FE Trustnet looks at five examples of these high-conviction funds that have a proven record of providing investors with stellar returns over the long-term.
Lindsell Train Global Equity
Richard Troue, investment analyst at Hargreaves Lansdown, says the Lindsell Train Global Equity fund is one of the best examples of a focused best ideas portfolio.
"I think Nick Train and Michael Lindsell are a good choice for an investor looking for a high-conviction management team," he said.
"In their UK fund, they have around 30 stocks and in the Global Equity fund they have just 27 holdings. The pair have done very well over the long-term and their approach is the type of buy-and-hold forever strategy."
"With the Global Equity fund, there will be times when it underperforms and it may look dull for a couple of years due to the small portfolio. There are clearly some risks involved when buying the fund as it is a best ideas portfolio."
"However, they have a bottom-up long-term view on equity markets," Troue added.
The FSA offshore recognised Lindsell Train Global Equity fund was launched in March 2011 and has been run by FE Alpha Manager Nick Train since its inception.
According to FE Analytics, the Irish-domiciled fund has returned 38.91 per cent over that time while its benchmark – the MSCI World Index – has returned 26.67 per cent.
Performance of fund vs sector and index since March 2011
Source: FE Analytics
The fund has tended to be slightly more volatile than its benchmark since launch.
Lindsell Train Global Equity’s largest regional weighting is to North America, with 45.6 per cent of the portfolio in US-listed companies.
The fund requires a minimum investment of £1,500 and has an ongoing charges fee (OCF) of 1.45 per cent.
Standard Life UK Equity Unconstrained
Troue also likes Ed Legget’s Standard Life UK Equity Unconstrained fund, however he says prospective investors must know what they are getting into.
"For a UK-focused growth fund, I do like Standard Life UK Equity Unconstrained," he said.
"It is very much a best ideas fund that focuses on more cyclical and economically sensitive sectors, such as industrials and financials."
"Legget has a very aggressive approach and looks to own a portfolio of between 40 and 50 holdings."
"It can take a real hit when markets pull back, but that is both the function of the fund’s concentrated portfolio and the cyclical stocks Legget holds. That’s because investors always flock to the more defensive names when there is bad news."
The £576.5 Standard Life UK Equity Unconstrained fund has been the top-performing portfolio in the IMA UK All Companies sector over five years, with returns of 140.01 per cent, beating its peers by more than 100 percentage points in the process.
However, it has been a particularly bumpy ride for investors over this time.
During the rally over the last six months, Standard Life UK Equity Unconstrained’s returns of 28.28 per cent make it the second best-performing fund in the sector, falling just behind Invesco Perpetual UK Aggressive.
Nevertheless, when markets have fallen – like in 2011 – the fund was the fourth-worst fund in the UK growth space, having lost just over 20 per cent that year.
The fund comprises of 52 holdings, with its top-10 accounting for nearly 40 per cent of the AUM. It has 40.3 per cent in industrials and 15.8 per cent in financials.
Standard Life UK Equity Unconstrained has an OCF of 1.9 per cent and requires a minimum investment of £1,000.
Fundsmith Equity
Tim Cockerill (pictured), head of collectives research at Rowan Dartington, says that along with Nick Train and Michael Lindsell’s portfolios, Fundsmith Equity is the only true high-conviction fund available.
"Fundsmith Equity is a good example of a fund with a small number of holdings, a long-term view and a very low turnover rate," he said. "They are all about finding businesses that they really think are outstanding in many respects, and then hold them for a long time. The Lindsell Train funds have the same approach of thorough research and then sit there and hold it."
"For me, those are the only true conviction portfolios. Managers say every stock in their portfolio is a high-conviction hold; however they will have a number of short-term holdings in there."
"I think the conviction in the likes of Fundsmith Equity runs a lot deeper."
"That is what investing is all about for me: a long-term view. Businesses have to take long-term decisions and I think if you have a short-term view, say a year, you are really just betting on share price movements."
The £1.2bn Fundsmith Equity fund has returned 50.31 per cent since its launch in November 2010.
This beats both the MSCI World and the IMA Global sector, which have returned 28.47 per cent and 20.27 per cent, respectively.
Performance of fund vs sector and index since Nov 2010
Source: FE Analytics
The fund has just 27 holdings, which the management team describes as "just a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time, and in which we invest our own money".
The fund requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.69 per cent.
MFM Slater Growth
FE Alpha Manager Mark Slater’s five crown-rated MFM Slater Growth fund also has a small number of holdings and a good track record.
It has just £56.1m of assets under management. The fund owns 36 stocks with the top-10 holdings accounting for 40.38 per cent.
MFM Slater Growth has been the sixth best-performing fund in IMA UK All Companies over three years, with returns of 71.53 per cent, considerably beating the FSTE All Share in the process.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
FE Research’s Charles Younes says much of this success comes from the manager's active, bottom-up approach.
"The fund invests in UK companies with the potential for substantial growth regardless of the economic environment," he said.
"Manager Mark Slater and his team use a range of financial ratios to filter all public UK companies in the hope of finding stocks that are undervalued, based on prospects for growth and profits."
"The portfolio was re-organised in 2010 to focus on businesses with much greater growth potential and, as a result, is now predominantly made up of small- and medium-sized firms."
"Slater plays an active role as a shareholder in each company, closely examining the health of the business and the management strategy."
The fund has an OCF of 1.55 per cent and requires a minimum investment of £3,000.
Jupiter European
FE Alpha Manager Alexander Darwall's Jupiter European is another example of a top-performing highly concentrated portfolio.
The five crown-rated fund has just 39 holdings, with the top-five accounting for 33.87 per cent of the £2.1bn AUM. Its top-20 makes up 85.36 per cent.
This approach has clearly worked for Darwall, as the fund is the second best-performing fund in the IMA Europe ex UK sector over 10 years, with returns of 340.69 per cent.
It has been one of the top-three funds in its sector over over one, three and five years.
Jupiter European requires a minimum investment of £500 and has an OCF of 1.59 per cent.