Failing to pick up on the sensitivities of bank balance sheets before the financial crisis was the biggest mistake FE Alpha Manager Nick Train has ever made. 
And his next mistake will be his belief in brands in the new age of technological innovation, which has the potential to make him look “foolish”.
The manager of the five FE Crown-rated Finsbury Growth & Income Trust and the LF Lindsell Train UK Equity fund has been among the best UK equity managers during his long career.
Since launch, the trust has returned an impressive 581.56 per cent, the second-best performer in the IT UK Equity Income sector and 430.62 percentage points above its FTSE All Share benchmark, although it has come as a surprise to Train himself.
Performance of trust vs sector & benchmark over manager tenure
Source: FE Analytics
“I am as surprised by the performance as any investor or observer of the fund – I cannot account for the performance,” he said.
“It is not that [business partner] Michael Lindsell and I ever sat down and said how do we construct a portfolio that is going to do well in any circumstances – it is not that at all.”
Yet even star fund managers make mistakes and not spotting how impactful an event such as the global financial crisis of 2008 would be on some of his bank holdings remains a sore spot.
“Looking back at the whole sweep of my career, god help me, I have never been more mistaken about something than the sustainability of certain bank franchises,” Train said.
“2008 was a terrible experience and in hindsight I was completely unprepared for the unbelievably maligned impact that it could have on a bank.”
At the time, the manager owned retail bank HBOS, which he believed would “sail” through an economic slowdown.
However, the bank was swept along with the sector, which at the time underperformed the FTSE All Share significantly by 23.65 percentage points, losing 53.58 per cent on average in 2008.
“It was just totally wrong because I had failed to understand the intrinsic amount of risk in a bank balance sheet. That is the worst mistake [of my career],” Train said.
“I feel in hindsight it was a pretty serious shortfall and a very important sector of the market that I had exposure to and I didn’t understand how bad things could get.”
Performance of indices in 2008
Source: FE Analytics
While it was an extreme set of circumstances – indeed not many predicted the impact that it would have on the market as a whole – Train said as a fund manager he is supposed to take such an event into consideration. “I hadn’t fully appreciated it,” he acknowledged.
Today, he holds no banks with his 25.9 per cent weighting to financials dominated by asset manager Schroders, investment platform Hargreaves Lansdown and the London Stock Exchange.
Instead, the biggest risk to his portfolio – which is made up of well-established businesses able to survive over the long term by maintaining their competitive advantages – is the pace of technological change that companies are facing.
The manager of the £1.4bn Finsbury Growth & Income Trust said: “I have been saying that we feel paranoid about the pace of technology change and the disruption that that is bringing.
“I am worried as hell that the things we are invested in and where we have a high degree of confidence about their franchise may in three years’ time turn out to be misplaced because the technology change just evaporates or vaporises their value-added.”
One such example, albeit not in the UK, was US razor manufacturer Gillette, which a couple of years ago was disrupted by upstart Dollar Shave Club.
“I don’t think I have ever seen a substantive brand lose so much brand equity so quickly as what happened to Gillette in the US two or three years ago,” he said.
Dollar Shave Club, along with other internet-based newcomers, took 20 per cent of the market share in very short order.
While Train does not own Gillette in any of his portfolios – he actually benefitted from the disruption as an investor in Unilever, which bought Dollar Shave Club in 2016 – he said that seeing this occur to an established brand was “really scary”.
Another example in the UK is the emergence of Alternative Investment Market (AIM) darling Fever-Tree Drinks, a soft drink manufacturer which has substantially impacted the market and disrupted incumbent leader Schweppes.
Performance of stock since launch
Source: FE Analytics
However, he said that the importance of these two examples is that they have both been built on brand awareness – his fundamental thesis for investing.
“I think brands will be even more important and valuable in the 21st century than they were in the 20th century,” the FE Alpha Manager said. “But it is quite plausible that it won’t be the same brands and absolutely the way that those brands get into people’s hands could change markedly.
“Fever-Tree is a brand that might have been created more quickly in the digital age than might ever have been possible but absolute that’s a brand.”
As such, he remains of the belief that brands will continue to do well in the future, but that investors can’t be lazy and say that it is going to be the same brands that did well in the 20th century.
Some, he added, may continue to do well – indeed he holds Guinness-owner Diageo and Remy Martin-parent Remy Cointreau, drink brands that are 250 and 280 years old respectively – but others will fall by the wayside.
“We have been saying that what do you ask [Amazon.com’s] Alexa for? That is the critical question you should mentally pose when you think about a company,” Train (pictured) said.
“Do you ask Alexa for a bottle of Johnnie Walker or for the cheapest bottle of whisky. At the moment I do not know the answer to that, but I do know that multiple billion pounds of value in [Johnnie Walker maker] Diageo hangs on the answer to that question.”
So, does this new problem pose more of a headache to the manager than the financial crisis did 10 years ago?
“Everybody wants to believe that now is the most difficult time ever. I can never remember a time when people haven’t said it is particularly hard now,” he said.
“I do think there are one or two statistics that you can point to that suggest that corporate half-lives are shortening. Companies’ periods in the sun are shorter in the last 30 years than they were in the previous 50 years.”
“Probably there is a cumulative acceleration in technology that is making things more volatile – I think you could definitely argue that – and maybe for the type of investors we are it ratchets up the risk because we are most likely to be invested in established things with heritage and if heritage is being chewed up more than it has been in the past then that is risky for us.”
As such, while his Finsbury Growth & Income Trust has performed extremely well since 2000, there will be times when it is out-of-favour.
“It is not an all-weather fund, or it is certainly not designed to be. There is no claim made beyond the proposition that we have tried to construct a portfolio of what we think are exceptional companies,” the manager concluded.