UK fund manager Nick Train is a self-confessed “great devotee” of Warren Buffett. Train has built an enviable track record of first-rate returns from buying quality companies — “durable, cash-generative businesses” — and holding them for the long term.
Train reckons such companies are “undervalued by most investors for most of the time”. He told holders of his CF Lindsell Train UK Equity Fund that “in early 2015, perhaps the most helpful thing I can say is that I continue to add to most existing holdings enthusiastically”.
The top three companies in Train’s portfolio are Unilever (LSE: ULVR) (NYSE: UL.US), Diageo (LSE: DGE) (NYSE: DEO.US) and Reed Elsevier (LSE: REL).
Unilever
Unilever is the largest holding in Train’s fund with a weighting of 9.3%. The consumer goods colossus owns over 400 brands, including such iconic names as Marmite, Vaseline and Domestos. Two billion people worldwide use Unilever brands on any given day. Rising populations and increasing wealth in developing economies should help drive the company’s growth for decades to come.
Unilever’s shares are currently trading on 21x forecast earnings, with a dividend yield of 3.2%. While many analysts and investors consider such an earnings rating pricey, Train points out that periodic corporate transactions in the sector at higher multiples “demonstrate how highly business people value such assets”.
Train said in January: “For us, companies of this rarity and excellence wouldn’t be truly over-valued until they traded at 30x earnings“.
Diageo
Diageo shares many qualities with Unilever, and is Train’s second-largest holding with a weighting of 8.3%. The global drinks giant owns an abundance of top brands, including world number ones Johnnie Walker, Smirnoff, Bailey’s and Guinness. Also like Unilever, rising incomes in developing markets are a driver for long-term growth.
Diageo’s shares are currently trading on 21x forecast earnings, with a dividend yield of 2.8% — again, similar to Unilever.
The Telegraph last year asked Train to name the one share he would buy for his children or grandchildren. Train named Diageo, commenting:
“Sometimes we complicate the investment challenge. If you can find a company whose products are likely still to be consumed in 25 years’ time, and if the company can succeed in at least maintaining or preferably increasing the price of its products above inflation, then you have the basis for a wonderful long-term holding”.
Reed Elsevier
Train has described information provider and publisher Reed Elsevier — his third-largest holding with a weighting of 7.9% — as “a ‘toll booth’ for professionals in the scientific, legal, healthcare and insurance industries” and “a collection of near monopolies”.
Reed Elsevier’s shares are currently trading on 18x forecast earnings, with a dividend yield of 2.5%.
While some analysts argue that Reed Elsevier’s valuation is too rich, Train believes the business merits a “very high” rating, saying: “we look to 25x much higher earnings (boosted by ongoing share buybacks, or smart acquisitions) in 3-5 years time”.