Nick Train, who co-founded asset manager Lindsell Train with Michael Lindsell, is one of the UK’s most-followed fund managers. His insights in commentaries for the Finsbury Growth & Income (FGT) and Lindsell Train (LTI) investment trusts are pored over by fellow stock pickers and media alike.

Train and Lindsell remain actively involved in fund management and running their company until at least 2029 and reassuringly, there is a clear path regarding succession planning.

One of the company’s rising stars is James Bullock, who has jointly managed global equity portfolios alongside Train and Lindsell since 2015 and manages the LF Lindsell Train North American Equity Fund (BJVLMG4) which launched in May 2020.

Bullock is co-portfolio manager of the Lindsell Train Global Equity Fund (B3NS4D2), which as of 30 April 2023 had generated annualised total returns of 13.9% since its March 2011 launch. That’s ahead of the 11.1% delivered by the benchmark MSCI World index over the same period.

Adorned with a four-star Morningstar rating, the portfolio is managed with the same investment approach as Lindsell Train’s other highly concentrated, low turnover collectives – a focus on investing in ‘exceptional’ companies for the long term.

Lindsell Train’s managers are convinced that inefficiencies exist in the valuation of exceptional businesses and that durable, cash-generative franchises are not only rare but undervalued by other investors most of the time.

DURABLE COMPETITIVE ADVANTAGES

Lindsell Train’s main research focus is on companies with durable competitive advantages that can achieve sustainably high returns on capital. When they find an exceptional business, they want to hold it for the long term.

Characteristics the team at Lindsell Train look for in investee companies include heritage, predictable earnings (through pricing power and/or intellectual property), low capital intensity and sustainably high returns on capital, a process which leads them to industries including consumer branded goods, media, software, financials and pharmaceuticals.

When quizzed on what makes a company exceptional, Bullock goes back to basics. The first consideration is that it can survive and will ‘still be around many years, if not decades from now.’ He says this is a ‘surprisingly tricky hurdle’ for companies to overcome, and that most companies don’t survive.

‘If we can look back at a business to see that it has already been around forever, decades, perhaps even centuries, that’s a pretty good starting point,’ he explains.

Bullock and his colleagues look for companies that can compound their internal rates of return so returns on capital and equity are hopefully much higher than the average business. ‘We want them to do that defensibly and durably because of the moat that is protecting their business model.’

Names that pass muster and populate the top 10 holdings of the global equity fund portfolio include Marmite-to-Magnum ice cream maker Unilever (ULVR), Japanese gaming giant Nintendo (7974:TYO), Italian luxury fashion house Prada (1913:HKG) and London Stock Exchange (LSGE).

UNBREACHABLE MOATS

The presence of a moat – a sustainable, defensible barrier to entry that means a company can keep pricing ahead of inflation and protect higher than average rates of return – combined with the ability to survive for the long term sets up ‘a really nice value creating compounding machine’, according to Bullock. ‘Ultimately that’s what you want in a stock.’

The Lindsell Train stock picker notes that the average age of the businesses in the global fund is ‘120-something years old, and that encompasses a couple of younger ones and a few very old businesses. Some, like London Stock Exchange, are centuries old.’

The moat is ‘key to everything really’, says Bullock. ‘In our experience, there’s very few places where we really find long-term defensible moats. In short, it is consumer franchises where you’ve got strong heritage-rich brands in good categories, media franchises that own intellectual property that can’t be copied, and in networked marketplace-style businesses.’

Companies deemed by the manager to have wide moats in the consumer franchises space include drinks groups Heineken (HEIA:AMS) and Diageo (DGE), the latter owning franchises that are ‘so long lasting, heritage rich, you couldn’t possibly recreate them from scratch’, such as the Johnnie Walker brand, which boasts ‘hundreds of years of heritage and global recognition’.

Bullock is not the only one who sees an opportunity to make money from investing in Diageo. Famous US investor Warren Buffett recently took a new position in the company via his Berkshire Hathaway (BRK.B:NYSE) investment vehicle.

‘It’s the biggest Scotch company and the biggest alcoholic drinks company in the world, but Diageo estimates it has only has a 5% market share of booze in general across the globe,’ says Bullock.

‘Peoples’ perceptions of large companies will continue to change; we now talk about trillion-dollar companies rather than just hundreds of billions. Most of the companies we look at are global companies and there’s a lot of world out there.’

HAPPY SNACKING

Lindsell Train Global Equity Fund offers investors exposure to snacking giant Mondelez International (MDLZ:NASDAQ), whose iconic portfolio of brands includes Oreo, Cadbury Dairy Milk and Ritz crackers.

Bullock says snacking is a great category, calling it ‘very brand loyal, impulse purchase, relatively price insensitive’. He adds: ‘If it is your one treat or your one piece of irrational exuberance in the day, you want to get your money’s worth, so snacking tends to skew quite nicely to high quality brands.’

Media franchise stocks in the portfolio include Walt Disney (DIS:NYSE), whose intellectual property includes Star Wars and Marvel, and which has been owned since the fund’s inception. Lindsell Train Global Equity also has a longstanding position in content owner World Wrestling Entertainment (WWE:NYSE), a bona-fide entertainment jewel of strategic interest to multiple media players.

Lindsell Train Global Equity’s managers had been coming to terms with the potential loss of WWE from the fund after majority owner Vince McMahon returned to the company in January 2023 with the aim of leading a sale process. The fund may yet maintain its exposure to WWE, which has done a deal with Endeavor (EDR:NYSE) in which the latter will combine its UFC asset with WWE to create a separately listed combat entertainment powerhouse with the ticker ‘TKO’, a reference to the ‘technical knockout’ fighting term.

This transaction is set to go ahead in the second half of the year, which gives Lindsell Train a chance to ‘re-familiarise ourselves with UFC in greater detail, which had been of limited interest up until now, given that it was buried within Endeavor.’

On paper, Bullock believes TKO will have an attractive financial profile, strong tailwinds, and clear levers for value improvement. ‘Our main focus now is on the new management team as they prepare to take over the stewardship of the storied WWE franchise, and their longer-term aspirations for TKO, after an initial period of operational improvements and deleveraging.’

FOCUS ON WHAT YOU OWN

Given the emphasis on unique assets with durable competitive advantages, Bullock concedes it isn’t easy to find lots of new ideas. ‘We don’t really have to and in some ways, we don’t want to, as this can be a distraction,’ he says. ‘The companies you own are far more important than the ones you don’t. You’ve got to get the former right and I’d rather spend most of our time on those.’

He also points out that the more a fund turns over its portfolio, the less long term it is as an investor and the less compounding is going on. ‘We have a well-stocked universe outside of our portfolio, so if we did need another stock for some reason, something we owned was taken over, there’s a pretty strong bench waiting for inclusion.’

In fact, Lindsell Train Global Equity has only bought one new stock in the last four years and that was over a year ago, namely FICO (FICO:NYSE), an US financial data business focused on credit scoring services.

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