Nick Train runs some of the largest investment funds in the country and is often referred to as ‘Britain’s Warren Buffett’. The fund manager adopts a similar investment strategy to Buffett, investing in companies that have competitive advantages, and that are able to generate strong cash flows, substantial profit margins, and excellent returns on equity. Today, I’m profiling two of the top holdings in the CF Lindsell Train UK Equity Fund.
Schroders
At the end of September, the sixth largest holding in his portfolio was FTSE 100 investment manager Schroders (LSE: SDR) at 7% of the fund. Glancing at the company’s financials, it’s not hard to see why he is attracted to the stock.
Schroders has generated a strong increase in both revenue and profits over the last five years, with revenue growing 43% and net profit increasing 55%. Operating margins and return on equity have been consistently strong over the period. A recent Q3 update revealed further positive momentum, with assets under management and administration increasing 9% to £430bn.
One thing that many of Train’s stocks have in common is that they pay dividends and Schroders is no different, with the company having an excellent track record of rewarding shareholders. Examining the dividend history, two things stand out. First, the company did not cut its payout during the Global Financial Crisis, an excellent achievement for a financial services firm. Second, growth has been prolific over the last five years, with the payout increasing from 39p to 93p per share. City analysts expect the dividend to rise a further 11% this year, to 103p, a yield of 3% at the current share price.
Is Schroders a good buy right now? With the City expecting earnings of 205p per share this year, the stock currently trades on a forward P/E ratio of 17. That’s not an overly demanding valuation in my view, but if markets were to wobble, Schroders shares may be available at an even better valuation.
Burberry
Another key holding in the portfolio, is Burberry (LSE: BRBY), with a fund weighting of 6.8% at the end of September.
The portfolio manager is bullish on the long-term potential of emerging markets, and believes that the luxury company is well-placed to capitalise as the wealth of consumers in these regions increases.
Like Schroders, it has been a strong performer in recent years. Sales have grown from £1,857m in FY2012 to £2,766m for FY2017, growth of an impressive 49%. Profit growth, has been a little more volatile, however, and has only risen 9% in that time.
Burberry has also rewarded shareholders with regular higher dividends and has increased its payout from 25p per share to 39p per share over the last five years. Analysts expect a payout of 41p for FY2018, a yield of 2.2% at the current share price.
Looking ahead, City analysts expect sales growth to slow in the near term, with growth of just 0.3% and 2.4% forecast for this year and next. It’s also worth noting that Burberry’s President and Chief Creative Officer Christopher Bailey will be leaving the company next March, which could potentially add uncertainty to the investment case. Given the stock’s lofty forward P/E of 23.8, I’d be inclined to wait for a more attractive entry point here.
