At first glance, celebrated UK money manager Nick Train’s £7.4bn Lindsell Train Global Equity fund looks to have done rather well recently. Over the last year, it’s achieved a return of 7.4%. That’s pretty decent when you consider the trio of headwinds — Covid-19, Brexit and the US presidential election — markets have faced. By comparison, the FTSE 100 is down 14% over the same period.
Look at things from a different perspective however, and this result isn’t quite so positive.
Nick Train has underperformed!
To properly measure just how good a manager is, it makes sense to compare ‘oranges with oranges’. Forget the FTSE 100. Train’s performance against rival managers adopting similar strategies is a better yardstick.
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It’s here there’s possible concerned. Terry Smith’s Fundsmith Equity fund, for example, has returned 17.2% in the last year. The promising LF Blue Whale Growth has achieved a stonking 24.1% gain over the same timescale. This is despite all three managers having concentrated portfolios of between 25-29 quality-focused stocks. This concentration matters because it means investors are relying more on the active stock-picking skills of the fund manager, and less on general market sentiment, to grow their wealth.
On this basis, Nick Train is really lagging his peers.
So, what gives?
There are arguably two main reasons to explain this underperformance. One is the geographical mix of Train’s holdings.
Unlike Fundsmith and Blue Whale, Train has a third of his portfolio invested in UK companies. However, Smith and Blue Whale manager Stephen Yiu have just 14% and a minuscule 3% exposure to London-listed stocks respectively. This matters, because the UK stock market hasn’t recovered as well as others around the world.
A second, related reason why Global Equity hasn’t done as well is due to the sort of companies Nick Train’s invested in. Consumer goods giant Unilever and premium spirit maker Diageo occupy the largest and third-largest positions in his portfolio. The share prices of both have recovered from March’s market crash but they’ve hardly set the world on fire.
By sharp contrast, both of Train’s peers have big stakes in US companies, such as Facebook, Microsoft and Paypal. Thanks to global lockdowns, these have thrived in 2020.
Keeping the faith
I don’t think any of the above should matter to Foolish investors. A year is simply not long enough to judge whether a stock picker has lost his or her touch. Far more important is that Nick Train’s fund is up 122% in five years, handsomely beating his chosen benchmark: the MSCI World Index (developed markets).
I’m also inclined to think that many of Nick Train’s holdings will recover strongly (and potentially do better than those of rivals) in 2021. It’s unfathomable, for instance, that people won’t return to bars and pubs eventually.
As an aside, we also need to consider the possibility that the US market — which Fundsmith and Blue Whale are heavily exposed to — is now seriously overpriced. In spite of Brexit-related concerns, the UK market still looks reasonably valued.
Buying opportunity
I certainly wouldn’t rely on the skills of just one manager, even Nick Train, for growing my wealth (n.b. I hold all three of the funds mentioned). Nevertheless, I don’t see any reason to become concerned about the Global Equity Fund’s performance. In fact, I think now might be a great time for me to top up my stake!
