Consumer staples have been a big headwind for the Lindsell Train suite of funds this as the sector has been rocked by higher inflation.
A stock market darling for much of the past decade, investors have worried that these businesses will have to face higher costs without the ability to pass these on to shareholders.
Beverage producers, a theme that makes up the top 24.9% of the Lindsell Train UK Equity fund, have been “out of favour” with investors for a while and “appeared pedestrian” compared with the performance of big technology companies over the past decade and, more recently, to the commodity companies, which have soared on the back of higher inflation this year.
However, they are beginning to show glimmers of hope, according to Nick Train, who said that the market was being “rational”.
“First the winnowing of Nasdaq since November 2021 is a reminder that not every loss-making technology concept is going to become the next Alphabet and that predictability and heritage are investment virtues too,” he said.
“Next, as regards margin pressures from rising input costs, our’ staples companies were able to reassure investors that these are manageable, at least for now.”
As such, beer maker Heineken was up 9% in the first quarter, while Guinness owner Diageo rose 4%. Non-drinks manufacturers such as Mondelez – the firm behind Cadbury and Kraft – also gained, with shares up 8%.
Unilever, which dropped 12.6% in share price over the past year as governance concerns and tighter consumer spending dragged down confidence in the company, was also on the rise, up 8%.
Share price performance of stocks over 12 months
Source: Google Finance
In the April report, Train said these stocks had been languishing for a number of factors, including the fact that “the profitability of the consumer staples sector is seen, not unjustly, as being vulnerable to these spiking raw materials costs”.
“There is also a sense that the brands that have created so much wealth for investors over many decades, in some cases centuries, are mature and losing relevance for 21st century consumers,” he said.
The worst performers over the month were financial service companies such as Schroders, Experian and Hargreaves Lansdown were the biggest detractors to performance over the quarter.
Train has come under pressure in recent years as his funds have come off the boil, having been top-quartile performers within their respective sectors over the past five to 10 years.
However, his portfolios have struggled over the past year as high inflation and tighter monetary policy have pushed sentiment away from quality growth (Train’s style) and into value.
The trust dropped 16% in the first quarter, having recorded its first bottom-quartile calendar year performance in the IA UK All Companies sector last year in more than a decade.
Investors will hope that the promising returns to his consumer staples companies last month could be a sign of a turnaround, with the sector making up many of the fund’s top holdings.
Diageo and Mondelez are two of the UK Equity funds largest allocations, weighing 9.9% and 7.1% of total assets.
The Global Equity fund performed better than its UK stablemate but still made a loss of 6.8% between January and March.
Co-manager James Bullock revealed in the April report that acquiring shares in data analytics company, Fair Isaac Corporation (FICO) – big news for a fund that rarely makes changes.
A key aspect that encouraged him to buy was its lack of competition – 98% of US securitisations used FICO as their sole risk measure service, demonstrating its dominance in the field.
Despite this, the share price of the company is down 23.5% over the past year as financials continue to struggle, which created an ideal time to buy.
Share price of FICO over the past year
Source: Google Finance
Bullock wrote: “A softening of the price down from recent all-time highs helped prompt our purchase.”