Skip to the content

Which fund should I buy to sit alongside Nick Train?

26 November 2015

Following on from an article earlier this month, news editor Alex Paget runs through his ideas for a perfect fund to sit alongside CF Lindsell Train UK Equity.

By Alex Paget,

News Editor, FE Trustnet

As I wrote a few weeks ago, I’m going to be buying FE Alpha Manager Nick Train’s five crown-rated CF Lindsell Train UK Equity fund to form the core of my portfolio – despite the fact it has never really underperformed.

Firstly, I want to thank everyone who commented on the article. It was great to see it sparked some debate and the comments were filled with interesting and helpful insights.

Now, as you know, I was concerned about buying the fund as (although I know exactly what role it would play in my portfolio, I like the process and believe in the manager) it has outperformed the UK equity market in every year since 2007 and there are concerns that Train’s quality growth style may go through a period of underperformance.

Relative performance of indices over 5yrs

 

Source: FE Analytics

In fact, since then the FE Trustnet team has written a number of articles from market commentators about why investors should avoid funds like CF Lindsell Train UK Equity due to their strong outperformance, the relative poor underperformance of value stocks and the increasing likelihood of an interest rate rise.

Brilliant…

But, as I wrote before, my plan was to never hold Train’s fund in isolation so given I rate the manager highly, I’m prepared to endure a tough period for the strategy in the expectation of long-term outperformance – as long as I can find funds that can complement it going forward.

And that is exactly where I find myself now – trying to find a fund which dovetails nicely with CF Lindsell Train UK Equity.

I’d like to point out I’m only looking at UK funds at this point in time. There are a couple of reasons for that – the UK market is the one I focus on the most and, at this stage, I can only invest a very, very modest sum.

In time, though, I will be looking to add other regional funds to my squad.

Given Train offers me exposure to high quality companies with reliable earnings and a strong franchise (which have performed phenomenally well and are very en-vogue), I want a more value-orientated fund to hopefully give me a smoother overall return.  

I also like the idea of blending strategies, as I have absolutely no clue which way markets are going to go.

In my mind, there a lot of good value managers in the UK. For example, I was toying with the idea of buying FE Alpha Manager Alex SavvidesJOHCM UK Dynamic fund or Schroder Recovery due to their established approaches.

However, when speaking to Hargreaves Lansdown’s Mark Dampier for the last article, he told me that I really should have a decent weighting to smaller companies given I am in mid-20s – and I tend to agree.

Therefore, (rightly or wrongly) I’ve stricken Savvides and the Schroders team off the list as while they are multi-cap managers, they can go heavily into large-caps (and possibly into Train’s staple holdings) and so I want greater control over my asset allocation.


 

My search for a value-orientated small-cap-biased fund has left me with three possible options in my opinion (though if readers have any other ideas, I love to hear about them) – and they are CF Miton UK Value Opportunities, Aberforth UK Small Companies and Fidelity UK Smaller Companies.

There is little doubt that CF Miton UK Value Opportunities, which is run by FE Alpha Manager George Godber and Georgina Hamilton, has quickly turned into one of the darlings of the IA UK All Companies sector since its launch in March 2013.

Performance of fund versus sector and index since launch

 

Source: FE Analytics

Not only has it been top decile and significantly beaten the index over that time, it has had the best risk-adjusted returns and maximum drawdown in the peer group – which isn’t something you would expect from small and mid-cap biased fund.

I also like and understand the process, with the managers running two tranches within their portfolio of ‘cheap value creators’ and ‘bargain assets’, but they also have stringent safety checks in place to try and avoid value traps.

But, I have two reservations about paring it up with CF Lindsell Train UK Equity.

Firstly, Train’s process is pretty defensive in itself so I’m not really looking for another fund which prioritises downside protection. On top of that, while the managers are hugely underweight the FTSE 100 at the moment, that could always change over time and I really want dedicated small-cap exposure.

Basically, I want something a tad punchier.

The £170m Aberforth UK Small Companies fund, as its name suggests, is genuinely small-cap and has that value tilt which I’m after.

It is also headed up by a very experienced team with Alistair Whyte and Richard Newbery since two months before I was born. Since then, they have been joined by Andy Bamford, Euan McDonald, Keith Muir and Mark Williamson as co-managers.

The team has proven its ability over the long term with the fund massively outperforming both the IA UK Smaller Companies sector and its Numis benchmark since our data on the fund started in February 1995.

Performance of fund versus sector and index

 

Source: FE Analytics

Yes, its relative returns look less impressive over one, three, five and 10 years but I don’t necessarily care what it has done in the more recent past (mainly as growth small-cap funds have seemingly dominated over the past decade or so) as I’m looking to buy a fund for the long term.

However, my major concern is that I know very little about it. This is, of course, nothing against the managers but I’ve only ever wanted to own funds where I know the process used and the managers’ views.

From my point of view, I want a basic understanding of why each of my potential funds is out or underperforming so I know whether or not it is actually playing the role in my portfolio I want it to.


 

So, therefore, my favourite out of the three has to be FE Alpha Manager Alex Wright’s Fidelity UK Smaller Companies fund as I have spoken to the manager on a number of occasions and written about the fund many times.

Wright is a genuine value-contrarian manager whereby he focuses on cheap, unloved stocks with an asset or characteristic that gives the share price a margin of safety, but also that are entering a period of positive change.

I like the fact Wright (and co-manager Jonathan Winton) have three sections of the portfolio – stocks which are deeply unloved and have only just come into the fund, stocks which have started to see signs of improvement and stocks where the managers believe the underlying value has been realised and are therefore looking to sell to bring in more first stage names.

Like Train’s fund, though, it has been an outstanding performer in total return terms. It tops the sector since launch in February 2008 and has more than doubled the gains of its benchmark. On top of that, it has beaten the sector and index in every calendar year since inception.

Performance of fund versus sector and index since launch

 

Source: FE Analytics

So, am I once again seeing safety in its strong past numbers? Certainly, the major reason I’ve written so much about the fund and therefore know it well is because of its barnstorming gains.

But, I am looking to the future here and I do think Wright is one of the best value managers in the UK. I also like the fact Fidelity has been very active in managing the flows into the fund in the past – suggesting the manager’s process won’t ever be affected by capacity constraints.

I’m clearly in the need of some assistance and thankfully, after explaining my circumstances and my objectives, Premier’s Simon Evan-Cook was there to lend a helping hand.

“Of those three funds, Fidelity would be my pick. The fund is still at a manageable size and Fidelity have shown themselves to be good at managing capacity in the recent past,” Evan-Cook said.

“Yes, the fund has outperformed quite consistently, but sometimes this is down to manager talent, not a style headwind. And as Alex and Jonathan are genuine deeper value managers, I’m confident they’re not about to face a reversal of a style tailwind, as they haven’t had one.”

“Note that’s a style tailwind as opposed to market-cap tailwind. Small-caps are a great place to invest, but the sell-offs can be brutal in the short term and we haven’t had a really severe one since the financial crisis. You need to be mentally prepared for that eventuality.”

Certainly, I know the process, rate the manager and think it would work very well alongside Train’s fund over the longer term. Plus, I’m conscious of the fact that Fidelity will close the fund if it sees a significant ramp-up in interest (despite the fact it is only £313m) so I don’t really want to miss an opportunity.

On top of that, while there were concerns Wright may not be able to spilt his time effectively between his small-cap fund and his new flagship £2bn-plus Special Situations fund, he has seemingly proved those doubters wrong.

Therefore, I think I’m going to go for it, but as always I’d love to hear what the readers have to say about my decision. 

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.