Lindsell Train IT

Closed-end funds and OEICs
Peter1B1
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Lindsell Train IT

Postby Peter1B1 » December 23rd, 2016, 10:50 pm

First post on Lemon Fool. Sad to see Motley Fool go: my best source of help and views for a novice investor setting up LT IT SIPPs.

Anyway, after five years overall performance has been, well, better than cash. But much of the growth has come from one IT - Lindsell Train IT which now represents 22% of pf against a target max of nearer 10%. The IT may become vulnerable to the unquoted elements within, though these account for much of its premium today.

So for long term pf management should I go to cash for say half of the holding and reinvest? Or ride the tiger hoping for continued stellar performance and risk further off-balancing of the pf.

A nice problem to have but thinking I should tackle it now. Views welcome, please. Peter1B1

scotia
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Re: Lindsell Train IT

Postby scotia » December 24th, 2016, 12:59 am

If you think Lindsell Train has a great investment performance (and I think its pretty impressive)- why not invest in its unit trusts, and avoid the risk of a sudden crash in the apparent substantial premium of its IT. I certainly wouldn't purchase the IT at its present level, but I'm quite happy to hold its UK and Global Unit Trusts - and I think in the past that Lindsell Train has warned about purchasing its IT at an excessive premium.

Lootman
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Re: Lindsell Train IT

Postby Lootman » December 24th, 2016, 1:26 am

Peter1B1 wrote:much of the growth has come from one IT - Lindsell Train IT which now represents 22% of pf against a target max of nearer 10%. The IT may become vulnerable to the unquoted elements within, though these account for much of its premium today.

So for long term pf management should I go to cash for say half of the holding and reinvest? Or ride the tiger hoping for continued stellar performance and risk further off-balancing of the pf.

LTI is up 360% for me since I bought it (late 2000's) - the best return of any of my collective investments.

Those "unquoted elements" are mostly LTI's share in its parent fund management company. So we've benefited from a virtuous circle. As LTI and its sibling funds have prospered, so has the parent's business, and that further powers LTI's share price. The high premium to NAV reflects the fact that the parent is not accounted for at full value, so isn't necessarily a concern, although it's irksome for those seeking to buy. Another factor is that the shareholdr base is loyal and not many sell. But demand is relentless and it doesn't issue a lot of new stock.

The risk is of an exaggerated decline where the underlying NAV falls AND the parent company declines in value in sympathy AND the premium goes to a discount. But it's hard to dismount a horse that's been winning every race for years.

That situation is screaming for some kind of protection that allows you to ride future gains but reduce the exposure quickly if it starts misbehaving. Options would be great for that but don't exist for LTI. Maybe a trailing stop set at a percentage below the current price? Your target sell price would be gradually reset at higher levels as long as the share price continues to rise, but would be triggered by a fall by your pre-set percentage.

Selling LTI is a bit like selling your house in London and moving somewhere cheaper. It works fine but only as long as you don't later want to move back to London, because you might then find that you can no longer afford to buy a house there any more.

Dod1010
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Re: Lindsell Train IT

Postby Dod1010 » December 24th, 2016, 7:35 am

I have looked enviously at Lindsell Train IT for some years but eventually settled on Finsbury Income & Growth as it is a cheaper way into LT's expertise. The problem, if it is that, in buying one of their open ended funds, is that they all hold many of the same stocks, so I am inclined to think that a bit of true diversification is no bad thing in this particular case. As the OP said, 22% in one share is a bit too much, however good an investment it is, unless that is you have keyman insurance on the lives of Messrs Lindsell and Train.

Some of LT IT's performance has come from its investment in its management company so you get a double whammy if things go wrong. That has to be adding a further element of risk, although I am not knocking it.

SalvorHardin
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Re: Lindsell Train IT

Postby SalvorHardin » December 24th, 2016, 9:54 am

I would second Finsbury Growth & Income, which I have owned for many years, as an alternative and/or complement to the Lindsell Train IT. It has a very similar portfolio with large holdings in Diageo, Unilever, London Stock Exchange, AG Barr, Relx, Mondelez and Heineken (amongst others). Website linked below:

http://www.finsburygt.com/

Lindsell Train IT’s large premium basically represents the market’s valuation of its asset management business. From what I’ve seen over the years there is a huge amount of investor sentiment in this, hence the sometimes wild fluctuations in the share price. I've avoided it for this reason - I get enough excitement from the rest of my portfolio, much of which displays great volatility, so I prefer my investment trusts to be boring in comparison!

It isn’t unreasonable for investment trusts and similar to trade at a premium where there are undervalued or unstated assets on the books. A good example of this is Law Debenture which for many years tended to trade at a premium of at least 10% due to its fiduciary services businesses. Since they gave this an explicit value in the accounts Law Debenture’s share price has moved to a discount to its new NAV.

A higher profile example, one which I am much more familiar with than Lindsell Train IT, is the Canadian real asset manager Brookfield Asset Management. Brookfield has a market value of about US$32 billion but its net asset value is about US$20 billion, which represents a premium of a similar order to that of Lindsell Train. This discrepancy makes some potential investors freak out, like with Lindsell Train, but what it represents is the value that the markets places upon Brookfield’s asset management business (which currently generates about US$1.3 billion of fees per year).

Peter1B1
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Re: Lindsell Train IT

Postby Peter1B1 » December 24th, 2016, 8:14 pm

Thanks all for comments.If I may summarise, 'LT is held up by the (unquantified but tangible non-the-less) value of its unquoted investments'. There is an element of pig on pork here but I am loathe to disrupt a winning participant. FIGIT noted - recent position opened up so I will have the comparison.

If I leave the situation alone it becomes sort of Darwinian in that the pf will reflect over time the survivors whilst the weak ones naturally dilute. Is that a recognised investment management approach?!

Appreciated.

Lootman
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Re: Lindsell Train IT

Postby Lootman » December 24th, 2016, 8:49 pm

Peter1B1 wrote:If I leave the situation alone it becomes sort of Darwinian in that the pf will reflect over time the survivors whilst the weak ones naturally dilute. Is that a recognised investment management approach?!

Professional traders express it thus and consider it to be an important axiom:

"Cut your losers; let your winners run".

The idea is that one great success can outweigh several mistakes, especially if those mistakes are not excised. For any given position your max loss is 100% but your max gain is unlimited.

That said, you're an investor and not a trader, and if this is causing you lost sleep then you should play it safe and fade LTI.

scotia
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Re: Lindsell Train IT

Postby scotia » December 24th, 2016, 11:08 pm

In October 2012 From http://www.thisismoney.co.uk/money/inve ... z4TnbnDr5V

This contains quoted advice from the manager (Nick Train):-

‘As a result we would advise investors to think carefully before buying shares at such a steep premium to NAV.’


In a further piece of candour, Mr Train also warned existing investors that as the trust’s fund manager fees were linked to its share price rather than NAV, they were losing out from the high share price too.
He said: ‘Having the fee calculated on the market capitalisation was designed to align the manager’s interests with shareholders, recognising that most of the time investment trusts trade at discounts, but in the current circumstances this is not the case.


If you think highly of the manager, perhaps his advice is worth taking?

mc2fool
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Re: Lindsell Train IT

Postby mc2fool » December 24th, 2016, 11:20 pm

Peter1B1 wrote:If I leave the situation alone it becomes sort of Darwinian in that the pf will reflect over time the survivors whilst the weak ones naturally dilute. Is that a recognised investment management approach?!

It's called long term buy and hold, LTBH, and is in particular the investment management approach on TMF of HYPers, who talk about "eternity" portfolios and disdain doing anything (voluntarily) with a holding/portfolio after buying/building as "tinkering". (Of course, there are involuntary actions like mergers, buy-outs, etc).

AFAIK it's not an approach used by anyone else. There are certainly no collective funds (ETFs, ITs, OEICs/UTs) that have bought their portfolios at launch and never changed anything since (how would the managers earn their fees? ;) ), and I've never come across any research (not counting anecdotal on TMF) investigating the idea.

Mainwaring
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Re: Lindsell Train IT

Postby Mainwaring » December 25th, 2016, 10:53 pm

So for long term pf management should I go to cash for say half of the holding and reinvest? Or ride the tiger hoping for continued stellar performance and risk further off-balancing of the pf.

Same here. Never 5 & 6 bagged before and felt the need to respond. I have trimmed my holding throughout 2016 as the price rose in the face of demand and the poor market makers tried to ply stock from our hands. I have much faith in Lindsell and Train but clearly I had a price...£6, £7, £8, and now £9. I have sold more then half what I have held for 7 years which was a wrench. With much of the proceeds I decided to double up on their and my Finsbury G&I thereby retaining some unquoted LT and retaining the quoted. There were also opportunities to buy back cheaper some shares I sold along the way, and I think a good chance this will happen again next year. Meanwhile, I long to get back to LTBH.

Completely different IT, Chelverton Growth Trust, was similarly chased to 2.5x NAV in the past few months. Within a few days of their board recently pointing out investors folly the SP collapsed to NAV.

Dod1010
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Re: Lindsell Train IT

Postby Dod1010 » December 26th, 2016, 2:57 pm

mc2fool wrote:It's called long term buy and hold, LTBH, and is in particular the investment management approach on TMF of HYPers, who talk about "eternity" portfolios and disdain doing anything (voluntarily) with a holding/portfolio after buying/building as "tinkering". (Of course, there are involuntary actions like mergers, buy-outs, etc).

AFAIK it's not an approach used by anyone else. There are certainly no collective funds (ETFs, ITs, OEICs/UTs) that have bought their portfolios at launch and never changed anything since (how would the managers earn their fees? ;) ), and I've never come across any research (not counting anecdotal on TMF) investigating the idea.


And once you dig below the surface I do not think it is an approach used by all HYPers either. In fact only used by pyad and his disciples, I think.

In common parlance, LTBH does not mean do nothing, ever. Many of us practise LTBH, but I for one use common sense when the time has come to sell something and I think if you ask you will find quite a few who would claim that in general they practise LTBH but who do voluntarily sell from time to time.

Dod

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Re: Lindsell Train IT

Postby Lootman » December 26th, 2016, 3:17 pm

Dod1010 wrote:
mc2fool wrote:here are certainly no collective funds (ETFs, ITs, OEICs/UTs) that have bought their portfolios at launch and never changed anything since (how would the managers earn their fees? ;) ), and I've never come across any research (not counting anecdotal on TMF) investigating the idea.

There is an entire class of collectives in the US with the hybrid (to UK ears anyway) name "unit investment trusts". They consist of a fixed portfolio of shares or bonds that are designed to be held, not eternally, but until a target maturity date. And for bonds that's inevitable anyway as they mature.

It's a small specialist niche of collective, but it does exist.

Dod1010 wrote:And once you dig below the surface I do not think it is an approach used by all HYPers either. In fact only used by pyad and his disciples, I think.

In common parlance, LTBH does not mean do nothing, ever. Many of us practise LTBH, but I for one use common sense when the time has come to sell something and I think if you ask you will find quite a few who would claim that in general they practise LTBH but who do voluntarily sell from time to time.

Yes, there is something intrinsically odd about a methodology that claims both that an investor is perfectly capable of knowing what and when to buy, but simultaneously is utterly incapable of knowing what and when to sell.

Many investors find selling harder to do than buying, and cannot so easily form rules about what and when to sell. But to institutionalise that uncertainty into a deliberate theory of investing does seem somewhat bizarre. If someone really is that passive and indecisive about selling then they should probably be in an index fund.

Or perhaps it is just a manifestation of a rationalisation of poor decision making - if you never sell then you never realise a loss and so can pretend it wasn't a mistake.

mc2fool
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Re: Lindsell Train IT

Postby mc2fool » December 26th, 2016, 6:16 pm

Dod1010 wrote:And once you dig below the surface I do not think it is an approach used by all HYPers either. In fact only used by pyad and his disciples, I think.

Yes, sorry, I should have said "pure" HYPers, or similar.... :)

tjh290633
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Re: Lindsell Train IT

Postby tjh290633 » December 26th, 2016, 11:10 pm

Dod1010 wrote:
mc2fool wrote:It's called long term buy and hold, LTBH, and is in particular the investment management approach on TMF of HYPers, who talk about "eternity" portfolios and disdain doing anything (voluntarily) with a holding/portfolio after buying/building as "tinkering". (Of course, there are involuntary actions like mergers, buy-outs, etc).

AFAIK it's not an approach used by anyone else. There are certainly no collective funds (ETFs, ITs, OEICs/UTs) that have bought their portfolios at launch and never changed anything since (how would the managers earn their fees? ;) ), and I've never come across any research (not counting anecdotal on TMF) investigating the idea.


And once you dig below the surface I do not think it is an approach used by all HYPers either. In fact only used by pyad and his disciples, I think.

In common parlance, LTBH does not mean do nothing, ever. Many of us practise LTBH, but I for one use common sense when the time has come to sell something and I think if you ask you will find quite a few who would claim that in general they practise LTBH but who do voluntarily sell from time to time.

Dod

It is certainly not an approach used by fund managers, whose main activity seems to be churning their portfolios.

To an HYPer, LTBH implies that you do not sell unless something happens that triggers a partial or full sale. One such trigger is if a holding exceeds a certain proportion of the portfolio, as would be the case with a managed fund if the rules governing size of constituent holdings were to be breached. Another is if the share ceases to pay dividends, or if the price has risen so that the yield has fallen below a predetermined level.

In my own case the weight limit for holdings is currently 1.5 times the value of the median holding, while the lower level for yield is just under 2%, approximately half the market average. Looking at 2016 I see that I did sell shares on 7 occasions, which includes disposal of Rexam and Premier Farnell on take-over. For the record those which grew too much as a proportion of the portfolio were Imperial Brands and Compass in February, Reckitt Benckiser in June, Rio Tinto and BAE Systems in November. Note that I do not use absolute price rises as a criterion, only rises relative to the portfolio as a whole. Over the course of 2016 price changes have ranged so far from a rise of +200% in the case of South32 to a fall of -25% in the case of William Hill. About one third have fallen compared with two thirds that have risen.

TJH
Last edited by tjh290633 on December 26th, 2016, 11:17 pm, edited 1 time in total.
Reason: Posted prematurely

OhNoNotimAgain
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Re: Lindsell Train IT

Postby OhNoNotimAgain » December 27th, 2016, 6:13 pm

Ah yes, Lindsell Strain, how is it doing this year compared to the index, out of curiosity?

Rob

GJHarney
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Re: Lindsell Train IT

Postby GJHarney » December 28th, 2016, 10:16 am

Selling LTI is a bit like selling your house in London and moving somewhere cheaper. It works fine but only as long as you don't later want to move back to London, because you might then find that you can no longer afford to buy a house there any more.


This is exactly how I feel about it. LTI has been my best investment by far, but I've not invested more in it for many years as each time I look at it I think nah, that's waaay to expensive, I'll wait and see if there is a fall and then reconsider. Problem is that there never has been, and had I have brought more shares of it each time I tutted at its expense I'd be even better off today than I am already with it. Like others I've tended to buy FGT instead which has done fine but it has been no LTI has it!

Despite doing so well LTI still remains a minor part of my portfolio so I'll not be selling for the reasons outline at the top of this post. If it goes down it goes down, I'll almost certainly still be well up if it does so in line with my normal buy and hold tendencies this one is staying in the corner with only an occasional glance to check whether it needs a dusting.

EricLightbulb
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Re: Lindsell Train IT

Postby EricLightbulb » January 18th, 2017, 1:32 pm

There is an interesting video from Nick Train here.

http://www.finsburygt.com

On another note, could anyone explain to me why, if the Lindsell Train Limited premium is the issue, why LT can't or won't increase the valuation of the company to reduce the premium?

Googling gave me this desciption of their methodology from 2015.

Lindsell Train Investment Trust plc

Amendment to the methodology and frequency of the valuation of the investment held in Lindsell Train Limited

The Board announces that it will in future amend the formula to value the Company's 24.42% holding in Lindsell Train Limited ('LTL') to reflect the forthcoming redemption of the 2.5% Consolidated Loan Stock and the adoption of a new benchmark announced in the recent release of the Company's annual financial report. In addition, the Board announces that in future it will update the LTL valuation at the end of every month, rather than quarterly, beginning at the end of June. The updated LTL valuation will then be reflected in the first weekly NAV announcement in the following month, beginning on July 8th 2015. The formula will be a simple average of the two components below with amendments highlighted in bold:

1. 1.5% of LTL's most recent funds under management ('FUM') ignoring differences between types of asset class and fee structures; and

2. LTL's net earnings (adjusted for a notional increase in staff costs to 45% of revenues excluding performance fees) calculated on a three month rolling basis, one month in arrears and annualised, divided by the annual average yield on the longest dated fixed rate UK government bond plus 0.5% subject to a minimum yield of 4% plus an equity risk premium of 4.5%.

The Board reserves the right to alter the basis of the valuation at its discretion.

Lootman
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Re: Lindsell Train IT

Postby Lootman » January 18th, 2017, 3:02 pm

EricLightbulb wrote:On another note, could anyone explain to me why, if the Lindsell Train Limited premium is the issue, why LT can't or won't increase the valuation of the company to reduce the premium?

I'll take a guess, based on working for a fund manager for a few years. You are correct that issuing new paper is a way to manage the premium and, of course, also increases the AUM which is the basis of how the managers get paid.

On the other hand, a good part of the success of LTI may be due to its small size, which enables it to be nimble and take performance-changing stakes in smaller issues without moving the price - something a large fund cannot do.

If LTI became too big then it might lose the edge it has, and start behaving more like its competition. Whatever their secret sauce is, it probably doesn't scale.

Dod1010
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Re: Lindsell Train IT

Postby Dod1010 » January 18th, 2017, 5:01 pm

If LTI is the investment trust, any new share issue would also dilute the holding of Messrs Train and LIndsell as well as that of Finsbury Growth & Income IT. Each of them holds 5% or more of the Trust, so I think additional shares in issue would rather upset the applecart without any real benefit except to reduce the premium (maybe).

It is still a relatively small Trust and will not take much managing at the moment. At the interim stage it still had its holding in Pearson!

Dod

richfool
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Re: Lindsell Train IT

Postby richfool » January 18th, 2017, 5:25 pm

Incidentally, Numis have recently moved Lindsell Train IT to a sell rating:

http://citywire.co.uk/money/numis-our-n ... 983333#i=5

There is also a discussion about Nick Train's holdings of Pearson in both LTI and FGT IT's in this link:

http://citywire.co.uk/money/pearson-del ... sh/a985142

see also:

http://citywire.co.uk/money/investment- ... ck/a984063


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