In 2021, investors favoured (at different times) either high growth technology stocks or highly cyclical businesses. Unusually, managers such as Lindsell Train, whose high conviction portfolio is invested in durable, cash-generative business franchises, failed to keep pace with the market last year. We asked Lindsell Train, who manages 15% of Witan’s assets in a global portfolio, to outline their thoughts for 2022, with a particular focus on how some of their investee companies might fare in the months ahead.
Optimism despite some recent challenges
 We are looking forward to 2022 with optimism. Why? Because the central pillar of our investment philosophy is that investors undervalue durable, cash-generative business franchises – and, in our opinion, rarely have the relative values of the companies we invest in looked so alluring. Our confidence in their durability and long-term relevance remains undimmed and perhaps even enhanced as the vast majority have borne the challenges of the pandemic to consolidate and extend their market positions.
The pandemic has brought forward more change, and at a faster pace, than is usual as consumers have been forced through circumstance to embrace different ways of doing things, often with the aid of new technology. The obvious beneficiaries in the short term are the technology companies. And understandably the relative performance of stock markets over the recent past has reflected this. In comparison, the performance of many of the types of companies we favour has looked pedestrian (and in a number of cases, downright disappointing). In the longer term, however, we would contend that these franchises and brands will be the winners, using the services and functionality that new technology empowers. These companies have the added advantage of heritage, having on average survived for more than 100 years, which means that they have encountered wars, depressions, recessions, digital transformations and more topically of course a devastating pandemic. This strengthens our belief that these companies have the wherewithal to successfully navigate future challenges.
Heritage across the portfolio
By way of example, three of the 22 companies in which we invest for Witan - all three with significant heritage (as shown below in brackets by the year the company or its lead brand was started) - have met the challenges of the pandemic in the following ways:
- Diageo (1759), faced with the intermittent closure of clubs and bars, has extended its reach with the consumption of premium spirits at home, boosting overall sales and profits. It was notably one of the few companies within its sector to maintain advertising and promotional spend over the course of the pandemic and looks set to benefit in the coming years as a result, with annual organic sales growth over 2023-25 anticipated to be 5-7%¹, representing a meaningful acceleration compared to previous years.
- Nintendo (1889) has taken advantage of elevated demand in lockdowns to spread its franchise. The company has now sold over 92m Switch consoles and nearly 700m associated games, making it one of their most successful console generations ever. A significant development over this period was that nearly 50% of Nintendo’s software sales were digital rather than physical, up from 17% five years ago. Not only does this channel carry a higher margin, but it also enables Nintendo to form stronger relationships with its fans.
Source: Nintendo Company filling
Nintendo Switch Sales data as of June 2021. Nintendo Account Update data, since launch of Switch (March 2017) to 30 September 2021.
- Disney’s (1923) new streaming services have similarly received an unprecedented boost, which has allowed it to be quickly established as one of the two leading services in this still nascent industry. The company’s Disney+ service now has 118m subscribers just over two years after launching. To put that in context, it took Netflix ten years to accrue 100m+ subscribers. In addition to already owning some of the highest quality and most recognizable intellectual property, Disney also has the size and scale to dramatically outspend its competitors, with $33bn in planned content expenditure in 2022 (nearly double that of Netflix).
Source: Disney+
‘Young’ companies with dominant platforms
Although we are comforted by heritage, we will sometimes invest in newer businesses where we can see high barriers to entry and where we feel confident that the business can prosper over the long term. One such example is the youthful PayPal, founded in 1998. Covid acted as an accelerant for many tech-driven, platform businesses around the world and PayPal succeeded in strengthening its competitive position, with the number of PayPal accounts growing by 41% and total payment volumes up over 90%. Another platform business we like is Hargreaves Lansdown, founded in 1981, where assets, customers and trading volumes are all up strongly. Indeed, since the onset of Covid, Hargreaves has onboarded over 375,000 new clients – this is exponential growth when you consider it took the company 30 years to first reach this number!
Broader market performance?
In summary, we will continue to focus our portfolios on companies that we judge to be exceptionally durable, often underlined by a long heritage. Meanwhile, we expect the performance of global markets to broaden away from its recent overwhelming focus on technology and cyclicals, to the benefit of many of our holdings. As Warren Buffet said “Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever”. 
Lindsell Train Investment Team,
2nd February 2022. |
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