The shocking events surrounding Neil Woodford and his Equity Income fund last week are a good reminder of the importance of focusing on risk as well as return when investing your money for the future.
If you’re trusting someone else to invest your money, it’s critical to understand how they’re investing it and the risks involved. With that in mind, today I want to highlight three risks associated with one of the UK’s most popular investment funds, the Lindsell Train Global Equity Fund.
Highly concentrated fund
In my view, the most important thing to be aware of in relation to this fund is that it’s an extremely ‘concentrated’ fund. According to the fund’s most recent interim report, at 30 June it held only 27 stocks (29 if you count the fact that it owned A and B shares in two companies).
That is a very low number of holdings for a fund, meaning that there’s a much higher level of stock-specific risk compared to the average fund, which probably contains around 50–60 holdings, or an index tracker, which may hold hundreds or even thousands of stocks.
As a result of its concentrated nature, if one or two stocks in the fund were to underperform, the overall performance of the fund could be impacted substantially.Â
Big bets on a number stocks
Additionally, on top of its concentrated nature, the fund has very large allocations to a number of stocks. For example, at 30 September, 8% of the fund was invested in Unilever, while 7.7% of the fund was invested in Diageo, and 7.6% was invested in Heineken.
Again, this means that there is a high degree of stock-specific risk. If these three stocks were to underperform (and Unilever and Diageo have both underperformed in the last month as the pound has risen) the overall performance of the fund could suffer.
Large exposure to the consumer staples sector
Finally, be aware that this fund is heavily exposed to the consumer staples sector. Not only does it own Unilever, Diageo, and Heineken, but it also has large positions in Pepsi-owner Pepsico and Cadbury-owner Mondelez International, and a smaller position in alcoholic drinks maker Brown-Forman.
Overall, 45.6% of the fund was invested in the consumer staples sector at 30 September. So, there’s definitely a fair bit of sector risk associated with the fund too. If the consumer staples sector was to undergo a period of underperformance, Lindsell Train Global Equity’s performance could suffer.
Of course, these three risks are not necessarily a reason to avoid the Lindsell Train Global Equity Fund. The fund has a brilliant performance track record, and I see it as an excellent option for those looking for global equity exposure.
It’s just important to be aware of the risks and to ensure that the fund is suited to your risk tolerance before investing.