Fund manager Nick Train found an unwelcome gift under his tree on Christmas Eve – a downgrade by ratings agency Morningstar to two of the funds he runs.

The agency cut its rating on the £6.7bn LF Lindsell Train UK Equity Fund (B18B9X7) from Gold to Bronze and cut the rating on the £1.8bn Finsbury Growth & Income Trust (FGT) from Gold to Silver.

Morningstar analyst Peter Brunt flagged that although the UK Equity Fund benefitted from ‘a highly experienced and long-standing manager and a unique, well-structured investment approach’, there were concerns over capacity management and ‘the strategy’s ability to maintain purity of process with such a large asset base’ which led Morningstar to lower its conviction level.

While Train’s strategy of running a highly concentrated portfolio has produced good returns over the long term, it has also exposed investors to ‘higher levels of stock-specific risk than most peers’, says Brunt.

Given the growth in assets thanks to strong performance and ‘sizeable’ cash inflows, and the concentrated nature of the portfolio, Lindsell Train UK Equity owns significant stakes in a number of companies which ‘could make the fund far less nimble to respond to adverse circumstances (including a significant liquidity event)’ in Brunt’s view.

‘The large asset base also precludes (Nick) Train from building sizable positions in opportunities further down the market-cap scale. While this has not had a large impact on performance so far, allowing assets to continue to grow will only further restrict his potential investment opportunities. In light of this, we are concerned that the group has not taken action to manage capacity,’ adds the analyst.

In response, Lindsell Train says its capacity for its UK strategy, which includes the two aforementioned funds and other UK equity mandates, is £12.5bn versus the current £9.5bn value.

‘We also acknowledge that our investment strategy results in concentrated portfolios, predominantly concentrated on the shares of blue-chip, multi-billion pound companies,’ adds the asset manager. ‘This concentration certainly brings investment risk, but has also been a key contributor to our competitive long term investment returns.’

Finsbury Growth & Income Trust is ‘identically managed’ to the UK Equity Fund. The top 10 holdings are exactly the same for both funds, albeit in different weightings. They are: London Stock Exchange (LSE), RELX (REL), Unilever (ULVR), Diageo (DGE), Mondelez, Burberry (BRBY), Hargreaves Lansdown (HL.), Schroders (SDR), Sage (SGE) and Heineken.

These names accounted for more than 80% of Finsbury Growth & Income’s assets at the end of October 2019.

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