Nick Train manages the £1.8billion Finsbury Growth & Income investment trust
Fund manager Nick Train has added credit scoring company Experian to his UK portfolios, including the top-rated £1.8billion Finsbury Growth & Income trust.
In the trust’s latest report Train, who is considered one of the UK’s leading investment managers, said he’d been building the position across his boutique firm Lindsell Train’s UK accounts over the summer.
This includes the popular trust as well as his £6.3billion open-ended Lindsell Train UK Equity fund.
While this is the third new position he has taken over the past year, this number of new holdings is ‘unusually high’ for Train, who is widely known for his long-term, ‘sit-and-wait’ approach.
The manager said there are two types of businesses he likes to own.
The first is UK companies with luxury, premium or aspirational brands, such as long-term holding high-end fashion brand Burberry and drinks company Fever-Tree – the latter of which was another new purchase made this year.
The second category, which Experian sits in, is ‘substantive UK companies with credible and globally-competitive assets in technology, data and analytics’.
Train said he should have owned Experian years ago and credits colleague Madeline Wright, ‘who has persistently and correctly championed the investment case for the company’ for finally convincing him to add it.
He said: ‘The rationale for owning Experian is consistent with one of Lindsell Train’s key investment themes: we are always trying to get more exposure to world class technology companies, especially those which own rich, unique and valuable data.
‘Since Experian’s inception in 1968 it has been building such a cache of unique consumer credit data, which is absolutely critical for the decision making processes of its credit granting customers.’
Wright said the team has followed the company for a number of years but in 2017 embarked on a more in-depth review.
This included meeting senior staff several times, as well competitors TransUnion and Equifax, to better understand the wider credit bureau industry.
The team said Experian has a strong business model and operates on a ‘give to get’ basis
Wright said all three companies have strong business models and operate an attractive ‘give to get’ basis, in which customers supply them with raw credit history data for free, the bureau aggregates it, applies analytics and tools, and sells it back to the customers as a credit report.
She added: ‘Renewal rates are around 90 per cent and competition is minimal because each company’s dataset varies and therefore most banks use reports from all three.
‘The cost per report is low at just one or two dollars, so there is little incentive for either the existing three to engage in price wars, or for a fourth player to enter.
‘This is especially true because it would take more than 10 years for a new entrant to amass sufficient data to effectively compete, and tough regulation in all geographies adds a further barrier to entry.’
The biggest risk Experian could conceive is instead from suffering a security breach, something which happened to Equifax in 2017, which saw data for nearly 150 million Americans and 15 million Britons stolen.
Wright said: ‘Clearly this was a very large, very serious breach, but while the event did have serious repercussions including the departure of the chief executive and numerous lawsuits, it didn’t affect Equifax’s business in the longer term. We think this “test case” indicates the resilience of credit bureau business.’
Most importantly, the team feels Experian will benefit from its shift from simply selling data to selling data enhanced by software decision tools.
Train said: ‘This means Experian is investing heavily into developing proprietary algorithms and data management tools, which increase the utility of the underlying data and increase the “stickiness” of its customer relationships.
‘Currently 55 per cent of sales come from what the company calls “data”, ie. large databases of credit history from which reports are generated.
‘But the “decisioning” segment, ie. advanced analytics and tools sitting on top of Experian’s datasets, is now 25 per cent of revenues and growing fast.
‘We expect this shift to decision tools to drive Experian’s growth over the next decade.’
Over five years, Nick Train’s Finsbury Growth & Income trust and Lindsell Train UK Equity Income fund have returned almost 60 per cent, significantly outperforming the FTSE All Share
Train said the increase in new holdings has been a result of a long period of disappointing absolute and relative returns from the UK stock market and therefore opportunity as many appear to have given up on it.
‘I don’t exaggerate when I say give up,’ he added. ‘Have you seen the industry data showing monthly outflows from across all open-ended UK equity funds? They are substantial and sobering.’
In September, the net asset value for Finsbury Growth & Income was up 2.2 per cent on a total return basis and the share price was up 1 per cent, while the index was down 1.7 per cent.