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How you can invest like Britain’s best fund manager

Nick Train is regarded by many as Britain’s most respected fund manager. Neil Woodford held this title for a decade but has lost his crown due to a number of high profile failures such as Kier, Eve Sleep and Lloyds Bank, leading to his main fund underperforming the FTSE 100 for the past three years. Nick Train on the other hand has over-performed during the same period through his basket of good quality companies that operate strong brands.

Focus on the company, not the market

The Lindsell Train UK equity fund that Nick manages himself has returned around 70% over the last five years, outperforming the FTSE 100. He very rarely buys or sells companies, preferring not to time the market. Instead he chooses to back brands and management that he likes. This includes Hargreaves Lansdown, which I have recommended recently for its high quality returns.

Train’s strategy might surprise a lot of people as he is not concerned with buying companies with seemingly good valuations. I say ‘seemingly’ because value does not mean the same as cheap. Companies that seem cheap can often be very bad value if they continue to fall, and expensive companies can be good value if they continue to rise. The problem is that low price-to-earnings ratios (P/E) and falling share prices are very tempting entry points, but they are almost always signs of trouble ahead (and I speak from experience when I say this). The success of Nick Train’s funds over the long term shows that ‘high’ valuations are often fair and entirely justified.

Three key features

The three qualities that all of Train’s holdings have in common are, first, a good operating margin (normally over 15%), and second, a high return-on-capital-employed (ROCE), which measures how effectively investments in a company perform. This ratio is key in terms of how quickly a business can generate growth. Together these first two show if a firm is very effective at generating capital and redeploying it in the business.

Thirdly, Train also looks for businesses that have a good brand that should continue to do well regardless of increased competition or difficult economic conditions.

Burberry and Diageo are two of his holdings that fit these three criteria. Burberry is a luxury brand with a 17% operating margin and a ROCE of 30%. Diageo is the owner of many popular drinks brands like Johnnie Walker and Guinness. It has a 30% operating margin and a ROCE of 16%. Both of these companies have strong brands which are known around the world and should continue to do well regardless of economic conditions. These are both great examples of high quality brands, but I could have picked almost any of the holding in his funds and they would have a similar profile.

Good company

If this all sounds quite familiar, then it is possibly because Nick’s strategy is very similar to that of the greatest investor of all time, Warren Buffett. Both of them very rarely buy or sell and yet have outperformed the market over long periods of time. This shows that the secret to investing success is much simpler than most people realise if you can stay disciplined enough to stick to your convictions. 

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Robert Faulkner own shares in Hargreaves Lansdown. The Motley Fool UK has recommended Burberry, Diageo, Hargreaves Lansdown, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.