When it comes to active managers, few are better known than Terry Smith and Nick Train.
The stockpickers have built a solid reputation over the decades and have provided investors in the Fundsmith and Lindsell Train funds with attractive returns. In particular, their global equity funds have become a popular option for Isas.
The two managers are looking for “quality” companies, ie companies that are well-established, generate reliable earnings and should be largely immune to economic shocks.
Over the long term, both managers have delivered strong returns, but that doesn’t mean the funds are identical. Smith holds two-thirds of Fundsmith Equity in US stocks, while Lindsell Train’s global equity fund holds just over a third.
We look at the performance of managers’ global equity funds and some UK-focused options for investors looking to add more quality funds to their portfolio.
Time to grab a bargain? UK funds may be outdated, but they could offer attractive returns
How have Fundsmith and Lindsell Train fared this year?
High inflation has ushered in a new economic system that offers investors both opportunity and volatility.
However, global markets have remained resilient, with the MSCI World Index up 19 percent year-to-date, in stark contrast to the -17.7 percent in 2022.
A fall in US inflation coupled with a renewed interest in artificial intelligence, which has buoyed tech stocks, has also helped markets. The S&P 500 is up 18.06 percent year-to-date, while the Nasdaq is up 35 percent.
Both Fundsmith and Lindsell Train global equity funds have benefited from the rally in tech stocks this year.
Fundsmith’s largest contributor from January to July 2023 was Meta. In a letter to shareholders, Smith noted that while fund pricing is often a priority, he remains focused on companies’ fundamental performance.
“The past six months have seen slowing revenue growth from our technology companies, robust performance from our healthcare stocks, and continued pressure on profitability from our consumer businesses.
“In summary, conditions are tougher and for the most part our businesses are struggling with slower revenue growth and/or higher input costs.” That does happen from time to time, so we’re mostly bullish.’
The Lindsell Train global equity fund, co-managed by Train, James Bullock and Michael Lindsell, has a higher proportion of the portfolio in the UK.
The latest fact sheet shows that 35.5 percent is invested in the US, closely followed by 30.3 percent in the UK and 21.3 percent in Japan.
Like Smith, Train has benefited from the strong rebound in U.S. tech stocks, with PayPal and Intuit up 12 percent and 11 percent, respectively, in July alone.
Co-manager Bullock said: “While we don’t own any of the obvious mega-cap tech winners like Nvidia (which has more than tripled this year), there are several less obvious beneficiaries who can credibly claim to have the Harnessing the power of AI.’ are improving their own products and services, but have not (yet?) experienced the extreme returns dominating the market.’
Can the UK market offer similar returns?
Smith and Train have made a name for themselves by identifying strong businesses and delivering long-term returns. This also applies to the UK stock market, although it is currently unfashionable.
Stockpicker Nick Train wants to invest in quality companies
Laith Khalaf, head of investment analysis at AJ Bell, warns that UK fund performance has been dismal in recent years.
The platform’s own data shows that even a top-quartile UK fund would not have managed to beat a bottom-quartile global fund over the past decade.
The average active UK fund has returned 74.3 percent over the past decade, compared to 155.3 percent for the average active global fund and 239.4 percent for the average active US fund.
“Many of the best-performing UK funds over the last decade have invested either exclusively or predominantly in mid-sized and smaller companies, but none have matched Fundsmith Equity’s returns.”
“However, the future doesn’t necessarily look like the past and investors would be wise to maintain some allocation to the UK equity market in their portfolios, particularly as the performance differential between global and UK funds is likely to have naturally rebalanced their portfolios in favor of the.” former.
“The strong performance of global funds is also due in part to a number of technology stocks topping the S&P 500, and a reversal in the fortunes of these stocks could see the tide turn.”
In fact, the UK market remains cheap in the eyes of many experts, which means it can be a good place to start if you’re looking to add to your portfolio.
These fund types differ from Fundsmith and Lindsell Train as the UK market is very different from the global market.
The FTSE All-Share is trading at 9x earnings while the global market is trading at 20x earnings. This is largely due to the UK being more exposed to the energy, banking and mining sectors than tech stocks which dominate the US.
Owen Freshwater, investment manager at Evelyn Partners, said: “Nevertheless there are many quality UK listed companies trading at attractive valuations.” Various fund managers use a similar quality process to Fundsmith and Lindsell Train to identify these companies and have delivering high returns for investors across market cycles.”
Active manager Terry Smith founded Fundsmith in 2010
Train himself runs Lindsell Train’s UK equity fund, which has returned despite a difficult few years 15.85 percent in the year ended June 30, 2023.
Its exposure to defensive consumer staples, financials and industrials has helped the fund steer its course.
Freshwater adds, “Given the higher quality of the portfolio, the portfolio trades at a multiple of earnings more similar to that of the global market than the UK, but in return gives investors access to a faster growing and more resilient group of companies.”
“This approach has resulted in performance that consistently outperforms UK peers.” Investors should be aware of a handful of companies listed in other markets (e.g. Heineken and Mondelez).’
Can UK funds repeat the success of Smith and Train?
While Smith’s and Train’s strategies cannot be fully reproduced, there are a number of funds that take a similar approach, investing in companies with strong fundamentals.
Freshwater highlights Evenlode Income, which identifies companies with strong economic moats, strong balance sheets and high cash flow generation.
“This approach leads to a similar exposure to Lindsell Train, with high exposure to defensive consumer staples (also owns Diageo) and industrials (Experian).
“The portfolio is more diversified at nearly 40 stocks and also includes some foreign stocks.” Given the dividend growth target, investors also get a yield advantage with a typical annual payout of 2.5 to 3 percent.”
Alex Watts, Investment Analyst at Interactive Investor, highlights Royal London Sustainable Leaders led by Mike Fox. The fund seeks to invest primarily in UK listed companies, particularly those looking to support the transition to a low carbon economy.
Although exposure to consumer companies is lower, the company has large holdings in financials, industrials and healthcare.
“Over five and ten years, the fund’s absolute and risk-adjusted performance is strong, outperforming both peer fund and benchmark.” The fund has generated impressive returns from the above-mentioned overweight industrials and healthcare sectors.
“As a UK equity offering on IIs ACE 40 (in the ‘Core’ category), the fund may be suitable for investors looking to make a sustainable journey into the UK market.”
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