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Weekend reading: Nick Train, the first-class fund manager

Weekend reading

Good reads from around the Web.

Even though I think most people are best off passive investing, I don’t think most fund managers are duplicitous, misleading, or stupid. (The industry they work in is another matter).

In fact, I have a few favourites who I try to learn from. Warren Buffett, obviously, but also in the UK the Buffett-like Nick Train, who runs The Linsell Train Investment Trust.

I’ve followed this trust for years without owning it, mainly because I missed my chance to buy when it went to a rare discount in the wake of the financial crisis. Train’s approach is different – he holds far fewer companies than most managers, he rarely trades, and he seeks Buffett-style consumer brands and moats.

He also charges a hefty fee for doing so, which is why I prefer to keep an eye for bargains among his holdings rather than pay him to hold them for me!

Nevertheless, in my view this manager is a class act – and that is underlined not by the sky-high premium over assets being applied to his trust, but by Train’s response to it in his latest update to investors:

The other development is the sharp rise in the Trust’s share price that has resulted in it trading at a 21% premium to NAV. The Trust traded at a premium of this magnitude in the past, at the end of 2001. Two years later the share price was at a 15% discount.

A shareholder who had bought shares in December 2001 suffered a whopping 28% quotational loss of value, whilst the NAV had fallen by just 10%  It took until June 2005, three and a half years later, for the investment to show a notional profit.

As a result we would advise investors to think carefully before buying shares at such a steep premium to NAV.

You might argue that Train can afford to be magnanimous when his trust is enjoying such acclaim from investors – even as rivals like the mighty RIT Capital languish on a discount.

But having read his updates for years, I take it at face value and applaud him for it – especially when he goes on to write:

It would be wrong also for existing investors to celebrate such a high price that results from a large premium. Remember that Manager’s annual and performance fees are calculated on the market capitalisation of the Trust not the NAV. Hence a high premium leads to the accrual of a larger performance fee which in turn depresses the NAV.

Having the fee calculated on the market capitalisation was designed to align the Manager’s interests with shareholders, recognising that most of the time investment trusts trade at discounts, but in the current circumstances this is not the case.

No doubt some shareholders will look to take advantage of this misalignment with the result that the price and the NAV should be brought back in line with each other in due course.

Mr Train is basically trying to talk down the share price of his own trust, and that will reduce his own income if he manages it!

Again, a cynic might say that’s easy if he knows his fans will ignore him. Some of them do think the trust’s hefty holding in the Lindsell Train business itself is worth the premium, but for his part Train refutes this.

Either way, the premium is still over 20% as I write, according to Trustnet.

That is certainly a ludicrous mark-up on most of the fund, which is invested in very liquid shares like Diageo and A.G. Barr

I’m not saying they’re not good companies – again, I like Train’s style – but the fact is you or I could go and buy these shares on Monday without paying a penny over the asking price.

So why pay £1.21 for every £1 of them?

But whatever happens to Train’s trust over the next couple of years, I hope his company goes from strength-to-strength. The financial services industry could do with more like him.

From the blogs

Making good use of the things that we find…

Passive investing

  • Indexes beat active funds again in S&P study – Rick Ferri
  • Set it and forget it – The Aleph blog
  • How ETFs are driving higher correlations [Academic paper]SSRN

Active investing

Other articles

Product of the week: The Battle Against Cancer Trust is a new fund-of-funds investment trust, where the various managers are all waiving their fees. Instead, 1% of NAV a year goes to medical charities. Here’s an info sheet, and the full prospectus. Read these Investor’s Chronicle and Money Observer write-ups, and why it’s got a four-star writing from BestInvest. Merryn Somerset-Webb in the FT likes it. You can invest in the IPO via Capita. The deadline is October 19th.

Mainstream media money

Highlights from the wall of noise…

Passive investing

  • A recap of Jack Bogle’s pitch for index funds – MarketWatch
  • A ludicrous new Nashville-focussed ETF – Index Universe
  • Swedroe: In defense of Modern Portfolio Theory – CBS

Active investing

  • Housebuilders outperform gold since 2008 [Graph]Business Insider
  • How to invest in the golf industry – FT
  • Swedroe: Hedge funds lag traditional assets – CBS
  • Yet more Swedroe: Volatility fund loses 97.5% of value – CBS

Other stuff worth reading

  • Don’t like your house? Swap with your parents – Reuters
  • Peston: Have regulators deepened the recession? – BBC
  • What do investment bankers actually do? – NPR
  • 5-year fixed rate mortgages dip below 3%, but watch fees – Guardian
  • Who really owns your digital assets? – FT
  • Democratic presidents have been better for equities – Economist
  • What your breath reveals about your health – WSJ

Book of the week: I was recommended The Most Important Thing by Monevator writer The Analyst but I’ve only just properly got into it – and so discovered he’s right, it’s a classic. Howard Mark’s unique insights come highly recommended by me, and by The Analyst!

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{ 8 comments… add one }
  • 1 OldPro October 13, 2012, 11:34 am

    There are a few good souls left in The City (TM) … if you like Nick Train you maybe should consider his other trust, FIGIT… here is the link to the latest information:


    The premium is only 3% there… “only”… But better than 21% in any circumstance!

  • 2 Greg October 13, 2012, 1:01 pm

    Don’t forget the truly enormous bid-ask spread for LTI… I doubt I’ll ever invest in it. If you want exposure to Nick Train then you could get FGT, (Finsbury Growth and Income) though it isn’t quite the same.

  • 3 Alex October 13, 2012, 4:31 pm

    One investment trust currently with an unprecedented discount: Jimmy Savile. A deluge of forced sellers…

  • 4 Miserly Investor October 13, 2012, 6:56 pm

    A refreshing quote from Train: he has clearly been influenced by the honest appraisal often seen from his idol Buffett. But I suspect for now investors should heed his words and shy away from buying whilst there is such a large premium.

    Thanks Monevator, very interesting. I’ll be browsing the other articles shortly!


  • 5 Graham October 13, 2012, 7:44 pm

    Thanks again for a bunch of interesting things to read.
    Re Nick Train, isn’t this an argument to buy one of the OEICs instead?

  • 6 The Investor October 15, 2012, 10:07 am

    @Graham — Indeed, if I remember correctly the investment trust actually has a holding in several of Train’s open-ended funds, so investors are again paying a premium on that holding to buy something they could access at cost (assuming no initial fee from a their fund broker etc). I think the Finsbury Trust is probably a good bet for cheaper Train, for those like myself who prefer ITs, as OldPro and Greg have pointed out.

    @Miserly Investor — Your welcome, glad you’re enjoying the roundups.

    @Alex — I was thinking more the BBC Trust…

  • 7 Alan October 18, 2012, 2:05 pm
  • 8 The Investor October 18, 2012, 3:29 pm

    @Alan — Wow, thanks for that. Shame it’s not a real clickable link but still nice to be noticed. 🙂

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