Fund manager Nick Train is often referred to as ‘Britain’s Warren Buffett.’ He adopts a similar investment strategy, choosing to invest in a concentrated portfolio of high-conviction holdings. He focuses on world-class companies with sustainable competitive advantages, holding them for the long term, and this strategy has enabled the portfolio manager to build up an enviable track record.
Indeed, The Lindsell Train UK Equity portfolio, which he co-manages, returned an impressive 124% over the five years to the end of July, more than doubling the FTSE 100 total return of 58%.
Today, I’m looking at two key Train holdings and explaining why Train sees appeal in these stocks.
London Stock Exchange Group
Train has significant exposure to the financials sector, and looks to invest in companies that will benefit from rising share prices over time. As a result, the portfolio manager has a sizeable holding in London Stock Exchange Group (LSE: LSE), as he anticipates that global stock markets will continue to rise over the long term.
A glance at London Stock Exchange’s financials reveals that the company is in good health financially. Revenue has more than doubled over the last five years, from £815m to £1,657m, and City analysts expect a further 11% rise for FY2017. The company consistently generates strong operating margins, and profitability also appears to be trending in the right direction, with analysts forecasting the group to generate earnings per share of 149p this year, up from 125p last year.
As a result, the stock doesn’t trade cheaply, and at the current share price trades on a forward looking P/E ratio of 26.6. The dividend yield is 1.1%. While I share Nick Train’s bullish long-term stance on London Stock Exchange, I’d prefer to buy the stock at a slightly lower valuation. The shares have had an incredible run over the last five years, rising almost 350%, so for now I’ll keep the company on my watch list and monitor for a pullback.
Schroders
Another financial stock that Train has considerable exposure to is FTSE 100-listed investment manager Schroders (LSE: SDR). The portfolio manager believes that with more people needing to save for their retirements, the long-term prospects for many investment managers look attractive.
Train stated recently that while he believes that competitive and regulatory pressures will result in investment manager fees falling in the future, the fact that equity markets have a tendency to rise over time will offset this. He also believes that technological change will lead to cost savings across the industry.
Schroders shares don’t look expensive at present – on analysts’ FY2017 earnings estimates of 205p, they trade on a forward looking P/E of 16.4. This looks reasonable to me, given the fact that the company has increased its revenues by a compound annual growth rate (CAGR) of 7.4% over the last five years, and grown its dividend at an impressive CAGR of 14.5% since 1988.
However, fund management stocks often pull back during market corrections, and with that in mind, a good time to buy Schroders shares might be when markets wobble a bit, and sentiment is a little less bullish.