Investment Masterclass: Nick Train on the case for investing in UK shares

This is an audio transcript of the Money Clinic podcast episode: ‘Investment Masterclass: Nick Train on the case for investing in UK shares’

Claer Barrett
Hi, it’s Claer here. I wanted to let you know the exciting news that Money Clinic is heading to Bristol as we’ll be recording an episode of the show live at the Bristol Festival of Economics on the evening of Thursday, the 16th of November. I’ll be joined by the FT columnist Sarah O’Connor and Susannah Streeter, head of money and markets at Hargreaves Lansdown. Tickets cost between £5 and £10. We’ll be taking questions from the audience on all aspects of managing your money, plus our predictions for the Autumn Statement the week after. To grab a ticket just head to ft.com/bristol or follow that link in today’s show notes.

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Are UK shares a bargain or a basket case? My guest on today’s investment masterclass believes that many London-listed companies offer extremely good value to investors, so long as they’re prepared to take a long-term view.

Nick Train
You should actually want the companies that you’re investing in to be undervalued, particularly if you’ve got the opportunity to buy more and more of them steadily because you’re buying better and better value.

Claer Barrett
The UK stock market certainly looks cheap from a valuation perspective when compared to the US, but the problem is it could stay that way for some time. In this episode I ask one of the best known fund managers in Britain what he thinks could be the catalyst for re-rating. And after years of underperformance from his own UK portfolio, why he thinks investors should continue to be patient.

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Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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Nick Train has been billed as Britain’s answer to Warren Buffett. The co-founder of investment house Lindsell Train is responsible for managing billions of pounds worth of investors’ money across two flagship funds, pretty much all of which is invested in London-listed stocks. Nick’s been around for a long time. He’s got over 40 years’ experience as an investment manager, and when he chooses companies to invest in, he’s also famed for taking a long-term view. Considering the poor performance of the UK stock market and the relative underperformance of his UK funds, the question is: will investors stick with him? Nick Train, welcome to Money Clinic.

Nick Train
Claer, thank you very much. Thank you very much for inviting me to be here. And I feel that it’s appropriate for me right at the start of this conversation to say, yes, I’m proud of the long-term returns that we’ve been able to generate out of the UK stock market. I think that’s an important point, but I would be the first to acknowledge the last couple of years I found difficult. And performance has not been so good. You know, we can touch on that. But I just feel in the context of a discussion about a long-term investment approach such as ours, it’s important to convey it doesn’t work all the time. Anyway, let’s see where our conversation takes us.

Claer Barrett
Sure. Now you run two of the biggest and best known funds targeting shares in UK companies. There’s the £4bn Lindsell Train UK Equity fund and the £1.5bn Finsbury Growth & Income Trust. Now they’re invested in very similar companies. But could you give us a flavour of the type of UK shares your funds hold and why?

Nick Train
What we’re doing is very simple, really. It’s saying that if we build holdings in self-evidently excellent companies, and we hold those excellent companies for long enough, we are likely to generate superior returns to the average because we own companies that are more excellent than the average. And I would say, I hope without straying into too technical ground, that we’re looking for businesses with high returns on equity or high returns on capital. First of all, we understand where their competitive advantage might derive. And two, we believe that that competitive advantage is likely to be truly durable.

Claer Barrett
Nick Train is renowned for being a buy-and-hold investor. Once he’s decided on a company that he likes, he hangs on to it for a long time even if the value of its shares fall. His holdings are also highly concentrated. His 10 biggest investment holdings account for more than 80 per cent of his portfolio by value. Drinks company Diageo, his third-biggest holding, has fallen around 12 per cent this year at the time of recording. But Nick is sticking with it.

Nick Train
I think about a business like Diageo, I think there’s a famous Warren Buffett proposition: if you could only invest in one company with all of your savings and you were not allowed either to look at the price for the next 20 years and definitely not sell it for the next 20 years, what business would you choose to invest your own savings in? And for me, owning shares in a business that owns Johnnie Walker or Guinness or my wife’s favourite Tanqueray, you are highly likely to wake up in 20 years’ time and find that Johnnie Walker Blue and Don Julio Tequila and Baileys Irish Cream are still potent, profitable brands which will have grown. I might pay some attention to the price/earnings ratio of Diageo today or relative to its recent history. But really, really, I would say the most important thing is committing capital to a business that’s got that sort of durability and future potential.

Claer Barrett
Now, you and I, we’re going to talk shop for the first half of the show, but then we’re going to get into more about how you honed your investment strategy and the advice that you give to young investors. But first, listeners, our usual disclaimer before we go any further. Your capital is at risk when you invest, and we will be discussing the merits or otherwise of investing in particular stocks. But just to make it explicitly clear, you shouldn’t interpret this as an investment recommendation or individual financial advice.

High-end consumer brands have long been a core theme of Nick Train’s portfolio. As well as Diageo, he’s also a big shareholder in Fever Tree — the posh tonic maker, whose shares are down 4 per cent, year to date; upmarket British fashion brand Burberry — down 16 per cent, year to date; and Unilever, the company behind Marmite and Hellmann’s mayonnaise, down 7 per cent, year to date. I asked him why he had faith that these companies would bounce back.

Nick Train
Perhaps the single most useful piece of investment advice I’ve ever received, the only piece of investment advice that has never failed me over time, was given to me many, many, many years ago by my then boss. And the advice was, Nick, if you find a company that makes products that taste good, then you ought to consider that seriously as an investment, because the likelihood is good-tasting products are going to have reliable customers and probably taste don’t change that much over generations. Actually, I think there are some tests to that proposition in the third decade of the 21st century, with people’s dietary habits may be changing.

Claer Barrett
And the cost of living crisis?

Nick Train
Maybe. Maybe as well, to an extent.

Claer Barrett
Trading down?

Nick Train
Maybe to an extent. But we have an inherited investment in our portfolio in Mondelez, which is the owner of Cadbury. When it was taken over, we didn’t sell. We retained the equity because Cadbury had been a wonderful investment over the previous, I don’t know, 50 years or something. And under the ownership of Mondelez, it carried on, generating very strong growing cash returns. And there’s something about being invested in Guinness or Cadbury or I mean, maybe even within a business like Unilever, Hellmann’s.

Claer Barrett
Hellmann’s mayonnaise.

Nick Train
So, yes, we’ve not populated the entire portfolio with heritage food or beverage brands. But as part of the fact that we’re looking to capture, which is to invest in something with predictability as well as some growth opportunity, that’s been a fertile source of ideas for us.

Claer Barrett
OK. Let’s talk about some of the other themes within your portfolio, because we’ve mentioned Big Tech companies in America, but actually you would argue there are a lot of very digitally interesting businesses in Britain and many of them are held in your portfolio.

Nick Train
Contrary to common perception, there are in fact a number of globally significant companies listed on the London Stock Exchange that, in their own way, are as valuable as some of their peers listed elsewhere, elsewhere around the globe. And you know, I think it’s slightly ironic that one of those London-listed businesses that we think is absolutely comparable in terms of its data, its analytics, almost its technology services is actually the owner of the London Stock Exchange itself.

Claer Barrett
Right.

Nick Train
London Stock Exchange Group, which has, by a combination of acquisitions and organic growth, turned itself, I think, into the 13th-biggest company listed on its own exchange. Among other claims that could be made on it on its behalf, the world’s number one provider of real-time financial data. And I would just remind people that in December 2022, Microsoft, the mighty Microsoft, chose to very publicly enter into a joint venture with the London Stock Exchange Group. Now, Microsoft has taken that stake because of the global reach of the London Stock Exchange Group, which is providing services to pretty much every substantive financial institution on the planet.

Claer Barrett
Most investment commentators agree that UK shares look cheap. The problem is they could stay cheap for a long time. So could more foreign investors buying in be a catalyst for re-rating? Microsoft’s involvement has certainly made other investors sit up and take notice. LSC shares have soared 18 per cent this year. And Berkshire Hathaway, Warren Buffett’s investment vehicle, has also been building a stake in Diageo.

Nick Train
What I find of interest and of encouragement and again, I’m talking about my companies in the portfolios that I run is the site of more and more global and particularly US institutions becoming bigger and bigger shareholders in some of the what we believe are outstanding UK companies that we’re invested in.

Claer Barrett
Tell us a little bit more about what you think these US shareholders can bring to the boards of UK companies that they’re sitting on, the ways that you think they might convince management to behave in different ways?

Nick Train
Listen, you know, there’s a long list of usual suspects about why has the UK been so disappointing. I’m persuaded that a factor — maybe not the dominant factor, but a factor — has been the propensity of UK companies to pay high proportions of their earnings as dividends. That’s been an observable fact about the UK stock market for as long as I’ve been.

Claer Barrett
Banks, oil companies . . .transitory income.

Nick Train
And indeed, and maybe for businesses of that type, the payout ratios, the amount of dividends they pay, perhaps that’s justified. But I think it’s so glaring that there are businesses in the United States that have never paid a dividend, whose share prices have done extraordinarily well over the decades because they’ve taken the perspective that there is a substantive, multiyear growth opportunity open to these businesses. And why shouldn’t they invest every cent that they generate from internal sources into capturing the fullest extent of that growth opportunity? And you might argue that UK-listed companies have been persuaded to start paying dividends too early. It might in certain circumstances have been better for them to have retained more earnings within the company and captured even more growth. That’s the sort of perspective that an investor in a different geography the US might bring to bear to a UK company. Why are you paying out? We don’t need these dividends. We want growth. You’ve got a growth opportunity. Invest in it for goodness’ sake.

Claer Barrett
What else could change the world’s perception about backward Blighty?

Nick Train
I have to say I have been known to whinge to my colleagues about the frustrations of running money in the UK. And some of my younger colleagues have said, Nick, you’re completely wrong. Remember your Investment 101, what you learnt right at the outset of your career that actually as a long-term investor in any business you should actually want the companies that you’re investing in to be undervalued, particularly if you’ve got the opportunity to buy more and more of them steadily because you’re buying better and better value. A very high proportion of the companies that we’re invested in are buying back shares themselves. Diageo is doing so. The London Stock Exchange is doing so. Burberry is doing so. Actually, Mondelez continues to do so.

Claer Barrett
And the logic of that, for somebody who’s listening to this and thinking, well, that doesn’t make sense, is that while they’re cheap, the company can buy them back and cancel them. Then there are kind of fewer slices of the pie, and the value of the shares left in circulation should theoretically increase.

Nick Train
That’s put far more accurately than I could, but that’s exactly right. But working on this proposition, there is an undervaluation of UK equity. You would expect to see companies taking advantage of that.

Claer Barrett
Nick’s sights are still firmly focused on the UK, but six years ago he famously invested in a New York-listed company: Manchester United Football Club. Buying in at $17 per share, his investment is still in the black, just. But much like Man U’s performance on the pitch, it’s hardly been shooting the lights out.

Nick Train
The reason that we made the investment was that we observed that the value of unique, iconic sports franchises has been going up. You can see this around the world when sports franchises, not just football clubs, change hands. They’ve been changing hands at higher and higher prices. And that’s a phenomenon that stretches back many decades. And we knew when we made the investment in Manchester United that we were buying equity in you know. I’m not a supporter, but whatever you were buying something that was completely unique, that has truly a global following and our assumption was — to be candid, our assumption was the fact that the family had chosen to list some of the shares, as you remark on the New York Stock Exchange, meant that probably ultimately they were going to sell. Because why? If you’re going to hold 100 per cent of it, why put 25 per cent of it on the market? So that’s why we accumulated the stake, in the expectation that one day there would be a realisation.

Claer Barrett
Although Nick’s not a Man U fan, if you are, you’ll know that the British billionaire Sir Jim Ratcliffe is expected to buy a 25 per cent stake in the club from the Glazer family and 25 per cent of its New York-listed shares. Although no deal had been officially announced at the time of this recording.

Nick Train
I’m going to assume that we’re closer to some sort of an announcement or crystallisation of value, but who knows when or quite what shape it will take. If the rumours are correct and I have no basis for knowing if they are not. But if the rumours are correct that the asset is worth more than £5bn, that is going to be the highest price ever accorded to a sports franchise. If this sum was actually paid and, well, it would be wonderful if our investors end up seeing that value accorded to the shares that we own on their behalf.

Claer Barrett
You rarely buy new holdings, but you let slip in an interview with the Investor’s Chronicle last week that you have made a new investment recently. Can you tell us anymore about it?

Nick Train
No. No, I’m going to be coy. I’m going to be a tease. We’ve not bought enough yet. I can . . . I’ll say we are buying equity in a business. It’s a FTSE 100 company with extraordinary profitability, an extraordinary market share. We’re able to access the equity of this business with the share price down maybe 40 per cent from its peak. It’s a business that we followed for many, many years. And I think the point to make, though, is that there are several of those that we are considering. And I would say there are more companies on my reserve bench — I don’t like that terminology — but there are more on the reserve bench than there have been really for as long as I can remember.

Claer Barrett
You might share Nick’s view that the UK’s poor performance is an opportunity to buy in at a cheaper price. But his more pressing problem is the underperformance of his two UK funds. Over the past ten years, they’ve beaten the benchmark FTSE All-Share index. But over the past three years they haven’t. Anyone investing in a cheap fund tracking their index would have made a better return on their investment. And in the past year, a top-paying savings account could have done better.

Now as somebody who is what we would describe as an active manager, your investors are paying a fee for you to make these decisions in a way that if we were just investing in a tracker, took a bit of every business in the market, it would be cheaper. So people might feel that they’re paying more for your expertise, but certainly over the last few years they haven’t been rewarded by that outperformance. Tell us how you feel about that, because I know it’s something that really bothers you.

Nick Train
Well, it does bother me. And I do think that it matters. And I do think that passive tracker products are most appropriate for most investors. I’m still in this business because the long-term returns on the strategies, the products I’ve been responsible for both at Lindsell Train and in my previous place of performance, did generate returns in excess of the benchmark. That’s the reason I’m still doing it, because if they hadn’t, you know, you long ago get winnowed out by pure market forces. I guess the other reason that I’m motivated to do my very best to continue with those track records. But I’m also, you know, I’ve both been influenced by and inspired by some of the legendary great iconic investors in our industry. And it’s all of the standard names. You cannot read too much about Warren Buffett. You cannot read too much about Sir John Templeton. In my opinion, I still do. And looking back over the sweep of their careers, they were able, notwithstanding some periods of poorer performance, they were able to look back over a long sweep and say, I added value compared to the market. And the reason for my hesitation is I cannot give assurances and you wouldn’t believe anybody who did give assurances. But I was trying to find a way to explain what the motivation has been and in a sense, what the right has been earned from the long-term track record to carry on looking to invest money in a very distinctive way, taking risk. Doubtless we take risk, but trusting that the risk will be rewarded in excess returns. I will also say that it’s very important for me psychologically that I am also an investor in these strategies. That sense of sharing in the risk and the reward that we’re taking on behalf of other people’s precious savings. That’s important.

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Claer Barrett
Of course, Nick Train is not the only active manager. He’s having a tough time picking market-beating winners. Research by broker AJ Bell found that last year only 27 per cent of funds managed by professional stock pickers managed to outperform the nearest passive fund equivalent. To those specialising in UK stocks, the figure was even lower, with just 13 per cent beating the overall performance of the FTSE 100. Active managers charge investors higher fees. But this is no guarantee that they will beat the market. As you’ll know from one of our most popular episodes last year, The cheapest way to invest. It’s well worth a listen if you want to learn more about passive investing. To finish up, I asked Nick to pass on some lessons he’s learned to Money Clinic listeners, starting with this one.

Nick Train
When my parents retired, they bought a dilapidated cottage in the depths of the Shropshire countryside, and in order to fund that purchase, they sold the family home in south-west London. And I, in my youthful, know-it-all arrogance, said to my father, don’t you understand, Dad? You know, you’re selling this desirable London property and you’re buying this sort of wreck in the back end of beyond. Don’t you realise that that’s not a very smart thing to do financially? And he sort of said, Dear boy, don’t you understand? I don’t care about the money. I care about my quality of life, and your mother and I are going to be very, very happy in this remote part of Shropshire, which they absolutely were. And I just thought that was a really useful lesson about the point of money.

Claer Barrett
Well, indeed, the point of money and what it can buy you. Now, FLIC, the FT’s financial literacy and inclusion campaign, very much believes that money and finance should be on the school curriculum. If it was, what might you like to deliver a lesson on?

Nick Train
I’m sure a lot of people feel uncomfortable, remorseful maybe, about the number of sports betting and other betting advertisements that there are plastered everywhere on TV, particularly around sports events.

Claer Barrett
On shirts, in the ad breaks.

Nick Train
And I . . . I have to feel that clearly there isn’t a huge difference between making a smart investment and taking a punt. Actually, in the end, you are betting with uncertainty. In the end you are. I think you can be more certain about investing in Diageo than the number of corners in a football match. But I would just think it was so healthy and beneficial for everybody and for society if people felt more inclined to take a flutter on the stock market, than take a punt on the outcome of a football match. I don’t know how you’d fit that into the curriculum, but that would be my wish that people would leave school thinking, maybe I’m going to have a bit of fun in the stock market rather than this.

Claer Barrett
Well, Nick Train, it’s been an absolute pleasure having you in the FT studio today. Thank you very much for joining us on Money Clinic.

Nick Train
Has been actually my pleasure. I wasn’t sure it was going to be, but it has been my pleasure. Thank you for nursing me through it, Claer.

Claer Barrett
That’s it for Money Clinic with me, Claer Barrett, this week and we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of the future episode, then email us money@ft.com. You could also take a peek at our website, ft.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB.

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Money Clinic was produced in London by Philippa Goodrich and Mischa Frankl-Duval. Sound design is by Breen Turner, and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music. Cheryl Brumley is the FT’s global head of audio. And finally, to repeat that disclaimer, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.