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Are Terry Smith and Neil Woodford genuinely the UK’s best fund managers?

Photo: Woodford Funds. Fair Use.

Right now, two big-name managers bestride the world of investment funds like twin colossi. Survey after survey, from platform after platform, names these two men’s funds as the most popular in the UK. Do they merit their high-blown status?

The fund god

So, to our first investment hero Terry Smith, who dazzles his rivals in the same way the original colossus Helios (the Greek titan-god of the sun) dazzled shipping entering the ancient city of Rhodes. Shine on Terry Smith. His star vehicle is Fundsmith Equity, currently the most traded fund in the UK, according to Alliance Trust, AJ Bell, Interactive Investor, Fidelity FundsNetwork and others who track these things. So what has he done to merit all this attention?

Helped FundSmith Equity to grow 150% in the past five years, that’s what. Terry Smith only established Fundsmith in 2010, and it has got off to a real flyer. This is a fast-growing colossus, already managing £9.2bn of investor money. Smith relies on “rigorous research” to produce a focused portfolio containing a small number of high quality, resilient, global growth companies that offer good value, which he intends to hold for a long time.

Stay focused

A look at the fund’s top 10 holdings hardly suggests a radical choice of investments, as it includes US giants Microsoft, PepsiCo, PayPal, Philip Morris and Dr Pepper Snapple. All four meet his criteria of being high quality businesses that can sustain a high return on operating capital, whose advantages are difficult to replicate, and that don’t require significant leverage to generate returns. They must also be resilient to change, particularly technological innovation, while trading at attractive valuations.

Fundsmith is no closet benchmark tracker, it may hold as few as 20 or 30 stocks, and this tight focus gives it greater scope for underperformance or outperformance. Smith deserves his plaudits, although you should note that this has been a boom time for US stocks, which make up almost two-thirds of his global portfolio. Low-cost tracker Vanguard S&P 500 grew 140% over the same period, and it doesn’t have a manager at all. Smith could quickly be toppled if the US retrenches under Trump. Still, it’s no mean feat to beat the US market, and Smith has done it.

Woodford’s cloudy year

Terry Smith is a fund management newcomer compared to Neil Woodford, who has been making a success of investing other people’s money for more than 25 years. His eponymous fund CF Woodford Equity Income is the top seller at Hargreaves Lansdown and The Share Centre, and second-placed just about everywhere else.

This is the man who famously turned £10,000 into £114,000 in 20 years. But he’s just suffered a disappointing 12 months, with Woodford Equity Income rising just 5.8%. That’s a fraction of Terry Smith’s 25.8%, according to figures from Trustnet.com. However, you can’t judge a man of Woodford’s stellar reputation on just one year, especially since he has a track record of making brave market calls that may dent performance in the short run, but invariably prove to be correct over the long term.

In both cases, past performance is no guarantee of future success, but right now, Smith and Woodford remain the ones to beat.

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