Amateur activist [Members]

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• 

  Mogul

  1 Delta Hedge December 30, 2024, 10:39 pm

  Thanks for another excellent deep dive @TI.

  Further to @Tm Grlla’s and my own previous comments on LTI and LTL (@ #17-29 in Sept in “Back to Ack” and @ #19-21 in May in “What cheap investment trust should I buy next”), I’m intrigued that you’ve upped your LTI stake from the circa 1% which you’d mentioned before. I’m holding 8 shares for a 1% ISA allocation upon the basis – basically – of (IMHO) a material implied undervaluation (in the LTI discount) by the market of LTL.

  What holds me back (but evidently not you) from re-upping on LTI (aside from having to sell something else in the ISA to fund it, and from my being constitutionally disinclined towards large position sizes for active bets) are:

  1. What/when is the catalyst for LTI, realistically?

  2. Could LTL be secularly screwed rather than just cyclically challenged (i e. should passive and tech ‘eat the world’, then, post Brexit, is a UK fund manager using a UK orientated quality tilt value style going to be in a permanently bad place)?

  For me LTI is *an* opportunity, but my conviction in it is fairly low to middling, at least compared to something like, say, PLTR, which has 10 bagged since 2022 and could, I think, quite plausibly do so again over 5-10 years (given it’s bleeding edge AI software (Forge, Gotham, Apollo and AIP), which may make it a prospective quasi monopoly (one with up to 80% gross margins) operating in what could well turn out to be a wide and deep blue ocean of opportunity).

  Much as I’d like my 8 LTI shares to do well, I just can’t see any value unlock on LTL and/or market rerating of the consumer staples brands so favoured by the likes of Train and Smith ‘lifting the weights’ for LTI (or Finsbury) to compete with that in terms of risk to reward. In a Peter Lynch ‘offense’ (growth engine) to ‘defense’ (quality value bedrock) split / share bucket approach, LTI seems more of the latter to me.
• 2 The Investor December 31, 2024, 4:31 pm

  @Delta Hedge — Thanks as always for the prompt and generous feedback and your thoughts. 🙂

  Re: Your two risks, yes I agree, as you’ll note I’ve included both of them in the article, along with others. There is definitely and always a risk that ‘things have changed’. Personally I think the rise of passive investing is a bigger risk than that quality companies will never again trade at premiums or at the least continue to produce 10%+pa compounded returns for decades to come but we’ll see.

  I specifically talked about AI etc in this non-AI article to try to draw this contrast. At the moment the market seems to either believe:

  — something very structural has shifted
  — or it’s correctly identified a secular trend / important technology but for far from the first time it’s got over-enthusiastic about its potential and is crowding out other attractive companies.

  It could be the former (railroads never reverted to the mean) but given the evident euphoria I think it’s likely to be at least a bit of the latter.

  US markets now comprise nearly 70% of the global market cap and closing in on 40% of the S&P 500 is itself in the ten largest companies, as per the graph above.

  Either everything has changed or this can’t continue forever. An obvious dichotomy perhaps, but no less real for that.

  As for Palantir, I think comparing a sky-high rated US AI darling that has gone parabolic in the past few months with a well-diversified out of favour collective investment vehicle holding a down-on-its-luck unlisted fund manager and trading on the still-disdained UK bourse will only get us so far. 🙂

  I am not against investing in growth, nor high ratings, but history is clear that in the past baskets of such stocks have done poorly, especially at frothy times.

  These are frothy times in the US. I prefer to play probabilities. 😉

  With that said, while LTI is currently my largest position (in part for the c.70% of quality stocks it is diversified into itself, so it’s not just an LTL play) I have a bunch of other things, including a moderate double-digit allocation to the US, of which the majority is in tech/growth.

  That’s the lowest in tech for many years, but I’m not out of it entirely. One doesn’t have to either/or most of these things.

  Typically I have 30-50 different positions at any one time (albeit traded around, as discussed in the piece) so again I wouldn’t get wedded to pitting any particular thing I write about against one’s favourite stock.

  When I made my investment I didn’t have ‘your’ stock in mind, after all, and my entire portfolio skew will be different to yours etc. Hence my long piece linked to in the ‘disclaimer’ box discussing how one should almost never make flat comparisons between your own portfolio and one you half-glimpse online or in the pub. 😉

  Happy new year to you and all Moguls!
• 

  Mogul

  3 Owl December 31, 2024, 9:23 pm

  Thanks again @The Investor. It was your writings of a more ‘Moguls’ kind that got me into Monevator ten or more years ago. At which time I recall you writing about investment trusts on discounts — It would be interesting if you would share some old stories of investment successes and failures from the last time so many investment trusts were so discounted.

  Are private investors in Lindsell Train’s trusts and funds aging and dying off without being replaced by younger investors? — making it a declining business not worth even its value with the discount of LTI? If the funds and trusts start performing well again, I suppose that would attract more investors back.

  (I’m not an investor in it, but still) it is frustrating, given the big discount, that LTI doesn’t sell say 10% of each holding, including of Lindsell Train Limited so as not to unbalance the portfolio. Michael Lindsell, Nick Train or other top people in the company could buy, or Lindsell Train Limited itself could buy back with some of its cash. Not eating itself on such a discount is like not picking up a £20 note you see on the street!
• 

  Mogul

  4 Carolus December 31, 2024, 9:27 pm

  Thanks @TI, interesting as always.

  I bought a small amount of LTI in February @£840, and since then have been considering whether to pick up some more.

  One thing I notice from the half-year report is that they seem resigned to LTL AUM falling further:
  “In the meantime we are realistic in recognising that LTL’s FUM will in all probability continue to wane in the shorter term, which will impact LTL’s valuation and by extension the Company’s NAV”

  I can’t help but think this, combined with the extract you’ve posted about buybacks, suggests that they don’t really believe the value currently attributed to LTL in the NAV.

  @DH agreed re: catalyst. A serious turn-around in fund performance and then AUM seems like the sort of thing that could take years, and in the mean time just keep grinding lower. At £150m the trust is small enough that in isolation you’d think an activist could readily get involved (or a takeover attempt?) but I suspect the setup here makes that less likely.

  Happy new year to all!
• 5 The Investor January 1, 2025, 4:02 pm

  @Owl — Thanks for the thoughts. I’ll have a think about the backwards dive, but to be honest I’m mostly about looking forward and the archival data mining @TA happily spends hours doing isn’t really my jam. You’re right there were some good bargains around in 2008/9/10, though with the benefit of hindsight you probably would have done better in a global tracker, such has been the all-conquering returns from the US mega cap tech sector.

  Data mining is also hard because sometimes the data has gone.

  E.g. this was a nice winner for me…

  https://monevator.com/how-i-bought-the-mortgages-the-banks-dont-want-via-prodesse-prd/

  …but the value was outed via acquisition and I don’t have industrial strength historical market data to analyse.

  More broadly, trusts just sit on discounts and they re-rate, or at least this has long happened and will happen again. Looking for catalysts et cetera is natural but probably an over-complication. (It’s easier to see something is cheap then to predict when and why it won’t be cheap again).

  We’ve already seen a bit of re-rating going on.

  Unfortunately I wrote about Augmentum (ticker: AUGM) on Moguls instead of Chrysalis (CHRY) which is up something like 70% for me in 18 months or so.

  Two of the big US-exposed Baillie Gifford trusts have also moved from huge discounts to around par (USA and EWI) in just the past 12-18 months. (Alas I missed out on the last spurt in those rallies, which has come post-Trump’s election and the general (extreme?) enthusiasm for US stocks.

  So I don’t believe that trusts are broken per se. Though I do agree the sector faces its biggest challenge since the split-cap scandal of the early 2000s.

  Agree re: the discount of course, though even for rich people like Lindsell and Train it’s a lot to ask them to do the buybacks under their own steam.

  But yes, ultimately leaving trusts on 20-25% discounts for many months on end is terrible for investor confidence. 😐
• 6 The Investor January 1, 2025, 4:06 pm

  @Carolus — Yes, the structural decline in enthusiasm for active investing is I think the biggest secular risk here.

  That said, any sort of sustained pause/reversal in the US large cap hegemony could make an awful lot of active funds look attractive and see them outperform for a while, given how vastly differently they’re invested to today’s global tracker allocation of nearly-70% in US stocks where very nearly 40% is in the top 10 positions…
• 

  Mogul

  7 Delta Hedge January 1, 2025, 9:29 pm

  Forgotten about that astute call on PRD @TI.

  Dec 08 was a fearsome time. 2022 doesn’t compare. It felt like it might become a 1929-32 scenario, with talk from even sensible commentators of the S&P going to 400, rather than the ~700 nadir which we know now was its floor.

  Making a call to take on anything MBS related in eye of the storm in 2008/9 took guts and conviction.

  Polygon (24% holder in PRD) featured in Wexboy’s 2013 buy call on Tetragon. But, having IPO’d in 2007 at $10 & crashed to $1 (on a 90%+ discount to NAV) in 2009, Tetragon was already back to nearly $15 by 2013 – so the juiciest returns were in the rear view:

  https://www.itinvestor.co.uk/2019/02/the-tale-of-tetragon-and-the-dastardly-discount/

  https://wexboy.wordpress.com/2013/01/18/wheres-the-credit-opportunity-in-2013/

  https://wexboy.wordpress.com/2013/01/22/tetragon-ready-to-be-a-star/

  For sure LTL is no Tetragon, Prodesse or Polygon.

  But whilst it doesn’t sport a discount to NAV like Tetragon in the teeth of the GFC, a TTM PE for LTL of 3-4 seems too low to me, even for a shrinking ice cube of a business (i.e. AUM down £9.1 bn, or 40%, Jan 2020 to Sep 2024).

  The risk is perhaps there’s no turnaround in performance & outflows accelerate. Costs can be trimmed to a point but, ultimately, profits will likely follow the path of AUM.

  Even then though, that still leaves the rest of LTI, with its many other (hopefully high quality) holdings.

  So, even in the worst case for LTL, it should not spell doom for LTI.
• 8 The Investor January 2, 2025, 10:11 am

  RE: LTI and LTL, all Lindsell Train’s portfolios are very much the sort I like to have some kind of exposure to generally, although I was very light as a result of valuation by 2021. E.g. no Unilever, no Diageo and others by then.

  This wasn’t a masterstroke because — as I’ve detailed before — I had other stuff that took me down anyway in 2022 (disruptive tech I’m looking at you.) But equally I’ve made worse decisions. 😉

  Now valuations have somewhat reset, I can:

  — buy and own quality directly (e.g. I have nibbled at the quality drinks makers, mostly to my detriment so far)
  — buy via a proxy such as FGT or (arguably) Fundsmith (very unlikely for me as its non-listed, though I do dabble with small cap Smithson (SSON) now and then)
  — buy via LTI and also get large exposure to LTL, for a geared play on some sort of cyclical/secular recovery in ‘non-AI related quality compounders’, which historically would be a good bet but which might be permanently impaired to some degree now due to passive/AI/GLP-1/whatnot.

  I’ve chosen option (3) here with *some of* my portfolio on the grounds that the rewards could be very high (thanks to the discount and the geared effect on LTL’s valuation) if things aren’t different, but the downside is with luck mostly protected by that same discount (and the implications for LTL’s implied valuation), the cash pile at LTL, and the moderate valuation versus history/peers of quality companies at the moment.

  Put that way not sure why I waffled through the 6,000 words in my article above, but hopefully it was a nice relaxing read with a coffee to recap last year and start the new one 😉