One of Britain’s best-known stock- pickers says a takeover bid for a “substantive UK company” could change investor sentiment about unloved domestic shares.
“I’m a UK equity guy. I have been for a very long time,” Nick Train told Financial News. “I want to believe the UK stock market is home to some world-class businesses and there are opportunities to invest. But there is a big element of wanting that as well as believing that.”
Train set up investment group Lindsell Train in 2000 with Michael Lindsell. He manages the £3.8bn WS Lindsell Train UK Equity fund and the £1.7bn Finsbury Growth & Income trust, and holds stakes in some of the biggest FTSE 100 companies, including the London Stock Exchange Group, RELX and Diageo.
‘Egregious’ lows
Despite the FTSE 100 flirting with an all-time high earlier this month, Train said current low valuations for UK companies were “egregious”.
“Sometimes you need a cathartic event for the tide to turn,” said Train.
He pointed to when the Bank of England rescued the former FTSE-listed Burmah Castrol in 1975 by buying its holding of BP shares to give it a cash injection. Some believed the move restored confidence in the market when it was at a low ebb.
“It is always difficult to identify market catalysts. But this time around, it may well take large-scale M&A for investors to recognise that their relentless selling has created a multi-year valuation opportunity in UK Plc,” said Train. “A bid for a substantive UK company could well be a trigger for a change in sentiment.”
British stocks remain out of favour among investors.
UK equity funds suffered outflows of £14bn last year — their worst on record, according to the Investment Association. UK pension funds have also slashed their allocation to domestic equities from 53% to just 6% over the past 25 years.
Meanwhile, Cambridge‑based chip-designer Arm, building materials business CRH and other UK companies have shunned London to list in New York, as the US offers the chance of achieving higher valuations.
‘We’re Warren Buffett adherents’
“In the end, value will out,” Train said. “If there are truly globally significant UK companies that will continue compounding and growing over time, sooner or later investors will recognise that and take advantage.”
Train pointed to the shareholder registers of some of the UK’s biggest companies, which he said were being populated with more international investors, particularly from the US.
He cited one of his top holdings: Diageo, where Warren Buffett’s Berkshire Hathaway has increased its stake. The drinks group has posted a more than 20% drop in its share price over the past year; it also issued a profit warning in December, following a slowdown in sales in Latin America and the Caribbean.
“We’re big Buffett adherents and have tried to apply lessons learned over the years. But it’s interesting to see an institution like Berkshire building a position in Diageo during a period of poor performance. Maybe that’s all that happens — the UK becomes more of a global marketplace,” he said.