Neil Woodford’s downfall has left a gap that’s quickly been filled by Nick Train. He manages the successful Lindsell Train Investment Trust (LSE: LTI), which has a history of impressive growth.
The trust reached a peak of £2,040 per share back in June 2019. But since then the shares have fallen back to £1,247. That’s a drop of 39% in only seven months.
And over the whole of 2019, despite the trust delivering a 32% net-asset-value return, the share price gained only 2%. Those who switched guru last summer as Woodford’s woes compounded have not done so well. But what went wrong?
Woodford?
Train has put some of the blame on the Woodford fiasco itself. In his latest monthly update, he said “there have undoubtedly been ramifications for Lindsell Train Limited from the Woodford affair.” Lindsell Train Limited (LTL) manages the investment trust (LTI) plus some open-ended funds. And the trust in turn is 50% invested in LTL.
Sounds like a curious arrangement? It means investors can put their money in LTL without LTL being itself listed on the stock market. But I do think it has helped fire up what I see as last year’s serious overvaluation of Lindsell Train Investment Trust (LTI) shares.
Train pointed out that his own funds do not carry the same illiquidity risks of Woodford’s. In particular, he stressed that “we do not invest in unquoted shares in the open-ended funds.” And in that, he does seem to be a more prudent investor than Woodford.
Justified
But I still think the LTI share price fall was justified, even in the absence of liquidity risk.
The Woodford failure did trigger a chain of events that led to a re-evaluation of the Lindsell Train Investment Trust. But what did it trigger, precisely? I reckon it meant a return to rationality, and it’s that renewed rationality that has pared back LTI’s share price.
In my view, the underlying cause of the LTI price fall since July is simply that the shares were seriously overvalued.
Investment trust shares typically sell at a discount to the value of their underlying assets. In rare cases, such as to gain exposure to the works of a high-flying investor, you might see a premium. That is, the shares might sell for more than their asset value.
In the Lindsell Train case, the premium reached 90%. That means investors, who were not able to buy shares in Lindsell Train Limited directly, were effectively paying the firm almost double the price to hold its own shares for them. I can’t see any way that could ever make sense.
DIY
But now that LTI shares have fallen, are they good value?
The latest net asset valuation comes in at £1,076 per share, and the shares closed Tuesday at £1,247. That’s a premium of 16%. And while that’s way more attractive than around 90%, do you really need to pay it?
You could just put half your money into LTL’s open-ended funds, and half into LTI’s other biggest holdings after LTL itself. You’d end up with essentially the same assets, but without paying a premium for them.
I doubt many people will do that and I suspect the LTI premium is close to bottoming out. But I still wouldn’t pay it.