Lindsell Train – fund manager interview with Nick Train

Published on 10 August 2020

Nick Train, co-founder of Lindsell Train, and Elliott Berstock, Edison’s managing director of European investor relations, discuss a variety of topics on Nick’s investment criteria and philosophy.

Topics discussed: working from home, quality of management teams, funds and trusts managed, impact of the pandemic on equities and the economy, Nintendo, Manchester United, Burberry, long-term vs short-term investing, running winners, key influencers on career, discount/premium control mechanisms, alignment of interests, different environments for Lindsell Train’s outperformance, and yoga.

Elliott Berstock:

Hello everyone, and welcome to this Edison Interview between myself, Elliot Berstock at Edison Group, and Nick Train, Co-founder and award winning Fund Manager at Lindsell Train. Today is the 6th of August, 2020 and I’m delighted to be discussing a number of topics with a renowned fund manager, who 20 years ago co-founded the investment firm, Lindsell Train.

Elliott Berstock:

As the usual format, we will be discussing some of the funds that Nick and the team manage. We will also be getting Nick’s thoughts on the economy and equity markets, but most importantly, Nick’s investment philosophy.

Elliott Berstock:

Before we do that, Nick, welcome. How are you and how have you found working from home during this period?

Nick Train:

Well thank you on behalf of myself and my ego for that introduction. Obviously, it is an increasingly pointed question these days, how are you? How the hell are you? Fine is the answer, thank you very much indeed. All of us in our business and my family as well, but thank you for your concern, and obviously I hope the same is true for you and all of yours.

Nick Train:

Working from home, which is what we’ve done and we haven’t yet returned on mass to the office, as has been, I guess, it’s been for most. I don’t know, I think it apparently does depend on your generation. I must admit, for the first month or so I regarded every single day that we functioned as a business during lockdown, as a miracle, because I guess I just didn’t have that instinctive trust that the technology would enable us to function successfully. It demonstrated very early on that it was going to allow us to function well, and we have, and here we are.

Elliott Berstock:

Yeah, and obviously throughout your career, you’ve had a number of face to face meetings with management teams. Have you missed that element, or has the video software worked well?

Nick Train:

It has worked well. We’ve had, I would say, even more access to management teams over the last four or five months than we would have done in normal circumstances, whatever they are these days. It was an interesting question, and reverting back to your first question as well, one thing I do feel that we are missing is our interaction as a team.

Nick Train:

It’s not immediately obvious, but inter perceptively with each passing day of not interacting with your colleagues face to face, I’m sure something is lost. I can’t put my finger on it, but definitely something is being lost. Yeah, I think it’s going to be very, very beneficial, crucial for us and for many, many businesses, once September comes, to start seeing each other again.

Nick Train:

I probably speak to Mike, Mike Lindsell, who we set the business up together, I probably speak to him three or four times a day by phone at the moment. That seems adequate, but when you consider, when we’re in the office together, I don’t know how many times we speak a day. You tell me, a hundred times, I don’t know, but orders of magnitude more. Even if it’s just you raise an eyebrow across the desk at each other, you communicate in a way that’s not available.

Elliott Berstock:

Yeah, I think there’s an element maybe of that wisdom, maybe not being passed down, especially to the junior members of the team, and indeed to myself in the office. That’s an element that I’ve definitely missed.

Elliott Berstock:

Coming home from management teams, we talked about the fact that you have a number of those meetings with management. How much influence do you have on those management teams, of the companies you invest in, and how important is the quality of that management team to your overall investment process?

Nick Train:

I think that the, as you remarked, sometimes people call me a veteran. I hate it when people call me a veteran, but I have been doing this for quite a few decades now. I think the truth is I’ve become increasingly sceptical about the ability to judge the competence of any management team based on a relatively short-term period of business performance. That makes me less willing to make judgments, investment judgments based on what I think is subjective and uncertain judgments about the people who are running a company at any given point in time.

Nick Train:

I think the reality is that to get to be in a position of responsibility and seniority in a publicly listed company, particularly in a major publicly quoted company, to get to be in a position of responsibility you have to be able, experiences, diligent, ambitious. They’ve all got those qualities. I’ve never met a chief executive of a company we’re invested in that doesn’t have all of those positive, personal characteristics.

Nick Train:

You have to say though that share prices go up or go down over longer periods of time, or underperform or outperform, and clearly there’s something on top of that, that maybe is just luck. Was it Napoleon who said, “Give me lucky generals.” That’s probably a cliché, but do you know what I mean? Sometimes, in fact quite often, we’ll end meetings with senior management of companies and just say, “Good luck,” because we mean that. Who knows what’s coming down the line that’s going to effect, I mean we’re living in unprecedented period of something I expected coming down the line. I admire people who create value for owners of companies. I really, really do.

Nick Train:

It takes a definite skill set, and we are looking out for it, but unfortunately you can’t bottle it, and it’s rather difficult to identify before the event. That’s my conclusion.

Elliott Berstock:

Yeah, that’s quite very helpful. I guess more of an overview for those of our listeners who might not be that familiar with yourself, and Lindsell Train. Are you okay to just briefly describe the funds and the two trusts that you manage?

Nick Train:

We’re an equity house, stocks, companies, that’s what we’re interested. That’s all we do. We’ve got three … Yeah, the company’s 20 years old. We’ve got three very longstanding equity investment strategies. One in global that we run as a team, one in Japan, which Mike Lindsell, that’s his expertise background for the decade, so Mike fronts up the Japanese fund on a day to day basis, and the UK, and that’s me, because I’ve been running UK equity money since probably before some of you were born. Oh dear, that makes me so depressed, but it might even be true, 1983 I started running UK equity money.

Nick Train:

There’s a variety of mandates or vehicles that we have to allow us to express what we do in global, in UK, in Japan. There’s some open ended funds, and as you remarked, there are two investment trusts as well. Our own eponymous, I like that word, investment trust, the Lindsell Train Investment Trust, that’s something of a unique, it’s unique within the context of our business. Apart from being a global strategy, global equity strategy, the Lindsell Train Investment Trust also has an investment in our company, Lindsell Train Limited, which has become a very important investment within that investment trust.

Nick Train:

It’s been a good thing. We hope that it will remain a good thing, but you never know, and so that’s a unique additional layer of difference about that investment trust, arguably a different level of risk as well. It’s, Lindsell Train Limited is a private company. It’s an unquoted company, so that’s an investment that company’s making.

Nick Train:

Then the longest track record, actually ironically, not ironically, as it happens, the longest track record we have in Lindsell Train is The Finsbury Growth and Income Trust, which may be … Finsbury’s a client of Edison, as you know, but that’s nearly now a 20 year track record, in UK Equities, that’s me.

Elliott Berstock:

Right, fantastic. We’ll come on and talk about the exceptional performance in those two trusts and the funds, and we’ll touch on your investment philosophy in due course. Before we do, I guess we’re in an incredible time in the economy at the moment. We’ve had this pandemic. The markets are always telling us to worry about something. Has this current recession, and this pandemic caused you to have maybe sleepless nights? Does the resilience of your overall stock selection criteria, and your emphasis on the long-term give you comfort in these adverse times?

Nick Train:

There’s a number of things I want to say here. I think anybody being asked this sort of question would go … I want to pick what I say carefully. Of course this is horrendous. As a citizen, as a member of society, I worry about my health, my family’s health. I worry about everybody’s health.

Nick Train:

We work on the assumption that this is temporary. It feels as though it’s gone on forever, but it’s actually, it is actually only a matter of months. Stock markets, all capital markets actually have a longer term perspective than just the next few months.

Nick Train:

While as a member of society I’m concerned, I have to say as a professional equity investor I’m not overly worried about the effects of the pandemic, assuming that the businesses that we’re invested in aren’t going to go bankrupt over the next few months. That seems most unlikely, happily for the type of companies that we’re invested in.

Nick Train:

The truth is, as a professional I’ve not lost sleep about the pandemic. However, although I’ve not lost sleep, I feel more anxious about the way that industry is changing around the world than I can ever remember. I think what I want to try and convey here is it’s evident we’re having this, to me rather extraordinary filmed discussion over this device right now. Probably inconceivable five years ago, this extraordinary acceleration in the adoption of digital products and services, that definitely is a result of the virus.

Nick Train:

We can all see unbelievable wealth and value being created in stock markets around the world, by digital enabled companies. We can all see … It’s incredible what NASDAQ has done this year. It’s incredible what Apple and Amazon share prices have done this year, but it makes sense. Yet at the same time, every investor will be aware that what digital is doing is destroying value as well in a wide swath of industries.

Nick Train:

For some, you think, “Well, can they ever come back? Has the technology shift just …” I don’t know. Sometimes I speak in clichés, forgive me. I almost wonder whether the true 21st Century, the true 21st Century started on the day of COVID this year. Do you know, the first 20 years of the actual 21st Century, that’s been a dress rehearsal. This is what it means to be a citizen and an investor in the 21st Century, and it means incredible opportunities to profit from successful digital businesses, but it also means that some previously, very reliable businesses and industries are going to fall into very tough times, and that worries me. It’s just a challenge to all investors to get these sorts of secular technology shifts right.

Nick Train:

This is, again I know this is a cliché, but this is what it must have felt like in the mid to late 19th Century, when the railroads were just fundamentally changing the shape of economies. If you got caught on the wrong side of the railroads, then your investments weren’t very successful. There’s plenty to be paranoid about, or I feel paranoid at the moment, believe me.

Elliott Berstock:

We talk about those technology developments and trends speeding up by this pandemic. What are some of the biggest consumer and behavioural changes that you think we can expect as a result of this pandemic? Do you have any examples of companies that you may be invested in that have really benefited from these trends speeding up?

Nick Train:

I do, and maybe I’ll table some of these. Okay. All right, let me just give one example because it’s at the top of my mind, but there’s something, I think, equally as important I want to say as well. In our global fund, in our Japan fund, you absolutely won’t be surprised to hear we have an investment in Nintendo. Nintendo, last night, reported results for its first quarter, which I won’t bore you with the numbers, but this was a blow out quarter to end all blow out quarters. There were a lot of optimistic forecasts for Nintendo in the market, but the companies absolutely smashed through those, just a wholesale flocking by consumers to Nintendo’s … I don’t know if … I know you’ll be aware of, I don’t know whether your listeners will be, but true escape is warm, fuzzy, video games, family-oriented, it’s just been perfect for lockdown.

Nick Train:

What really struck us was a huge acceleration in those games being bought by digital download rather than people going out to the shop and find a little cartridge that you stick in the machine. That’s fantastic news for Nintendo, because the profit margin on sending a digital signal down a wire, or through the Ether to a machine, there’s a lot more profit than selling a piece of plastic. I’m sure that is a change that people will never go back to. Once you’re downloaded a video game once, you never go back to buying the physical item again.

Nick Train:

What I wanted to say as well, in an environment where there is this accelerated use of digital, and where there has been uncertainty raised about companies that rely on human, physical interactivity for their success. I don’t know, I’m thinking about … I don’t know, Disney’s theme parks. They were near empty for months recently. Disney just reported results, big loses from their theme park assets.

Nick Train:

I’ve not walked down Regent Street, but I’m told Regent Street is a ghost town. All of those luxury good shops are empty. We have some investments, maybe we’ll talk about them later, we have some investments in some sports franchises, some football clubs. The matches are presumed, but the stadiums are empty. Is that, are all of those, are those permanent? Will, as the pandemic either just becomes ingrained in our society, or we find a vaccine for it, does that human interactivity come back? Of course, I don’t know the answer, but I must say our belief is that clubbing, shopping, watching sports at the pub, going to have the experience of watching Manchester United play live, those seem so fundamental human behaviours, I think it’s very dangerous to get too pessimistic about those sorts of companies now. Actually, I expect it to bounce back. Sorry, that’s a very long-winded answer.

Elliott Berstock:

Have you been adding to those stocks that have clearly been impacted, and that you feel should bounce back strongly? During this period as well, a number of fund managers I’ve been speaking to have been selling a number of their holdings. Have you been active on that side?

Nick Train:

No, we’ve not sold anything at all. I think, I said have lucky generals, I feel in a way Lindsell Train is a lucky business in 2020 because we naturally, because it is our stated investment approach. We naturally own the sort of businesses that other people regard as defensive, or high quality businesses. That’s our whole thing.

Nick Train:

As a result, our performance year to date, I think is okay, maybe better than okay in some areas. In a sense, we shouldn’t be congratulated for that because we’d have owned it anyway. That’s what we do. Within our portfolios, what Mike and I, and the whole team, what we feel most urgently is that we mustn’t get bounced out of companies that are having a tough time over this six month period. As long as we don’t think they’re going bust, or as long as we don’t think that fundamentally their business has changed.

Nick Train:

I don’t know, I think about … We have investments in a number of luxury goods companies, right across Lindsell Train’s portfolios. In the UK, Burberry for instance, Burberry is probably the biggest single detractor from my performance so far in 2020. I complete get, it’s a business that is very exposed to Asia, very exposed to Chinese tourism, very exposed to consumer feel good, and it’s terrible at the moment. I just feel that the last thing we should be doing is selling Burberry after a 25% fall in its share price, and actually we should be buying more, because the company ultimately makes beautiful things, and ultimately is has this wonderful resonance for its brand in Asia. That will be highly valuable again one day, so that’s the way we’ve been thinking about it.

Elliott Berstock:

Yeah, and your investment philosophy, you’ve said is picking great companies and holding them for the long-term. I guess I just want to explore that a little further, the long-term element to it. A number of fund managers I’ve interviewed recently, I think it was Andy Bruff who said, “Trees don’t grow to the sky and the life cycle of companies is reducing, and every company has a finite size.” What would you say to those individuals who might think that stocks are there for trading and not collecting?

Nick Train:

I would most fundamentally say that all of us must be humble about our insights, our investment approaches in the face of the radical, inscrutability, and uncertainty about capital markets at all times, at all times. Nobody has ever or will ever identify or execute on an infallible investment approach that works for all seasons. It’s a fool’s errand. All you can do is identify a set of behaviours that constitute an investment approach, that you think give you as an individual, or the team that you’re working with the best chance, never certainly, the best chance to meet clients’ aspirations over time.

Nick Train:

It’s a long time since I’ve met Andy, but I know Andy and I have a huge regard for him, and I have a huge regard for people like him who do successfully identify these types of life cycles for companies, and within industries, and add value for their investors by, perhaps trading is too pejorative a term, but timing things effectively.

Nick Train:

I tried to do that 30 years ago, and demonstrated to my own satisfaction that it wasn’t my skill. I know how trite, and this is our fault, not your fault, how trite what you’ve just described as our investment approach sounds, identify great businesses and then hold them for very long periods of time. It’s so simplistic.

Nick Train:

I’m going to add to it with another really simplistic, but I think a powerful piece of investment advice, which we do our best to adhere to, and that is the piece of investment advice that says run your winners. It’s obvious. History confirms it, that this shared crisis of outstanding businesses, great businesses do show a tendency to go up a lot over multiple decades. Of course there are counter exceptions, and of course there is a subjectivity in identifying what constitutes a great business, but when you see the potential rewards for, I don’t know, owning Unilever for 50 years. They’re extraordinary. Unilever’s share price, over 50 years, has gone up more than 100 fold. The company’s grown its dividend every year for over half a century.

Nick Train:

The returns that you can earn from identifying a business with those sorts of sustainable longevity are very high indeed. You know what? Running your winners sounds so simple, but all of us, maybe even you yourselves, will recognize that it’s more of a challenge, both intellectually and maybe even more importantly, emotionally, it’s more of a challenge than you might think. There’s always the temptation to take some profit.

Nick Train:

Unilever, believe me, look at the charts, unbelievable returns over multiple decades, but I can point multiple five year periods when Unilever’s share price did nothing, and what are you supposed to do when the shares of a great business do nothing for five years? The temptation is to sell. This is boring. I’m going to move onto the next idea. Maybe you get lucky, maybe your new idea is better than Unilever, but can you be sure?

Nick Train:

All I know, and even this isn’t an internal observation, all I know is that over the 21st Century to date, running winners in strategically advantaged companies has been a hell of a lot more rewarding than averaging down into losers. Now that can change, of course it can change, but in the end, all anyone at Lindsell Train can do is say, “Here’s our investment approach. We’ve stuck to it. We propose to continue to stick to it. It’s up to you to decide whether it’s relevant for you, or you think it might be effective over the next period.” That’s what I’d say.

Elliott Berstock:

Yeah, and the outstanding performance, I guess, speaks for itself.

Nick Train:

I don’t think it does.

Elliott Berstock:

Okay.

Nick Train:

I think it’s a factor.

Elliott Berstock:

Yeah.

Nick Train:

I think it’s a factor. I think it’s worthy of note. I think it deserves consideration and explanation, but I don’t think there’s any predictive value in it, particularly. Do you know what I’m saying? Unfortunately, it is true, past performance is no guide to future performance, but thank you for pointing it out.

Elliott Berstock:

No worries.

Nick Train:

Okay, thank you.

Elliott Berstock:

I guess you mentioned running the winners, and the disciplines associated with that, and the investment psychology around knowing how to do and stick to your criteria. What influences have there been? We can talk maybe about Warren Buffet, Benjamin Graham. How much of an influence have these individuals, investors, economists played in your career?

Nick Train:

Massive, massive. There is no originality in what we’ve done, truly. There isn’t. We’ve just sought to read and understand as much as we possibly can about the approaches that have allowed highly successful, capital allocators to be successful, and then try and establish whether or not any of those approaches might suit us, given our intellectual capabilities, and given our emotional makeup.

Nick Train:

I think the emotional makeup is as important as the intellectual ability, frankly. Unfortunately, the correlation between being super, super smart, and being a great investor, all great investors are very, very bright people, but I know a lot of very bright people who turn out not to be good investors.

Nick Train:

I think it’s true for Mike and I, the big influences. I name them because I want everybody to know, and because go away and read the stuff. Absolutely Buffet, absolutely and Munger, the generosity those two have shown in explaining so clearly an approach.

Nick Train:

Slightly less well-known, maybe, I’m sure familiar to you, Peter Lynch at Fidelity. I still think, One Up on Wall Street, even written 30 years ago, I still think that’s a hugely valuable book. Particularly with Peter Lynch, although you can see this in Buffet as well, part of the reason that people don’t run their winners is because they believe that they’re going to be smart enough to trade in and out, and they’ll get back in to a stock when it has its next run. They underestimate the potential in a great business.

Nick Train:

Understanding, again, such a simple idea, but Peter Lynch’s success was based on successfully identifying and then benefiting from baggers. Shares that go up 10 times, 20 times, 30 times, and that idea of owning something because it might go up five fold over the next seven years or something. It’s real. It does happen. Good businesses with growth, they do go up that much, and yet so many investors, and I think it’s true particularly of professional investors, think, “Oh, my job is to find the next 20% gain, and then sell the 20% and move onto the next one.”

Nick Train:

I’m not saying that’s not valid, but the big lesson for me from Pete Lynch was run your winners because they can go up more than your wildest dreams.

Elliott Berstock:

Yeah, I think one of my favourite Peter Lynch quotes is, “The key to making money in stocks is to not get scared out of them.” I guess that nicely sums up what you’re saying about running the winners.

Nick Train:

Yes, there’s also … He says, “Don’t sell for arbitrary reasons.” Just because it hits a certain price end ratio, or a certain price, that’s arbitrary. The stock doesn’t know that. The company doesn’t know that.

Nick Train:

I do understand what Andy Bruff is saying. I hope that this isn’t going to come out as me knocking Andy Bruff over the course of an entire discussion, because I absolutely don’t mean to, but particularly in the 21st Century, particularly in the 21st Century, digital businesses or truly global businesses have demonstrated the ability to carry on adding value three year over three year, over three year, way beyond the linear expectations that people used to have in the 20th Century.

Nick Train:

I think … I’ve written about this more recently, the site of Apple and Amazon, just those two companies combined, being worth more than the entire UK stock market. Just two companies worth more than the entire UK stock market. There are so many implications from that, but one definite implication is what you might have thought was big, or mature for a business in the 20th Century, it’s not valid for the 21st Century. Things can do on much longer and get much bigger than you anticipate.

Elliott Berstock:

Yeah. Okay, great. I guess moving topic slightly, the Lindsell Train Investment Trust went to quite substantial premium last year, and I think you famously warned investors to never pay too much of a premium for the trusts. Looking at the share price relative to the NAV at the moment for both Finsbury Income and Growth, and the Lindsell Train Investment Trust, they’re both trading around par. Is now a good time for investors to be buying?

Nick Train:

Let’s just be absolutely clear here. You’re referring to the Lindsell Train Investment Trust.

Elliott Berstock:

Yes.

Nick Train:

Which has had wild premium gyrations, and traded at a discount at times as well. Finsbury Growth and Income Trust, actually there is a discount management policy for that trust that ensures that the NAV should, or the share price should never be that far removed from the NAV. I’m not going to bore you with the reasons why that isn’t true of the Lindsell Train Investment Trust, but there we’ve just let the market takes its course.

Nick Train:

I think the only thing I’m prepared to say is that I personally have been a buyer of shares of both trusts in 2020. Yeah, I’m delighted to do that. The Lindsell Train Investment Trust, as we rehearsed earlier, roughly half the assets are now accounted for by the stake in my company, or my and Mike’s company, and a few other shareholders. The Lindsell Train Investment Trust is absolutely a bet on the future success of Lindsell Train Limited. I have, truly, no special insights into that, but all I can say is that I’m a dedicated, committed employee of Lindsell Train Limited, and I want to carry on working very hard for its future success, and if I can buy shares, more shares in that, then that seems a good thing to me.

Elliott Berstock:

That’s great, and it proves that interests are very much aligned.

Nick Train:

Yeah, thank you. Thank you, all credit to Mike Lindsell. It was his conception right at the outset. How do you … No one can guarantee success. You absolutely can’t, but you can create alignments of interest, and I think the structure of the Lindsell Train Investment Trust did create a real alignment of interest between us and those people prepared to support our company.

Elliott Berstock:

Yeah. Some investors have mentioned to me that your funds, and indeed Lindsell Train Limited performed best against the benchmark in periods of bull markets and where consumer confidence is at its strongest. Would you agree with that?

Nick Train:

Flippantly, the Lindsell Train UK Equity Fund for the first seven months of this year is outperforming by more than it possibly ever has over any discreet seven month period in its history. This definitely isn’t a growth bull market with high consumer confidence. Actually right now, I don’t think that observation carries weight.

Nick Train:

I want to say secondly, that what we have noticed for sure is that we don’t do well during certain types of boom, investor manias. I personally had the most difficult time in my entire investment career between 1998 and 2000. I would just not emotionally and intellectually capable of dealing with that technology bubble over that time. I hope we’ve done a bit better into this different technology boom.

Nick Train:

We had a very tough period when there was that big commodity price boom in the mid, 2007, 2008. We don’t invest in commodities. That was rough as well, so I can definitely point to those as periods that if they were to recur in the same way, we’d probably do badly. Listen, I try as much as possible, not to think about it in these terms.

Nick Train:

I know that many of our clients, particularly many of our institutional clients, want to pigeon hole us. They want to be able to say, “Oh well, it will do well here and badly then,” because it makes their life, as capital allocators, more easy.

Nick Train:

We never invest in anything without expecting to own it over the course of several stock market and economic cycles. Truly, we really are thinking about the next 30 years, and we know there will be times when anything we own is doing well, or doing badly, but we’re not interested in trying to time them.

Elliott Berstock:

No, that’s great.

Nick Train:

To us it’s an irrelevant question.

Elliott Berstock:

Yeah. No, that makes sense. Just looking in the background then, you’ve got a number of books about, you’re clearly passionate about the education and about markets. What do you enjoy doing outside of this in your free time, so to speak?

Nick Train:

Can I evangelize?

Elliott Berstock:

Yes.

Nick Train:

It’s never too late to take up yoga, and the best time to take up yoga is now.

Elliott Berstock:

Makes sense.

Nick Train:

Yeah. No, that’s become an increasingly valuable part of my life over the last 10 or 15 years. I think a yoga practice makes you a better person at virtually every level. I would say I’m definitely a better investor because of the yoga practice. That’s maybe what I would say.

Elliott Berstock:

Great. Well that’s it. That’s a nice insight, and a nice note to end on. That concludes our interview. I hope everyone found that as interesting as I did. That just leaves me to say thank you very much, Nick Train, Co-founder and Fund Manager at Lindsell Train.

Nick Train:

Thank you. Thank you everybody.

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