Nick Train and Terry Smith are two of the most popular fund managers in the UK. Based on their track records, it’s easy to see why those determined to retire with a great nest egg have been so keen to invest with them.
The Lindsell Train Global Equity Fund (one of several managed by Train) returned 272% from launch in 2011 to 31 March this year. Smith’s Fundsmith Equity fund returned 328% between November 2010 and the end of last month. Remember — these gains take into account last month’s dramatic market crash.
Many Foolish investors will prefer to pick their own stocks. Nevertheless, I think learning from both money managers could increase your chances of obtaining great wealth.
Buy class to retire richer
Although they’ve no affiliation, Train and Smith have very similar investment strategies. Just like Warren Buffett, both look for high-quality companies. These tend to generate big returns on capital employed. In other words, they make great money on the money they invest in themselves.
Train and Smith also look for businesses with compelling brands. Naturally, they don’t hold exactly the same companies in their portfolios, but many come from the same defensive sectors, namely consumer goods, software, and healthcare.
In addition, these managers embody the idea that knowing everything about a small bunch of great stocks is far better than knowing little about a lot. Their portfolios contain 20-30 companies. I believe private investors should only invest in their best ideas too if they want to outperform benchmarks like the FTSE 100 and potentially retire early.
Avoid the rubbish
It’s a testament to Train’s and Smith’s stock-picking abilities that their funds have done relatively well during the pandemic. The former’s fund declined just 3.3% in March, while the latter’s fell 3.7%. Their benchmark dropped 10.6%.
I think this can be attributed not only to their love for great companies but also their aversion to simply buying what’s cheap. As Smith remarked in his recent letter to shareholders: “Shares in companies that are lowly rated are so mostly for good reasons.”
This observation is so important to grasp right now. With many stocks (good and bad) still reeling from the crash, it’s vital to get under the bonnet of each potential investment and check its fundamentals. Companies usually stay ‘cheap’ if they’ve too much debt, can’t grow, or struggle to make a profit.
And it goes without saying that ‘quality investing’ is far less risky than buying a basket of penny shares.
When Train and Smith buy, they do so with the intention of holding for the very long term, unless something changes in the underlying business. A market crash doesn’t faze them. As a result, both funds have exceptionally low turnover rates relative to other funds.
Such inactivity might be too much for private investors managing their own money for retirement. But it’s worth remembering that frequent buying and selling only guarantees higher costs, nothing more.
Of course, you could just invest with Smith, Train, or both, and be done with it. Those that dislike management fees, however, might simply want to apply the principles these professional money managers abide by instead.
The next few months could see a resumption of volatility in markets. Buy and hold great stocks at reasonable prices and the dream of a golden retirement could become a reality.
Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK has no position in any of the shares mentioned. 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.