three that are very interesting,” he says. “If anything tells me the market’s cheap it’s that even I’m finding things hard to resist.”

Train also makes the case that many of his holdings contain latent value – and is highly supportive of that many of his holdings including Diageo, Unilever, Relx, Experian, LSE and Burberry (BRBY) taking advantage of low valuations by carrying out share buybacks.

“It’s a completely rational thing to do,” he says. “If you’ve got a world-class business that’s undervalued relative to its peers; then to retire as much equity as you can at these prices, as long as you’ve invested enough to maintain your organic growth rate, will be hugely accretive, one day.”

AI plays

The Lindsell Train team tends to focus on resilient companies with strong brands – something that has translated into a heavy onus on consumer brands, from Diageo, Unilever and Heineken (NL:HEIO) to Burberry. However, a lack of exposure to companies seen as tech plays, in part, explains some of the performance problems. Train argues that several holdings will benefit from advances in AI – even if the effect on the bottom line remains difficult to quantify right now.

“Companies that possess large amounts of proprietary data that are unavailable to others are in a position to utilise AI tools to create additional value for their customers,” he says. 

He notes that Relx has used AI for at least a decade, with its client retention and growth rates on the rise, while LSE and Experian also have a “credible proposition” that’s likely to “create better outcomes for their customers”. He believes Hargreaves Lansdown (HL.), a name that faces numerous challenges from growing competition to regulatory scrutiny, also benefits from a huge volume of data and customer interactions.

“I’d group Hargreaves Lansdown within that cohort of data-owning businesses that have a significant opportunity to use AI tools to create better outcomes for customers,” he says. “Hargreaves has more digital interactions with its customers than anybody else in the UK. It is still, by some margin, the leading consumer investment platform.”

When asked whether such companies should shout louder about AI credentials, Train describes himself as “happy for the conservatism”. Some of the problems may relate again to the malaise of the UK market. “I look at these companies and think, how many global asset allocators might ask themselves, do I want some exposure to AI winners?” he says. “How many would think to look at the UK? I’m going to guess, not many.”

The team otherwise remains focused on their holdings, and one metric Train looks out for is the “perception of value”. This, and the strength of a brand more generally, can be gauged in part via certain metrics.

“I can’t pretend we have a quantitative or statistical-based rule that infallibly tells us, but market share gains or losses are worth noting,” he explains. “In the consumer space, you want to find businesses able to maintain the real price or value of a product, without losing volume. When your input costs go up can you increase the price of your product and will consumers accept that price increase or do they look elsewhere?”

By Train’s take his portfolio holdings still hold up on such metrics. Investors in his funds, and the UK, will hope to see more of that unleashed.