Nick Train: when doing less earns more

by Jonathan Davis

This is a fuller version of an interview which first appeared in the Spectator in its October 3rd 2015 issue

When you put your money into an actively managed investment fund, it’s as well to remember that you are putting your faith in a human being you have probably never met. Have you ever stopped to think who you have chosen to be the steward of your savings? They come in all shapes and sizes, from brash and super-confident ‘masters of the universe’ (mostly in hedge-fund territory) to more diligent, understated portfolio technicians who probably drive Skodas and come blinking into the limelight only under duress.

Interview

Few investment managers, it’s safe to say, are quite as backward in coming forward as Nick Train of Lindsell Train. His track record is exceptional, but largely under the radar. One of his UK funds has beaten the market 13 years out of 15; the other nine years out of ten. The investment trust he runs with Michael Lindsell has done so well that its shares trade at a huge premium to asset value.

Yet it’s a struggle to get Train to take credit for this impressive result. His view, doggedly developed over more than 25 years, is that investment managers don’t need to be high-powered to be a success. ‘The truth is that I’m basically innumerate. Both Mike and I are strong proponents of the view that there is no single correct way to be successful in capital markets. There a multiplicity of approaches and each and every one of them offers the prospect of success. The most likely requirement of success is finding the investment approach that is most emotionally satisfying for you.’

The approach that he and Lindsell find works best for them is the ‘slow buy and hold’ perspective of Warren Buffett, a biography of whom he read at a formative stage in his early career — his curiosity piqued by the fact that the author, no relation, also carried the surname Train (the book was John Train’s The Money Masters, published in 1980). Investigation of the ideas of other famous investors such as Peter Lynch and George Soros reinforced his conviction that the Buffett way is the only one he personally has the temperament to make work.

‘There’s a sense that there’s this coven of market wizards who are operating at some extraordinary abstract level of intellectual power, and that’s why lesser mortals like private investors ought to entrust their money to these gifted people. But actually, what Lynch and Buffett have demonstrated is that sometimes simple, even obvious ideas can be more than enough to beat the market.’

The Buffett approach revolves around the idea that there are only a handful of great quoted businesses that are capable of sustaining high returns on capital for more than a few years. The investor’s challenge is to buy their shares at those occasional moments when, typically for some transient reason, they are trading at reasonable prices. Once bought, you hold them, presumptively, more or less for ever. If you bought them at a good price, why would you ever swap them for something which does not have the same permanent competitive advantage?

Nothing could be simpler as a concept. But putting it into practice requires discipline and patience of a kind that few find easy. Train has probably taken the ideas more to heart than any other UK investment professional. The week I spoke to him he sheepishly admitted that he had just started to build a new position in a company for the first time since 2011. To go for four years without making a new investment takes the Buffett mantra of ‘masterly inactivity’ to a new extreme.

The last shares he bought were in the Dutch brewing giant Heineken, after they had tumbled by nearly 50 per cent in the wake of the first Greek crisis. ‘When the sun shines, Heineken sells a lot of beer in Greece and across southern Europe, so the price got hit quite badly. The crisis was what triggered the opportunity. In the UK stock market, there isn’t a truly global lager brand to invest in. It was the global nature of the Heineken brand, the Coke of beer, which made it more attractive to us.’

Big global brands in the consumer business are one of three types of company which Train says he is happy to invest in, reinforcing an adage of Vivian Bazalgette, who was a colleague in his former life at M&G: ‘If it tastes good, buy the shares.’ Other examples include Pepsi, primarily for its snack business, not its cola; Unilever for ice cream, soap and shampoo; and Diageo for spirits.

A second group of companies reflects the idea that ‘the world will never be bored of being informed or entertained. So, if we can find companies that own or create wisdom and entertainment that others covet, that strikes us as being a sensible place to allocate capital.’ Cases in point: Pearson, Disney, Daily Mail & General Trust and Euromoney Institutional Investor.

The third leg consists of what Train calls ‘proxies for the success of capitalism’: the likes of the London Stock Exchange, broker Hargreaves Lansdown and the asset management business Schroders. ‘By holding those companies for the proverbial long run, even though it’s unpredictable, we’re locking into the propensity for stock markets to go up over time, and that seems to us to be an appealing thing.’

This last group, says Train, reflects his conviction that as a professional investor it pays to be an optimist. Is he worried about the market’s recent anxieties over China? ‘No. I hear from some companies that there are temporary issues, but frankly I don’t think it’s helpful to think about that sort of thing. What matters to us is, will the Chinese lose their thirst for Johnnie Walker Blue Label or their appreciation of Burberry chic over the next 50 years? I don’t suppose that’s going to change. That could be a faulty impression, but if it’s right, then what one would regard as temporary fluctuations in an economy shouldn’t have much effect on the investment proposition.’

What about Next, probably the UK’s best high-street operator? Train apologises for not owning it. ‘The truthful answer is that I have not been successful over the years in identifying successful retail franchises. Even if it’s irrational, I think acknowledging one’s weaknesses is helpful, and not straying into areas where you have not demonstrated the ability to pick winners in the past. But you’re absolutely right, one looks at Next and thinks, what an error of omission that is… But there we are.’

And as for Apple and its ilk, he demurs again. ‘We’re envious of the people who make fortunes investing in tech. It’s just that we know we don’t have the critical ability to distinguish what’s going to last and what’s not, and nor I suspect would we have the guts required to invest in semi-speculative, untested technology assets. I’ve nothing but admiration for people who do it. I believe society benefits enormously from people’s willingness to speculate on untested technology. In fact, I think it’s virtually the purpose of the stock market to test new ideas. It’s just that we know it’s not an area where we’ve got much value to add. So we’d rather stick with Thomas Burberry’s invention of gabardine 130 years ago.’

Does he have any thoughts on the summer weakness in shares? Train pauses to reflect, as he does on every question I ask. ‘No. I have nothing useful to say about that.’ Worrying about the big macro issues is, in his view, a waste of time. The remarkable thing about Train and Lindsell is that they genuinely have no side. Their formula might bore you to death if you tried it, but the one thing you can’t say is that it doesn’t work.

This is a fuller version of an interview which first appeared in the Spectator in its October 3rd 2015 issue.

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Nick Train

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Lindsell Train

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