Dull plodding is what wins the race in the end, Nick Train tells Merryn Somerset Webb.
This is an interview with Nick Train. Regular readers might notice that it isn’t the first I have done this year – there was one with him in late June too. And they might think that two in one year is overkill. I don’t agree.
Train is an exceptional fund manager. The Finsbury Growth & Income Trust (which is in the MoneyWeek Investment Trust Portfolio) does exactly what we tend to think funds should do: it has a concentrated portfolio of good-quality stocks, very low turnover and hence costs – and, of course, a stunning performance record. It has made an annualised return over the last 15 years of a satisfyingly precise 10% (against the FTSE All Share average of 4.9%) and produced regular rises in the dividend payout along the way.
So when Train came to talk in Edinburgh to a room of his wealth-management groupies (they love him – he actually does what their clients need him to do), I went along to listen. Then I made him have another coffee with me afterwards (Train isn’t mad about hanging around with journalists, so it does take a little persuading). Train is a great one for self-deprecation. Ask him why he does better than other people and he likes to suggest that he doesn’t really know – that he just buys good stocks he thinks will go up. And then they do.
It is that simple? He insists that it is. He reminds me of a good bit in Gillian Tett’s book on the financial crisis (Fool’s Gold) in which she compares the architects of financial mass destruction pre-crisis to medieval priests giving sermons in Latin to a group of people who didn’t understand Latin but trusted their “super-beings” simply to be right. “But it was all nonsense.” So it is with those who try and make investing sound complicated when in the main it is not.
I’ll accept this. Maybe it is simple. But perhaps it isn’t easy. (Walking a tightrope is simple, but not easy.) Perhaps the fact that so few people can do it well is a matter of personality? After all, almost
all sensible strategies work when back-tested. But almost no one has the intellectual stamina to stick to one strategy over the long term. With value investing, for example, it can be tough to stay the course (see last week’s interview). “Value investors are people who put a very high price on having the last laugh,” says Train. But he does agree.
“The industry is populated by exceptionally bright, exceptionally assiduous people who are working to achieve the same objective.” But “I have found that the most brilliant of my contemporaries have not necessarily been the most successful in the thing that really matters… beating the market over time”.
That seems counterintuitive. But perhaps the very smart have a “profusion of ideas” and an intellectual curiosity that “drives them too fast from one idea to the next to the next”. For success in investing – assuming it isn’t all about luck – you probably need someone more “stolid and dogmatic”. So readers should look for a single-minded dimwit to manage their money? “Maybe.”
I ask him who are the really good fund managers in the UK at the moment. “Neil [Woodford], of course, Neil,” comes top. Then there is Anthony Bolton, who he “couldn’t admire more”, and the soon-to-retire Richard Hughes at M&G. He is irritated by the retirement of the latter two: it frustrates him that the best in the business “duck out at what seem to be unnecessarily young ages… you get better as you get older… I almost feel that it is a duty for those with ability to hang on… there are so many inept people out there. The ones who are really good should carry on. People need them”.
I wonder what these investors have in common. The answer gets us closer to what might set Train apart. A “set of healthy disciplines”. Which are? Not trading too much. Not pursuing speculative ideas, however attractive they might look in the short term. Not conflating economies with stockmarkets because they are not the same. Not being pessimistic.
“The last one is the most important… it is so easy for people to become pessimistic… it seems so smart to be pessimistic…you sound more credible, more wise when you warn about problems and catastrophe than when you talk about the wonderful things to come.” But investors should never forget that history is on the side of the optimists. With this in mind, Train reckons that “at the margin most people don’t have enough invested in equity”.
Even now, I ask, given that for valuations to revert to historical long-term averages, returns will have to be low over the next decade? Maybe, says Train. “No financial history is long enough to draw any hard and fast conclusions.” The “Anglo Saxon corporate sectors have pretty reliably generated 7% annually over long stretches of time” and things may well get a lot better – “my view is that the number is more likely to be 20% than 7%”.
OK, that sounds good. But why will that happen? He just doesn’t expect valuations to revert to a lower mean. He expects the opposite: “a secular, multi-year expansion of price/earning ratios for quoted companies in substantive trustworthy markets such as the UK and the US”. Again, why? Because the capital intensity of quoted companies is likely to decline enormously as digital technology becomes a bigger and bigger driver of profitability.
And as capital intensity falls, cash flows will rise: “there is more money to be distributed to shareholders as dividends and buybacks… that is highly likely to drive exceptional returns”. Right now there are “truly extraordinary and thrilling opportunities in new companies, but it is also clear that “existing companies have an unprecedented opportunity to improve returns”.
We talk about Unilever and its purchase of Dollar Shave Club. That purchase might not be the one that works for the firm long term, but it is “an indication” that Unilever sees how it can reduce the amount of capital it needs tied up in stock (sitting with wholesalers and retailers) with a view to producing a more direct relation with consumers and hence higher profits.
Now we are getting somewhere. I wonder if that’s a theme that all the firms in his portfolio have in common. It is. It is one of the “most notably consistent aspects… every major company that we speak to is excited about the opportunity that digital is offering them to change their relationship with their customers and change the capital intensity of their business”.
I can see that with many of the firms I know Train likes. But what of Burberry? How does digital change the way a luxury-goods firm works: surely to sell expensive stuff you need the personal touch that comes with an expensive shop in an expensive place? Not so, says Train. Over the next decade Burberry will have to open many fewer new stores to get its turnover growth: it is “establishing unprecedented online relationships with existing and new customers of its brands”.
It isn’t certain this will transform its business, says Train – in capital markets you can’t talk about certainties, only about “optionality and possibility”. But if, like Burberry, “you have 40 million contacts with people who are interested in your brand” – that’s more than any other luxury-goods business – you certainly have optionality. And that’s “really exciting”, given what it tells us about productivity and long-term returns.
As he talks, I realise he is right. I am not a Burberry buyer. But I am a J Crew buyer. There isn’t a J Crew shop where I live, but the firm has nonetheless built up a relationship with me: I know more about their collections that I should; I buy online and I buy in store when I am in London. Without the online relationship, the lack of a store in Edinburgh would mean that I never bought at all. This stuff works.
We end there. There is another theme in Train’s life he needs to address: hill climbing. Today he has a Corbett to climb. That, for those who don’t visit Scotland much, is a mountain higher than 2,500ft but lower than 3,000ft. If they are over 3,000ft they are Munros. Train has already climbed all of those. He has had to move down the scale. This, he says, is surely “quite a good indicator” of his personality. Climbing 282 Munros while based in London takes “moronic dedication” – and “that’s a good metaphor for what I do, just doggedly plodding on”. And off he goes (more striding than plodding, really).
Fact file: Nick Train
Nick Train started out at GT Management (GT) in 1981, after graduating from Queen’s College Oxford with a BA in modern history. He spent 17 years at GT, before joining M&G as head of global equities in 1998. He co-founded Lindsell Train in 2000 with Michael Lindsell, and is the lead manager of the Finsbury Growth & Income Trust.