Lindsell Train Global Equity is one of the most popular global equity funds in the UK. And for good reason. Since its launch in March 2011, it has smashed its benchmark.
Recently however, the fund – which I hold in my investment portfolio – has underperformed. Last year, it only returned 11.7% when its benchmark – the MSCI World Index – returned 12.3% and rival Fundsmith returned 18.3%. Meanwhile, in 2019, the fund returned 19.4% while the index rose 22.7% and Fundsmith returned 25.6%.
Of course, these numbers are still good. A two-year return of 33% is very healthy. However, they’re below the benchmark and below other funds such as Fundsmith.
This begs the question. Should I hold on to Lindsell Train Global Equity or switch to another fund?
Why has Lindsell Train Global Equity underperformed?
To answer that question, let’s look at why the fund has underperformed. I can see three key reasons.
Firstly, portfolio manager Nick Train has a very specific investment style. He only invests in what he considers to be ‘very high-quality’ businesses. Quite often, these are companies with powerful brands and a consumer focus.
This ‘quality’ approach to investing has worked very well, in general, for much of the last decade. However, like any style, it’s not going to work all the time. For example, recently we have seen a rotation into beaten-up value stocks. Train doesn’t hold these kinds of stocks, and this has contributed to the fund’s underperformance.
Secondly, Lindsell Train Global Equity is underweight in the tech sector compared to its benchmark. Train’s top holdings at 28 February were London Stock Exchange, Diageo, Nintendo, and Heineken. The top four holdings in the MSCI World, however, were Apple, Microsoft, Amazon, and Facebook. Over the last few years, Big Tech stocks have done very well. So, this has also contributed to the underperformance.
Finally, Train runs a concentrated portfolio – a risk I’ve warned about before. The fund holds less than 30 stocks. This approach can deliver great results when your stocks are outperforming. However, it can also backfire if your stocks are underperforming. That’s because stock-specific risk is higher.
Take London Stock Exchange for example – the top holding in the fund at the end of February. This stock recently fell from around £95 to £76. That 20% fall is going to impact Lindsell Train Global Equity significantly because the stock was about 7.6% of the fund at 28 February.
Lindsell Train Global Equity: my move now
While Lindsell Train Global Equity’s performance has been a bit disappointing lately, I am going to stick with this fund. Ultimately, I like Train’s investment approach and I like the holdings in the fund.
I also think it’s a great ‘sleep-well-at-night’ fund. While it may never deliver monster Scottish Mortgage-like returns, it’s also unlikely to crash 30%+ in the space of a month.
Having said that, the recent underperformance is a good reminder of the importance of diversification. When investing in funds, it’s sensible to spread money over different funds with different managers and styles.
So, while I’m going to hold on to Lindsell Train Global Equity, I am going to ensure I also hold plenty of other funds and stocks as well, to lower my overall portfolio risk.
