The Motley Fool

Terry Smith vs Warren Buffett: 3 differences in the way they invest

Terry Smith, who manages the popular Fundsmith Equity fund, is often referred to as ‘Britain’s Warren Buffett’. The reason is that, like Buffett, he invests in high-quality businesses for the long term. He’s also delivered stunning long-term returns for his investors in the same way Buffett has.

However, look closely at their respective strategies and you will find some differences in the way they invest. Here’s a look at three key ones I’ve spotted.

Diversification 

Comparing the Fundsmith portfolio to Warren Buffett’s Berkshire Hathaway portfolio, the first major difference I see is the number of holdings.

Currently, Buffett owns 46 stocks, according to CNBC’s Berkshire Hathaway Portfolio Tracker. This means his portfolio is relatively concentrated. By contrast, at 31 October, Fundsmith only held 27 stocks. This means the fund is highly concentrated.

This suggests Smith is even more of a high-conviction investor than Buffett.

Sector bias

The next major difference is Smith tends to avoid a number of sectors that Buffett invests in.

Look at the Fundsmith holdings and you’ll see the portfolio is heavily biased towards three main sectors – consumer staples, technology, and healthcare. Industries Smith has avoided include banks, insurers, and airlines.

By contrast, Buffett owns several banks, a number of insurers, and multiple airlines. So, from a sector allocation point of view, the two investors are very different in their approaches. Buffett’s portfolio is a little more diversified than Smith’s.

Thematic approach

Finally, comparing Fundsmith’s holdings to Berkshire’s holdings, Smith appears to have more of a ‘thematic’ approach to investing, in my view. When I look at the Fundsmith portfolio, I see plenty of companies that are well placed to benefit from powerful long-term trends.

For example, one of the biggest health challenges the world faces today is diabetes. This condition currently affects over 400m people across the world and, by 2045, it’s expected to affect around 630m people. Here, Fundsmith has exposure to healthcare companies such as Novo Nordisk (which specialises in diabetes medicines) and Becton Dickinson and Co (which makes insulin needles and syringes), which should both benefit from this alarming trend.

Another major trend that Fundsmith is well placed to benefit from is the world’s ageing population. Here, the fund owns stocks such as Coloplast (which makes healthcare products related to ostomy, continence, and wound care), and InterContinental Hotels (retirees generally love to travel).

Other trends the fund should benefit from include urbanisation, rising wealth across the emerging markets, and the increase in digital payments. Looking at the Fundsmith portfolio, almost every stock looks set to benefit from powerful long-term trends. However, looking at Berkshire Hathaway, I don’t see the same thematic approach.

In summary, while Smith and Buffett do have their similarities, their investment styles are also quite different in certain areas.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.

Simply click here for your free copy.

Edward Sheldon has a position in Fundsmith. The Motley Fool UK has recommended InterContinental Hotels 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.