However successful we are as investors, there’s always more to learn. A good place to start is by following the small number of professional fund managers who have beaten the market over long periods.
One of the top-performing managers in the UK is Nick Train. Train is often referred to as Britain’s Warren Buffett for his practice of buying shares in high-quality companies and rarely ever selling.
His funds’ results support this approach. Since its foundation in 2006, the Lindsell Train UK Equity Fund managed by Train has delivered a total return of 372% (as of November 2019). That’s more than three times the 121% return recorded by the FTSE All-Share Total Return Index over the same period.
The power of booze
FTSE 100 spirits giant Diageo accounted for 9.6% Train’s UK fund at the end of November. The drinks firm’s brands include Johnnie Walker, Smirnoff, Tanqueray, and Baileys.
The Diageo share price has risen by about 75% over the last four years, providing a powerful boost for investors who have been lucky or smart enough to hold the shares.
Sadly, I’m not one of those investors. I’ve always felt that the shares have been a little too expensive for me to buy. But in this case I’ve been proven wrong. Diageo appears to be a great example of what Warren Buffett meant when he said that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Why I like Diageo
I think there are several reasons to believe that Diageo qualifies as a wonderful company. Firstly, the group’s consistently high profitability means that it can afford to invest in growth without excessive debt. In recent years, growth has focused on premium brands such as Cîroc vodka and Casamigos tequila.
Diageo shares continue to look expensive to me on 23 times forecast earnings, with a dividend yield of just 2.4%. But the group’s impressive track record suggests to me that investors who follow Train into this stock will probably continue to do well.
The best company you haven’t heard of?
You may not be familiar with FTSE 100 group Relx. This £37bn firm provides a range of information and data analytics services to specialist markets. These include publishing scientific, medical, and technical journals and providing the widely used LexisNexis legal database service. Relx also runs trade shows and exhibitions that attract more than 7m visitors each year.
These operations give the group a dominant market share in certain sectors. As a result, many of the group’s must-have subscription services benefit from strong pricing power.
Profit margins are high. Relx reported an operating profit margin of 26% last year and generated a return on capital employed of about 22%. These impressive results mean that the group can support attractive shareholder returns while continuing to expand.
Like Diageo, Relx shares trade on more than 20 times earnings and yield less than 2.5%. But such highly profitable businesses rarely come cheap. I suspect Train’s decision to buy and hold Relx shares will be rewarded by further gains over the coming years.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and RELX. 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.