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Nick Train: Why ASOS overtaking M&S is a “wake-up call”

19 January 2018

The FE Alpha Manager explains what impact technology has had on markets and why he remains bullish on consumer brands.

By Rob Langston,

News editor, FE Trustnet

Nick Train has described the sight of ASOS’s market value surpassing that of Marks & Spencer’s as a “wake-up call” and has reinforced his view on why technology will continue to play a key role in share price performance going forward.

Train noted that although technological disruption has led to greater uncertainty for established businesses, it will also create great opportunities for those companies that get it right.

The FE Alpha Manager said technology is a key theme within the £4.9bn, five FE Crown-rated LF Lindsell Train UK Equity fund and represents around 40 per cent of the portfolio.

To highlight the disruptive power of tech, he gave the example of Marks & Spencer, noting the retailing giant’s share price was no higher at the end of the December than it had been in 1992.

“The sight of ASOS, founded in 2000, leapfrogging M&S’s market value – a business going back to 1884 – was a wake-up for me and a real sign of the times,” he said.

“It’s a sign that technology-driven change is relentless and that while new fortunes are being minted, old ones may atrophy and decline.”

The fund manager said such stories made him feel “a bit insecure” in 2017, adding that profit warnings from traditional companies became more frequent and companies were punished.

“Indeed, if those profit warnings were merely a result of a traditional cyclical slowdown you’d argue that the share price reactions were excessive,” he said.

“But there is a good case to argue that 2017 was the year when investors really got to grips with technology as a secular challenge to a multiplying number of businesses – even those with decades of past success.”

Train said changing trends wrought by technology have had a material impact on long-established companies and the dynamics in sectors.

Performance of WPP in 2017

 

Source: FE Analytics

Highlighting the 26 per cent fall in advertiser WPP last year, as shown, above, Train said that changing viewer habits have challenged traditional advertising models.

“This is not because the youth of Britain are watching less video entertainment than in 2010,” he explained. “The success of Netflix – shares up 55 per cent in 2017 – tells us entertainment is as sought out as ever.

“No, it’s that people are watching stuff differently and less often via advertising-funded TV. That’s a problem for WPP, or at least for its traditional line of business.”


 

As such, Train said digital disruption was relevant to all the holdings in the fund’s portfolio.

“So, what is an investor in UK equities of my vintage to do in these uncertain times?” he asked. “First, let me reiterate that now is an exciting and rewarding time to be seeking out well-positioned UK companies – probably as exciting and rewarding as at any time in financial history.

“There are uncertainties – yes, but the potential is thrilling for those that can get right either the technology or their access to new global markets, or preferably both.”

While Train said some holdings had been affected by the impact of digital disruption – such as brewer Greene King by online delivery – there were also opportunities.

“We want to find companies where new technology will turn out to be their friend – enhancing the existing franchise,” he said.

“Opportunities of this type make up over 40 per cent of portfolio value and, really, these ought to be the most rewarding in the coming years.”

However, while technology plays an important role within the portfolio, consumer brands make up the largest proportion, at 45 per cent.

He said the “prospects for great brands that are also great products… are better than ever”, noting that the internet will help brand owners build “deeper and more valuable relationships with their customers”.

Although some analysts argue that the share prices of the firms that own these brands have gone up too much, or the greater choice of products available has limited the potential upside, Train pointed out these arguments held true at the start of 2017.

Indeed, he noted that while last year there was an increase in interest rates and the price of some commodities – negative drivers for consumer brands – it didn’t stop shares in these companies from rising.

However, Train said he had a “deeply unsophisticated reason for still being bullish about great brands”.

“When I think about them I still get the feeling that if we own them for long enough, then good things will happen for our clients – dividends will ratchet up, every so often one of them will do a deal or be subject to a deal being done to them,” he explained. “And that still seems more than good enough for me.”


 

Finally, Train said he has been adding to his own holding in the fund more recently: “I do so, not because I expect our performance in 2018 to be as strong as in recent years – although why not?

“But rather because I see the portfolio as a collection of more or less unique companies with enduring worth and most with credible opportunities to grow that worth into the future, especially through this period of technology change, indeed often precisely because of the technology change,” he finished.

 

The £4.9bn, five FE Crown-rated LF Lindsell Train UK Equity fund targets capital and income growth and a total return in excess of the FTSE All Share index.

Last year the fund delivered a 20.66 per cent total return, compared with a 13.1 per cent rise in the FTSE All Share index and a 14 per cent gain for the average IA UK All Companies fund.

Performance of fund vs sector & benchmark in 2017

 
Source: FE Analytics

The fund’s five crown-rating and the inclusion in the FE Adviser Fund Index Aggressive and Balanced portfolios has earned it a place on FE Invest’s Approved List of funds.

“We like the consistency of his strategy, which will not vary depending on the economic conditions. His very selective approach allows him to run a highly concentrated portfolio, which should boost the fund’s returns if his stockpicking is successful,” said the analysts at FE Invest.

The fund has generated a 288.14 per cent total return since launch in 2006 compared with a 113.12 per cent gain from its average peer and a 112.24 per cent return from the index.

It has a yield of 1.89 per cent and an ongoing charges figure (OCF) of 0.72 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.