However, should investors restrict themselves to one or the other of these two managers to avoid taking a double hit if their style should fall out of favour?
Paul Warner, managing director of Minerva Fund Managers, holds both Smith and Train because he says he likes the way they take a ‘Warren Buffett’ approach to investment.
“They see themselves as owners of the companies they invest in, as investment managers should, with return on equity as one of their main measures,” Warner said.
Smith heads up the £3.2bn Fundsmith Equity fund in the IA Global sector and Train manages the £1.3 CF Lindsell Train UK Equity, Finsbury Growth & Income Trust and Lindsell Train investment trust which are UK focused. Both tend to invest in mega caps that get a large proportion of their earnings globally, while they tend to buy and hold for the longer term.
Holdings such Diageo, Unilever and Heineken in the case of Train and Imperial Tobacco and Domino’s in the case of Smith are mature consumer companies with a dominant market position that generate ample amounts of cash.
Train admits there has been a gradual increase in non-normal benchmark holdings within his funds and trusts, resulting in some holdings being domiciled outside of the UK.
“Initially they were the result of inheritance. We had an enormous holding in Cadbury which turned into a US quoted piece of Dr Pepper/Mondelez/Kraft. But buying Heineken three years ago was the first time I had deliberately allocated capital out of the UK and my benchmark,” he said.
“It made me feel very uneasy. I don't like owning non-UK securities for a strategy that is measured against the FTSE All Share but the UK stock market is wonderfully diverse with outstanding global businesses. However, there are some investment ideas that I can't buy into in the UK. With Heineken for example we wanted to buy a truly global market brand and that was unattainable in the UK.”
Train concedes this gives himself and Smith a similar style.
"Yes, but why don't more people run money this way?” he asked. “It is so simple: it clearly can be really quite effective and yet a very small proportion – apart from us and Terry Smith – in the investment community try and run money this way.”
It is only since November 2010 that the pair can be compared across their funds, this being when Smith launched his own business.
According to FE Analytics, Train has returned most over this period – 107.86 per cent compared with 83.26 per cent from Smith. However, both have materially outperformed their respective peer groups.
Performance of managers and peer groups since 2010
Source: FE Analytics
The managers’ more recent performance over the past year is much more similar with less than percentage point between them.
CF Lindsell Train UK Equity is top decile in terms of total return since its launch in 2006 and has also scored very highly for volatility, maximum drawdown and the Sharpe ratio – which is a measure of risk adjusted return.
Performance of fund, sector and index since 2006
Source: FE Analytics
It is top decile of the IA UK All Companies sector for all these measures.
The Fundsmith Equity fund, which benchmarks against the MSCI World, is also top decile for the all of the above measures as well as total return since its launch in 2010.
Performance of fund, sector and index since November 2010
Source: FE Analytics
One long-term holder of Smith (pictured) is Thesis’ Steven Richards, who has held a significant position through one of his fund of fund strategies for a long time.
“The fund’s outstanding performance pays homage to Terry’s highly critical, exacting process of picking only the highest quality of stocks with a view of indefinite holding periods,” he said.
“The fact the fund comes with an industrial-looking ‘owner’s manual’ impresses a feeling you’ve just purchased a brand new Japanese pickup truck that will provide diligent, faultless service for decades to come.”
“The fund’s assiduous attention to cost limitation has ensured you pay little over the management fee, paying but a handful of basis points per year in trading costs. The fund enjoys little cost drag except that which we happily pay through the AMC for the intellectual property.”
“In as much as Terry does not promote his forecasting of the market, we appreciate that the short-term fortunes for his fund cannot be predicted either, but as a long-term hold we believe in Fundsmith’s philosophy.”
Mike Deverell, investment manager at Equilibrium, rates both managers highly and says there is a case for holding the two together, although whilst eyeing both managers’ funds up over the past few years, he is not going to invest in either.
“We have looked closely at both from time to time. They are very good [managers] with a similar style, holding things for the very long term with a low turnover,” he said.
“Our concerns are that in last 12 months it may not be a great time to be buying because of the nature of how they hold for a long time and things currently looking very expensive compared to the rest of the market, especially their bias towards quality.”
“It the part of the market where people have been willing to pay a lot for so-called quality companies. I have some concern over whether they can continue their track record.”
Both managers have been vocal on the importance of keeping costs down, in order to keep fees low with Terry Smith particularly critical of in the investment management industry’s justification for high fees.
However, Train is cheaper than Fundsmith Equity, which has a clean ongoing charges figure [OCF] of 0.99 per cent while CF Lindsell Train UK Equity is 0.77 per cent.
