The last few months has been a challenging period for many investors. Since the middle of February, the FTSE 100 index has fallen around 20%. Many popular Footsie stocks, such as Royal Dutch Shell and BT Group, have performed far worse.
There are some investors that have come through the last few months relatively unscathed however. One such investor is Terry Smith – the man they often call ‘Britain’s Warren Buffett’. Over the last three months, his equity fund, Fundsmith, has only fallen around 3%. That’s a significantly better return than the FTSE 100 has generated. So, what’s Smith doing differently that has enabled him to outperform?
The first thing to understand about Smith’s investment strategy is he invests with a global focus. This means that, relative to those who only invest in the UK, he has access to a wider range of opportunities.
This ability has certainly helped Smith outperform this year. For example, his top holding, Microsoft, which is listed in the US, is up over 10% this year. Meanwhile, his second top holding, PayPal, which is also listed in the US, is up around 30% year-to-date.
Smith also has a strong focus on companies with attractive growth prospects. PayPal is a good example. It’s benefiting as the world makes more electronic payments and uses cash less. Over the last three years, revenue at PayPal has grown over 60%. There aren’t many companies in the FTSE 100 that have generated that level of top-line growth.
It’s also worth pointing out that Fundsmith has a strong focus on three main sectors. These are technology, healthcare, and consumer staples. This has also contributed to the fund’s strong performance. It’s not hard to see why. The technology sector is benefitting as we all work and shop from home, while healthcare and consumer staples are defensive sectors that offer high levels of resilience during periods of economic uncertainty. Just look at FTSE 100 consumer staples stock Reckitt Benckiser, which Fundsmith holds. It’s up over 10% this year.
Finally, Smith invests in high-quality businesses that are resilient to change and can sustain a high return on capital employed. FTSE 100 champion Unilever is a good example of a high-quality stock he owns.
Generally speaking, these kinds of stocks tend to outperform when the market crashes. Looking at Unilever, it’s only down about 5% this year.
It’s not hard to invest like Smith
Can your average UK investor invest in the same way that Smith does? Absolutely.
For a start, it’s very easy to add internationally-listed stocks to your portfolio. Through platforms such as Hargreaves Lansdown, you can invest in world-class companies listed overseas within minutes.
Secondly, there are plenty of high-quality, resilient businesses listed on the London Stock Exchange UK investors can invest in. Unilever, Reckitt Benckiser, Diageo, and Sage are some good examples. These kinds of companies can provide portfolio stability.
Finally, there are plenty of UK stocks that have attractive long-term growth prospects. You just need to know where to look. Often, they’re outside the FTSE 100.
If you’re looking for more information on companies with high growth potential, you’ll find plenty of great research right here at The Motley Fool.
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Edward Sheldon owns shares in Royal Dutch Shell, Microsoft, PayPal, Sage, Diageo, Unilever, Hargreaves Lansdown, Reckitt Benckiser and has a position in Fundsmith Equity. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft and PayPal Holdings. The Motley Fool UK has recommended Diageo, Hargreaves Lansdown, and Sage Group and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and long January 2022 $75 calls on PayPal Holdings. 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.