Lindsell Train Global Equity – Don’t invest without reading this?

Lindsell Train Global Equity is a really popular fund right now. It is no surprise, because it has consistently outperformed its benchmark.

As the name suggests, it is a global fund. As with many of that ilk the benchmark it is measured against is the MSCI World index. Over the last 5 years Lindsell Train Global Equity has achieved an annual return of 20%. That compares to about 12% for MSCI. That is serious out performance.

Michael Lindsell, Nick Train and James Bullock manage the fund.

The team has a great track record and are well respected. In fact, when you look at their resumes it just goes to show you don’t need a degree in finance to be a successful fund manager. Bullock studied Physics and Biomechanics, Train studied History and Lindsell studied Zoology.

This fund is often compared to Fundsmith Equity. The two funds definitely have a lot in common. However, one area where they differ is the heavy Japanese flavor of Lindsell Train Global Equity. This comes from Michael Lindsell who spent time in both Hong Kong and Tokyo.

The fund is run with a clear investment philosophy:

We aim to achieve the Fund’s objective by constructing a concentrated portfolio of “exceptional” companies, with a focus on those businesses with truly sustainable business models and/or established resonant brands. In building the portfolio we focus on companies demonstrating long-term durability in cash and profit generation.

Lindsell Train Global Equity

So basically Lindsell Train focus on outstanding companies that have been around for ages, and are expected to be around well into the future. It certainly sounds like a good approach.

However, as you might expect there are a few issues with the fund. Particularly through the eyes of a passive index investor.

Firstly, fees are relatively high and the related share structure is complicated. The fees are related to the type of share you invest in.

The ongoing charges and minimum investments are shown below:

Ongoing Charge (by Share Class)

• A: 1.21% p.a.
• B, C & E: 0.71% p.a.
• D: 0.51% p.a.

Minimum Investment (by Share Class)

• A: £1,500
• B: £150,000
• C: US$240,000
• D: £200m
• E: €100,000

I’m guessing most UK investors will go with class A or class B shares. That is because they’ll want sterling denominated shares and they probably won’t have £200 million!

On the face of it then, if you’ve got £150K to invest you can get ongoing charges of 0.71%. However, if you haven’t you’ll have to cough up 1.21%. Not overly expensive in terms of active managed funds, but a lot more than a passive fund.

That compares to 0.15% you could pay for investing in HSBC MSCI World UCITS ETF (HMWO) i.e. a fund that tracks the benchmark.

Of course, up until now, Global Equity has more than out performed the benchmark. Because of this investors are likely to be well in the money. However, if Lindsell Train Global Equity doesn’t continue to outperform, that expense will start to matter.

In a previous article about Fundsmith, I pointed out that Mark Dampier, research director of the UK’s biggest broker Hargreaves Landsdown said that being expensive was the main reason Fundsmith Equity didn’t make it onto the Wealth 150, a list of the UK’s best funds.

This isn’t the case with Lindsell Train Global Equity which is on the list. Dampier obviously doesn’t think it is expensive. In fact, he also pointed to the similarities Fundsmith has with Lindsell Train Global Equity as another reason for not adding Fundsmith Equity to the Wealth 150.

Basically you only need one because they are so similar and all else being equal you may as well chose the cheapest.

A second drawback with Global Equity is that like Fundsmith is it is highly concentrated. Concentration tends to mean the possibility of higher returns.

However, concentration also tends to mean higher risk. The fund is highly concentrated in terms of number of companies and geographies.

The geographic spread is shown below.

Geographic Exposure

• 34.22% US
• 32.57% UK
• 20.14% Japan
• 7.55% Netherlands
• 3.75% Cash and Equivilents.
• 1.77% Italy

At the time of writing, it is heavily concentrated in just three countries: the US; the UK; and Japan, and only invests in 5 in total. On top of that, the fund only contains 20 to 35 stocks.

You don’t have to read too much about investing to understand how important diversification is. The benchmark MSCI World index contains thousands of stocks across 20 countries.

Finally, research has consistently shown that investors tend to flock to funds that have done well in the past. But unfortunately, there is a wealth of research out there that shows that funds that have done well in the past are less likely to do well in the future.

In fact, the better they’ve done and the longer the period of doing well, the more likely a period of underperformance is just around the corner.

There’s no doubt Lindsell Train Global Equity has been a great fund in the past, the problem is, past performance is not a reliable indicator of future performance.

The team at Lindsell Train may be the ones that defy the research and continue to out perform the market. On the other hand, they may not.

If you go with the market you are guaranteed to get the market’s returns and the market has in the past proven to be generous. If you don’t go with the market you have a chance to outperform, but at the same time you have a chance of underperforming. Why take the risk with your hard earned money?