Proof of the importance of a Hargreaves Lansdown “best buy” recommendation, perhaps, or an absurd overreaction to having one removed? Shares in Lindsell Train Investment Trust slid by 22 per cent on Friday after the FTSE 100 investments group said that it would be dropping Lindsell Train’s UK Equity and Global Equity funds from its Wealth 50 list of top picks.
The decision was nothing to do with the trust’s returns, which have been stellar, but was the result of its high ownership of Hargreaves Lansdown shares and the potential for a conflict of interest: its 12 per cent stake makes it the second largest holder behind one of the group’s co-founders.
The incident may be the latest example of what looks like an overly cosy relationship between Hargreaves Lansdown and some of the vehicles that it champions, but the large markdown in the shares certainly throws the valuation of this trust into relief.
Lindsell Train Investment Trust was launched in 2001, a year after Michael Lindsell, 59, and Nick Train, 60, established their eponymous investment group. The brief is straightforward: to generate long-term value and to pay the maximum possible in annual dividends based on investing using what it describes as the purchasing power of sterling. It has a benchmark linked to the longest-dated, fixed-rate UK government bond, which it has beaten comprehensively since its launch and over the past one, three and five years.
Central to the trust, and its valuation, is its holding, equivalent to 46.7 per cent of its net asset value, in Lindsell Train Limited, the private investment group set up by Mr Train and Mr Lindsell. Lindsell Train Limited had a total of £20.8 billion in funds under management at the end of May and operates three strategies: UK, global and Japanese equities, each of which exclusively buys into listed companies. Its strategies have proven hugely popular with investors, who have poured more than £5 billion into the investment group since the beginning of the year, and its returns have been the envy of the rest of the industry.
The trust takes a fairly simple, some would say conservative, approach to valuing its holding in this limited company. In essence, it takes the average of 1.5 per cent of its assets under management plus the adjusted annualised earnings with a discount applied, at present 8.5 per cent. That means it probably ascribes it a value of a little more than £300 million. The stock market has a much more bullish view, attaching an implied valuation of as much as £1.1 billion to the fund manager at its height last month.
There are obvious worries. Lindsell Train Investment Trust’s shares recovered some of their lost ground yesterday, rising 5.1 per cent, or £77.50, to £1,592.50 — a bumper premium of about 63 per cent to the most recently disclosed net asset value per share of £1057.47.
Given that the rest of the portfolio is held in conventionally valued quoted securities, that premium is effectively the worth ascribed to the Lindsell Train fund manager. While they are clearly gifted stockpickers, that rating can be justified only if the investment success continues. The experience of the October equities sell-off last year and the recent travails of Neil Woodford, 59, and his gated income fund, tell us that this cannot be presumed.
It surely will not be long before the fund’s two co-founders will be ready to enjoy a well-earned retirement. Lindsell Train is grooming successors, but they are unidentified as it stands. It is therefore tempting to conclude that, however strong the trust’s performance, a dose of reality for the valuation of the investment manager is probably no bad thing.
ADVICE Avoid
WHY The highly ambitious implied valuation for Lindsell Train Limited makes the shares a riskly proposition
Mulberry
Even in the sales, most shoppers are going to find buying a Mulberry handbag quite a stretch. The retailer insists that two thirds of its luxury leather handbags sell for below £1,000, but the obviously desirable ones in its range sell for considerably above that.
Mulberry was created in 1971 by Roger Saul, 69, as a maker of luxurious leather bags, about half of which are produced by two factories in Somerset. Although it still makes the overwhelming majority of its sales in Britain, the company has been expanding internationally, in Asian markets in particular, and has been diversifying its product range such that it now also makes sunglasses, backpacks and shoes. It operates from 103 stores and 22 concessions and has increased its network of outlets in Asia to 34, against a total of 55 in the UK.
There is obvious merit to its expansion, which puts it closer to higher-spending wealthy buyers in Asia and reduces its dependence on a domestic market where the downturn in consumer confidence has put the retailing sector as a whole under pressure.
The collapse of House of Fraser, for example, cost Mulberry several million in unpaid debts and helped to propel it to a pre-tax loss of £5 million last year against a profit previously of £6.9 million. It also acted as a drag on group sales.
Most of the heavy lifting building a trading base in Asia is behind it. Mulberry reckons that capital expenditure during the current year will fall to about £6 million, from £11.9 million last year, and that the benefits should start to come through in higher sales.
The retailer is clearly doing all the right things — prioritising digital sales, selling directly to consumers rather than to wholesalers and marketing its “made in the UK” credentials to brand-conscious overseas shoppers. Yet the shares are difficult to recommend. They yield only 1.8 per cent and are thinly traded, with about 90 per cent of the stock held by three investors. Although they rose 4 per cent yesterday, up 10½p to 266½p, they have lost nearly 60 per cent of their value over the past 12 months and there seems no obvious near-term catalyst for a recovery.
ADVICE Avoid
WHY Unrelenting pressure in the UK not yet offset overseas
● Correction, July 12, 2019: Lindsell Train Investment Trust does not appear on Hargreaves Lansdown’s Wealth 50 list as we stated. Lindsell Train’s UK Equity and Global Equity funds will no longer appear on the Wealth 50 list. Lindsell Train Limited holds a stake in Hargreaves Lansdown rather than the investment trust. The most recently disclosed net asset value per share for the trust on the day was £1,057.47 and not £993.99 as we stated.
