Terry Smith and Nick Train are two of the UK’s best portfolio managers. Over the last five years, their respective global equity funds, Fundsmith Equity and Lindsell Train Global Equity, have both returned nearly 20% per year for investors.
What’s fascinating about these two fund managers is they both employ very straightforward approaches to investing. It’s nothing that the average investor cannot replicate. With that in mind, here’s a look at how I plan to invest like Smith and Train next year.
Terry Smith and Nick Train focus on their best ideas
The first thing to note about Smith and Train is they take a ‘high-conviction’ approach to investing. Instead of owning hundreds of different stocks like some portfolio managers do, they only hold around 30 stocks each. In other words, they’re focused on their best ideas. I think this is a smart strategy. Personally, I own just over 40 stocks. Next year, I plan to reduce the number of stocks I hold slightly to focus more on my best ideas.
Big bets on top stocks
While Smith and Train each hold around 30 stocks, they don’t hold them in equal weights. Instead, they allocate more weight to the stocks they’re most bullish on. Smith, for example, has a large position in Microsoft. It’s currently about 7% of his portfolio.
Train, meanwhile, likes Unilever and Diageo. These two stocks represent about 16% of his portfolio. This is an approach I pursue as well. My top holdings going into 2021 include Apple (6% of my portfolio), Alphabet (6%), and Diageo (5%).
A focus on quality
Smith and Train also invest with a strong focus on ‘quality.’ Instead of buying cheap stocks, they look for companies with strong and sustainable earnings, high levels of profitability, and strong balance sheets.
It’s a similar approach to that of billionaire investor Warren Buffett. I think this is a great approach to investing and I’ve been focusing more on quality stocks in recent years. The results have been excellent. These kinds of stocks tend to deliver strong long-term returns while also protecting investors during periods of market volatility.
It’s worth pointing out that many of the companies Smith and Train invest in are benefitting from dominant structural trends. PayPal, for example, which both fund managers own, is benefitting from the shift to digital payments. Diageo, another stock they both own, is benefitting from the global ‘premiumisation’ trend. I plan to focus my portfolio more on powerful trends in 2021.
The world’s best companies
Finally, one of the keys to success for Smith and Train is that they invest globally. While both own a handful of UK shares, they don’t restrict themselves to the domestic stock market. This opens a whole new world of attractive investment opportunities.
Some examples of top international companies found in their portfolios include make-up powerhouse Estée Lauder, diabetes specialist Novo Nordisk, entertainment company Walt Disney, and beverages champion PepsiCo.
I’ve been making my own portfolio more global over the last few years and the results have been fantastic. While the FTSE 100 has struggled, I’ve made big gains from the likes of Apple, Alphabet, Microsoft, and PayPal. In 2021, I’ll continue to invest with a global focus, in the same way Smith and Train do.
Edward Sheldon owns shares in Apple, Alphabet, Diageo, Unilever, Microsoft, and PayPal and also has positions in Fundsmith Equity and Lindsell Train Global Equity. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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 Alphabet (C shares), Apple, Microsoft, PayPal Holdings, and Walt Disney. The Motley Fool UK has recommended Diageo, Novo Nordisk, and Unilever and recommends the following options: short January 2021 $135 calls on Walt Disney, long January 2021 $60 calls on Walt Disney, 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.