Fund managers get a lot of flak for charging high fees yet also failing to deliver market-beating returns. But while many actively managed mutual funds trail the market, there are a few out there that have deservedly earned their fees after having outperformed the market’s performance for a number of years.
The Finsbury Growth & Income Trust (LSE: FGT) is one of the best performing funds in the UK equity space, having delivered total net asset value (NAV) returns of 81% over the past five years. This compares favourably to the FTSE 100’s total return of just 36% in the same period.
Nick Train, who has been managing the fund since 2000, has achieved this success by investing in a concentrated portfolio of durable, cash generative businesses that are under-priced on its valuation analysis. With just 26 holdings altogether, he is able to keep portfolio turnover as low as possible, while keeping most of his exposure to his highest-conviction picks.
The fund’s five biggest positions are Diageo (9.5%), Unilever (8.9%), RELX (8.7%), London Stock Exchange (8.6%) and Hargreaves Lansdown (8%).
A concentrated portfolio can be a double-edged sword though, as it can increase your exposure to a small number of winners but does this by reducing diversification, which can increase the overall risk level of the portfolio. It’s all fine when your best investments are doing well, but when things turn sour, you could suffer major losses even if just a few of your top positions implode.
There are countless examples of companies that have ended up in serious trouble, and even the best stocks can suffer huge losses, sometimes abruptly, taking overly concentrated investors down with them.
Fidelity Special Values (LSE: FSV) is another fund that has massively outperformed the FTSE 100. It’s an actively managed investment trust that aims to deliver attractive long term capital growth for investors by investing in unloved companies in sectors that are out of favour.
Over the past five years, the trust has beaten the FTSE 100 by a whopping 68 percentage points, after having achieved a cumulative performance of 104% — almost three times the Footsie’s return over the same period.
Alex Wright, who has been managing the fund’s portfolio since 2012, has demonstrated considerable skill in picking under-valued stocks. He’s a value contrarian investor who looks for companies which have potential for share price growth that has been overlooked by the market. Alex has a long-term investment view and only seeks to invest in companies where he understands the potential downside risk to limit the possibility of losses.
Alex’s portfolio typically has a heavy bias towards medium-sized and smaller companies, which is a major factor in the fund’s outperformance against the Footsie. In contrast, however, it is more diversified, with typically between 80-120 stocks held in the portfolio. It also has greater geographical diversification, with up to 20% invested in overseas stock markets.