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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.
@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!
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!
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!
@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. 😐
@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…
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.
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 😉
It’s a very welcome, illuminating and thoughtful 6,000 words @TI, and one hopes that someone from the UK investment trust industry, maybe even LTI itself, subscribes and reads it because the problems faced at LTI and LTL are widespread amongst UK trusts.
IMO, UK ITs face an existential passive indexing challenge across two vectors of risk.
The first is performance led. They’ve lagged indexers for a while now, and by a lot.
This may reverse, but then again it might not.
If you take Mike Green’s ideas about the inelasticity of markets seriously (some do), then active managers (as a group) may be destined in the long run to underperform indexers. If this turns out to be so then there’s not much that ITs can do on that front. The only option realistically is to stick to their investment style and hope that’s not the case. Adopting closet indexing is going to be found out, so imitation of passive won’t work.
The second risk vector is around the perceived ‘weaknesses’ of format of closed end active funds as compared to passive index tracking ETFs.
IMO this is question of misperception, but ITs do still need to do more quickly:
– to lower their costs/fees;
– to enhance their liquidity;
– to reduce their discounts;
– to increase engagement through AGMs, voting rights and more direct access to fund managers; and,
– to improve their transparency and marketing to attract more investors by promoting their unique benefits, like access to illiquid assets, long-term investment flexibility, and gearing for potential outperformance.
Only today, the Telegraph reports that Herald Investment Trust – a big success story over 30 years – may be on the verge of disappearing. Action is needed, and it has to come from and be led by the trusts themselves.
Thanks – I was waiting for this.
I probably said this in another post, but I’ve been holding LTI for about 12 years now, so it’s been quite the ride, and I think I’ve got to know it quite well.
I think, TI, you’ve put the case very well. It’s obviously been a frustrating few years as a holder (though that 6% divi has mitigated things), but my feeling is that each year that it doesn’t recover makes it more likely that it will recover the following year (though of course this is not guaranteed).
I think Lindsell & Train have a strong fiduciary duty to their clients and shareholders, which reassures me.
As TI says, this is a geared recovery play in the LTL stake, BUT now that it is a slightly more reasonable 30% holding rather than 50%, there are other ways to win.
I take heart that some of their, let us not forget – all high quality, holdings are now cheap, instead of usually being expensive. I do not believe the majority will be disrupted (I think the decline in Novo Nordisk/Eli Lilly ‘may’ be a precursor for the revival of food & beverage stocks).
Perhaps more importantly, I hope everyone noticed that Nick Train in the last year has been increasing exposure to their more ‘digital’ companies, which are extremely impressive, but are just not as fashionable names. But look at the long-term share price of the London Stock Exchange. It’s a NASDAQ beater.
I take the point that AUM may not have bottomed yet, but let’s be honest – it’s impossible to time this. Given the small liquidity, if it recovers, I imagine it will be rapid. So it doesn’t seem a bad time to just pick up shares at the moment, as it’s hard to pick up many at a time.
Finally, I think one should remember sentiment, and how things can change. Think back three years ago. I felt pretty stupid not owning any of the Baillie Gifford Trusts. Their performance was crazy. It was hard to imagine that they would correct as they have. So I think while it’s hard to believe at present that LTI will come back up (even if the discount halves it would make a difference), unexpected things can happen.
Was interesting to listen to yesterdays Merryn Talks Money where Boaz Weinstein from Saba capital was being interviewed on his plans to take over the board of 7 (currently) investment trusts, to what sounded to me to be for exactly the same issue that you highlight TI, that these boards are unwilling to buy back their own shares, he says because they are greedy and want to keep their AUM as high as possible
From a quick google, I see that there is a lot of pushback, Ros Altman for example stating that US hedge funds should not be allowed to opportunistically purchase British funds on the cheap…
But if the boards of these trusts are willing to allow the discount to widen to such an extent, and there is a fairly clear path out by buying their own shares, why should they be protected?
CQS Natural Resources Growth and Income PLC, in whom Saba have a 29% position, just wrote out to shareholders urging them to vote against Saba’s proposal to dismiss all the current directors and replace them with 2 Saba nominees. I voted against via the fund platform “Shareholder meetings” tab. I worry that new directors would lack experience running a specialist IT and the current board have achieved a respectable 220% share price growth over the period since the appointment of the current fund managers in October 2015.
https://www.theaic.co.uk/aic/news/industry-news/fight-back-against-saba-let-us-show-you-how
The Association of Investment Companies is also getting involved, Saba are clearly ruffling a few feathers
@Delta Hedge: that seems like a fair point, but i think their offer of providing you with at exit at 99p to the £ on NAV seems quite attractive if there is a significant discount on the particular IT. I also note that the ITs that they have invested in have had their discounts narrow in the last year – so the strategy seems to be working?
@Tom @DH @Flotron @all — Thanks for the thoughts. Had a nice bit of a movement in LTI this week. It touched 830p in-trade today and FGT is also on the move.
I have some sympathy with smaller trusts such as LTI when it comes to buybacks — even though I made the case for them and think they should do them — because it can drive up costs for remaining shareholders pretty steeply. Of course few trusts have historically been speedy to cut costs when NAVs soar so…
With LTI specifically though, the share is so illiquid that I doubt it would actually take a lot of buying to close the discount to something in the 10-15% range. Many times you’ll see the price gap down 2-3% just on a sale of half a dozen shares!
It’d be lovely if the rally at FGT continues, as this is a good proxy for LT funds generally and would imply we could finally see some AUM inflows and even valuation write-ups for LTL.
But a long way to go for that. I’d settle for the precipitous decline having stabilised for now! 😉
Disclosure: Still very long indeed, have trimmed a very very few given that I’d been averaging down near £7 to a grossly overweight position.
p.s. As always I should remind Moguls that I cannot provide updates on when I buy/sell anything, it’s completely impractical and anyway shouldn’t have any bearing on your own investment decisions. I make mistakes often etc — timing mistakes not the least! (Guess who sold half his Pernod Ricard position the day before the luxury bounce this week? 🙁 )
@TI: re: “very long indeed”: obviously I’m invested in LTI (and was pre-article), but not at scale, and I agree with all the premises in your (as always) very excellent article; but, if I may ask, is there any reason over and above the article for so extensively overweighting vis a vie (any and all) of your other 30-50 different positions?
@flotron: lots in Money Week on Saba this past week, e.g.:
https://moneyweek.com/investments/investment-trusts/saba-investments-taking-advantage-of-uk-investment-trusts
@DH — At sub-730p I really thought it was a no-brainer, and in fact I wonder if my purchases helped stop it going any lower haha.
It’s already less attractive than that, but I still consider it a very good triple-discount play (cheaper UK stocks in funds managed by a hopefully near bottom of the cycle rated fund manager owned by a closed-end fund trading at 20%-off).
When I say ‘very long indeed’ I mean by the standards of my hyper-diversified portfolio. But at the max it would have been a chunky percentage for most portfolios, albeit it’s a pretty diversified holding itself so that definitely takes the edge off for me.
But again I URGE readers not to attach ANY particular notice to anything I say about timing or sizing (even more than the standard disclaimer that none of Moguls is personal investing advice, even security selection).
I put the “active” in active investor. Once or twice in the past I’ve liquidated 25-50% of a then decent-sized six-figure portfolio in an afternoon then gone for a stroll.
It’s unlikely but not impossible that I could have sold 80% of my LTI shares by the end of next week, and I triple-underline that these missives are not some kind of record of my trading activities or any sort of guidance.
Don’t do this at home — but even more so don’t do it because I did! 🙂
@TI Yes, I felt buybacks were tricky here because of the small size & the big holding of LTL.
However, I don’t know what others think about this, but could you argue there has been an ‘informal buyback’ by Mike Lindsell who has been buying chunks of shares fairly regularly for the past year. I don’t know if Nick Train is also, as doesn’t appear until results come out.
Longer holders will remember commentary saying they liked to buy shares at Par as it meant they increased their stake in LTL, but it had been at a Premium for so long, this looked like a fantasy…!
Other point to mention is 3 new holdings which are not what I’d call ‘traditional’ Lindsell companies i.e. Clarkson, Intertek for the UK, and Thermo Fisher for Global. Either it’s style drift, or they’re reacting to their problems. Maybe this is input from the younger members? I’m not so familiar with Clarkson though it’s an Asset-Light business liked by Horizon Kinetics, but the other two are pretty classic quality stocks & TMO has been drifting for a while as per the sector in the post-COVID de-stocking. Management are pretty good, so can imagine this recovering in the next year or two & doing well. Anyway, something to ponder. On balance, I think it’s good that they’re trying new things while not doing a total right-turn.
LTI went up to £890 today. There’s life in the old boy yet. Up and to the right on the charts. That’s what I like to see.
Longer term hold this one. Train can be relied upon, good faith minor missteps aside (which we all make, after all), not to style flip (Woodford from blue chip divi payers to profitless nano caps) or style drift (Smith going from holding the likes of Imperial Brands to holding MSFT, Meta etc). Nothing worse than not getting what it says on the tin.
BTW I’ve seen Thermo Fisher (re Tom Grlla #18) coming up multi times in US based value + quality investing Substacks (IIRC Old Dominion Freight Line’s another one seemingly on everyone’s list in that space). Not sure if that’s a good or a bad sign.