You're absolutely right. The UK has been a disappointing market. On the other hand, the long period of kind of disapprobation about the UK by global asset allocators, it's resulted in those London-listed companies that are evidently world-class enterprises. It's led to them being under-owned and undervalued. And I think what really interests me about the UK is we can find companies listed on the London stock market that appear to offer an access to the wealth that's likely to be created by artificial intelligence. And perhaps that's not a perspective on those businesses that's widely recognized.
We believe that you can identify companies with structural franchises or brands that will endure and prosper. And the best thing you can do is to hunker down and own them through inevitable periods of more difficult trading performance or investors' attention being directed elsewhere. So yeah, maybe to a fault almost, but we've chosen to be very, very patient and very, very supportive of companies where we can see value creation.
Welcome to the Master Investor podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor podcast is sponsored by Interactive Brokers. Please do remember the views expressed in this podcast are for general informational purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes.
My guest today is one of the UK's best-known fund managers as the founder of Lindsell Train and the manager of their global strategies as well as the Finsbury Growth and Income Trust, one of the oldest UK investment trusts founded in 1926, believe it or not, which he has managed since 2000. He's known for his patient, conviction-led approach which has led to extraordinary long-term performance, albeit some more challenges in recent years. I am of course talking about Nick Train. Nick, a very warm welcome to the Master Investor podcast. Thanks so much for joining me.
Well, thank you for that glowing introduction and I'm pleased to be here and hope that we can unearth something of interest to your viewers.
I have no doubt that we will and I have to say in terms of unearthing something, I probably should have known this but I didn't realize until doing the prep, the Finsbury Growth and Income Trust is 100 years old this January.
Absolutely it is and it's one of the signal achievements of my life as I see it that I've been responsible for the investment affairs for a quarter of that. In fact, this month, December, I've lapped 25 years of responsibility. And I can't tell you how many, but there aren't that many managers of investment trusts with a 25-year and counting track record.
And the performance since 2000 has been really impressive. The fund's up 733%, the benchmark is up 317%.
Which is the UK stock market.
Which is the UK stock market is the benchmark. Fabulous, very long-term. We'll get to some of the pressures in more recent years a little later. And you've got a vote coming up on this and it's in terms of continuation.
It's for the continuation of the company. Our commercial relationship with the investment trust is completely separate to this existential question of whether the company continues for, let's hope, another hundred years. And if there's anybody watching or listening who is a shareholder in Finsbury, please vote for the continuation. I think that the asset class, investment trusts in general and this investment trust, I would say so in particular, deserve to continue.
Well, and this is great to hear you say that and our listeners can judge after the whole episode as well. Let's talk a little bit about your investment philosophy overall. I mentioned in the top patient, conviction-led and I think very long-term is fair to say.
Well, patient kind of connotes long-term. Yeah, I mean, you know, you can measure this. Our annual portfolio turnover, voluntary turnover over the last quarter of a century has averaged something less than 5% per annum, which even in the context of other patient investors really is quite extreme. You know, when I look at the top four or five holdings, most of those we've owned for at least a decade and some of them pretty much 25 years. So yeah, that's an approach.
And obviously at Lindsell Train you have global funds, Japanese funds, North American funds and UK funds and you lead the Finsbury Growth and Income Trust which we've mentioned already which focuses on the UK.
The UK really is my major focus.
As I was going to say as well as being one of three fund managers of the global fund. So kind of having a full appreciation of that area and I just wanted to mention that before we dive into the UK and the Finsbury Growth and Income Trust because I think it's worth just snapshotting you and the firm's view of not just global markets but US markets as well which I think influence a lot today. Do you look at that very strong performance, very strong level of innovation in the US that we've seen over the last five or 10 years and think things are a bit stretched, a bit overdone or not?
We are, we're always bullish. I think that is a very useful discipline as a long-term equity investor to be constructive about equity as an asset class. And I have to include US equity within that context. I wouldn't want to opine on where NASDAQ's going to be over the next 18 months, but I think that the structural drivers of a global equity bull market, which are a combination of technology innovation and pressures on declining inflation, make for a constructive backdrop. I think, I hope, that the UK stock market might offer particular value in that context.
Let's touch on then UK versus the rest of the world. I mean before we get on to your fund and the selling points of that, I guess it's fair to say for the last decade, two decades, picking a fund that is benchmarked to the FTSE All-Share as opposed to the S&P 500 was the wrong choice. Expand on that for us a bit and do you think that's about to flip?
You're absolutely right. The UK has been a disappointing market and it's been disappointing for, in hindsight, understandable reasons, which is that the exposure offered by the benchmark to structural growth industries has been lower than other markets. And I can't honestly say, to use your terminology, that that is about to flip.
On the other hand, the long period of kind of disapprobation about the UK by global asset allocators, I think evidently it's resulted in those London-listed companies that are evidently world-class enterprises. It's led to them being under-owned and undervalued. And I think what really interests me about the UK is looking at the stock market from the perspective of what does artificial intelligence mean for industries, companies over the next decade, we can find companies listed on the London stock market that appear to offer an access to the wealth that's likely to be created by artificial intelligence. And perhaps that's not a perspective on those businesses that's widely recognized. So maybe that's the thing that most thrills me about the opportunity that I think we're capturing in our portfolio.
I'm really interested to explore that a bit. Is that a recent thrill for you? Because I mean I guess AI is a recent development. So is that case for, and we'll get to the fund itself in a moment, that case for a fund indexed to the FTSE All-Share quite a new case because AI is applicable and can deliver profit margin improvements for your companies in a way that perhaps five years ago you couldn't have made the case for UK-based companies.
Yeah, I think it's fair to say that the advent of ChatGPT focused everybody's minds on what the implications might be of this emerging tool.
I mean, can I talk about this just a bit? Wilfred, we both know that we might at some stage talk about London Stock Exchange Group as a business that could be a beneficiary of AI. And I think the chief executive of LSEG, David Schwimmer, has shared a useful framework for thinking about the AI phenomenon. He analyzes it as being constituted of three interlocking factors, the AI phenomenon. There is first of all the requirement for unprecedented amounts of computing power.
Second, the emergent agents that are competing with each other all the time. They're evolving all the time to become cleverer, with maybe at some indeterminate point one of them emerging as the cleverest, but we don't know which one that's going to be yet, if ever. And then the third but still absolutely critical factor, the third leg of the stool as he puts it, is data. And David Schwimmer's view is that the compute will become commoditized. Ultimately, it will be determined by who's got the most hundreds of billions of dollars to invest in the computing parameters.
The agents will be in a kind of perpetual battle between each other to generate new insights to justify their commercial viability. And from his perspective, owners of proprietary data, obviously it has to be proprietary, but owners of proprietary data are in a strategically advantaged position to kind of sell their data to the highest bidder. And just on LSEG for a moment and just to conclude this bit of conversation. So fascinating to see that LSEG has cut deals with both Anthropic and OpenAI to sell its proprietary data to those agents.
London Stock Exchange Group, I should mention, is soon to be a sponsor of this podcast, though that's totally unrelated of course to the fact that you own it in your fund. Let's round...
Some wonderful commercial acumen, if I may say so.
Well, I mean, I won't comment on that but full disclosures are out there. Why don't we dwell then on this as a particular stock pick for a moment because what then is the valuation multiple that you have to pay for that exposure to this growth AI theme compared to I guess some of the plays that you...
Does it really matter? I mean, I can tell you...
I can tell you, but I think, you know, if we've learned anything from NASDAQ over the last decade it's that the starting multiple for a digital business with low capital intensity and a significant growth opportunity, the starting multiple doesn't matter that much. I mean it is absolutely critical that the franchise or the franchises, because there are several within LSEG, are world-class and that the growth does eventuate.
But I mean the way I'd look at LSEG is that it's an example of a London-listed business that is a globally significant set of assets with a clear growth opportunity and, you know, just ostensibly, you're not asked to pay the same valuation that you might be for a comparable NASDAQ-listed asset. Now, I've conveyed a lot in those comments. I think you could deduce, and it pains me to say it, but I don't think I would recommend anybody contemplating the UK stock market as a possible home for capital. I'm not sure I would recommend buying an ETF on the UK. I would think that you would need to do as we do and look through the UK stock market for those relatively rare businesses that have, you know, as I've tried to convey with LSEG, truly globally significant assets.
It's an interesting point and I would also guess that the amount of people that are doing that is much lower in this country versus the US where S&P 500 ETFs, NASDAQ ETFs have taken more of the overall market share in the last decade or two. We flipped the order there a little bit which I think is actually quite helpful because it brings me to another point. Your fund I think has a maximum of 30 holdings but in fact is even more concentrated than that suggests. You have typically around 20 with I think you have five holdings that are 10% or so, LSEG being one of them. We'll talk about some of the others. The top 10 make up 80%.
I think it's more than 80%. Right now maybe 80, 85%.
So to your last point about not recommending an overall ETF, you are very, very concentrated.
Exactly. And to revert to your opening gambit about an investment trust as a vehicle, the constitution of an investment trust permits a degree of portfolio concentration that wouldn't be available to most other, certainly conventional, fund structures. So the palette of investment approaches available to an investment trust are wider and yeah, I think we've taken advantage of that.
I hear the, because you talked about patience earlier, I hear Buffett and Munger behind your questions and, you know, I think it is worth me putting it out that the achievement of Berkshire Hathaway has been a huge influence on us and Munger's observation that all you need are eight world-class businesses to make up a portfolio and then you just sit and wait and good things will tend to happen to you. You know, that's been a pretty good account of what we've attempted to do. And yeah, as you were kind enough to notice, at least at one phase of this, very, very good things were happening to us.
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Why don't we continue to talk about some of those big positions? So another one which I guess feeds into the similar theme you're saying about LSEG with the data position and how it can tap into AI and it's another one of your sort of circa 10% positions is Relx.
And that previously was Reed Elsevier. Talk us through the buy case for that now.
When you look at the franchises within Relx, how it's been able to create value essentially the journey from being an analog data provider to important industry verticals like legal, like research, like insurance to being a digital provider of data and now data analytics and software services to those industries. That's been a long value-creating journey. We, the last time we met the chief executive of Relx, you know, the CEO reminded us that 20 years ago when he was appointed, Relx's risk division, which is an AI-powered machine-to-machine service to corporations all around the world. 20 years ago, that division represented 2% of Relx's market value in his estimation.
Today, he reckons that Relx's risk division is worth over half of the value of the company, and the company's value is materially higher than it was 20 years ago. But as he says, the prospects for that risk division are better than ever and the size of the market opportunity is greater than ever. And again, going back to that earlier proposition, what have we learned from NASDAQ? It's that capital-light digital businesses with a clear and substantive TAM ahead of them, total addressable market ahead of them, they can stay rewarding for much, much longer than maybe British investors have understood.
I think it's very notable, I mean the two businesses that we've spoken about both have very significant US shareholdings. There are US growth institutions right at the top of the register for both LSEG and Relx. Now maybe that's partly to do with the changing shape of UK institutional investors withdrawing from equity but I also think it is an endorsement of the value creation in those companies that US investors identify.
