Buckingham Gate Portfolio Review – December 2019

Lindsell Train UK Equity : The importance of liquidity

The demise of the Woodford Equity Income fund has shown just how important it is for a fund to be able to manage it’s outflows. For those who need reminding, the fund had suffered from a run of redemption’s over a period of time and was suspended in early June when it was unable to meet the request from Kent County Council to withdraw its investment of circa £250 million in the fund.

The reputational damage incurred has since led to the decision to remove Neil Woodford as manager of the fund in October and an announcement that the process of winding up the fund would begin in January 2020. This leaves the reputation of Neil Woodford, once considered as one of the most successful fund managers during his tenure with Invesco Perpetual, in tatters and seems very unlikely that he will ever recover from this and return to a position where he is trusted to manage other people’s money.

The fallout from the implosion of this fund has seen analysts much more focused on liquidity risk than ever before, and one of the casualties of this enhanced inspection has been the Lindsell Train UK Equity fund. Following our latest portfolio review in early November, Square Mile have taken the decision to downgrade the fund over liquidity concerns and it was removed from all of the Buckingham Gate portfolios on the 18th November 2019 and replaced with the Liontrust Special Situations fund.

The Lindell Train UK Equity fund has long been considered one of the most successful UK Equity funds, and under the management of Nick Train since it’s inception in July 2006, has generated a return of 377% compared to 119% from the FTSE All Share over the same period. However, performance over the last six months has been poor, and the fund has seen significant withdrawals over recent months with September seeing its largest ever monthly outflow of £374 million. While these withdrawals can be explained by a lack of appetite of investors for UK equity markets as a whole due to Brexit etc, the level of withdrawals and the structure of the Lindsell Train fund are causes of concern.

While there are a great deal of differences in the investment approaches adopted by Neil Woodford and Nick Train, there are similarities in that they both have the courage of their convictions in choosing the companies that they invest in. Nick Train’s investment process has been characterised by a low turnover approach and the ability to invest heavily in companies that he believes in. This highly concentrated portfolio approach has been one of the main reasons for his success, but also has the potential to be his downfall.

Square Mile’s analysts are very concerned that the large concentration of assets in the fund’s top 10 holdings could see the fund struggle to sell these at a cost effective price should significant outflows persist.

It is important to reiterate that Square Mile have no immediate concerns about the ongoing viability of the fund, and it has consistently met its performance objectives and redemption requests. However, the fall from grace of the Woodford Equity Income fund has made analysts very mindful of history repeating itself and are keen to look at other investment strategies that may work better in current market conditions.

There is absolutely no way of telling if this will be a good or bad decision for the portfolios in the future, but it is clear that Square Mile are very conscious of avoiding the trap that what has worked in the past will continue to work in the future.

If you have any questions on the above, please do not hesitate to get in touch with us by calling 020 3478 2160 or emailing portfolios@buckinghamgate.co.uk.

"The value of investments and the income from them may fall as well as rise. You may get back less than you originally invested"