Billions have been entrusted by investors in recent years to the care of the fund management firmament’s top stars, Terry Smith and Nick Train.
But a sense of unease now pervades some of the fans of these managers.
They may differ in their personalities, but their shared preference for big name consumer and technology stocks has lately been delivering some disappointing results.
Are we witnessing the twilight of the two fund management gods, celebrated for their exceptional level of out-performance between 2010 and 2020? Or will their long-term buy-and-hold approach come good?
Smith favours cosmetics, with stakes in Estee Lauder and L’Oreal and cigarettes in the shape of Philip Morris, while Train places his faith in alcohol, owning Diageo, Fever-Tree, Heineken and Remy Cointreau. They both back Unilever and a mix of tech stocks.
The two stars’ misfortunes are, of course, attributable to such shares’ fall from fashion.
The allure of these quality growth stocks has been lessened by soaring inflation and interest rates, although opinion on Wall Street did appear to change this week, sparking a chase for technology companies.
Despite this shift, some are asking whether Smith and Train should be responding to the new passion for ‘value’ stocks which are inexpensive, but – apparently – possessed of the potential for great things. Smith has shared his scepticism of this assessment.
The giant Fundsmith, Smith’s best-known vehicle, may have provided a return of 65 per cent over the past five years, against an average of 43 per cent for similar global equity funds, but the fund’s value has dropped by 18 per cent since January.
The share price of the Smithson Investment Trust, which focuses on smaller businesses, has fallen by 37 per cent over the same period.
As an investor in Fundsmith since 2015, I have been developing something akin to a seven-year itch, although the total value of my monthly contributions to the fund is up 45 per cent. I am also in two minds over Smithson.
The five-year return from Finsbury Growth and Income, Train’s investment trust, has been 24 per cent, compared with 17 per cent for the average UK Equity Income trust.
Yet the trust’s share price has fallen by 15 per cent since January. The Lindsell Train UK Equity and Global Equity funds are also failing to sparkle. Neither Smith nor Train seem ready to retire, with Train promising seven more years.
They have also dealt – each in his characteristic fashion – with criticism. Train apologised profusely but believes his portfolios, which are full of ‘outstanding companies’, will bounce back.
The notoriously blunt Smith picked a fight with lacklustre Unilever over its sustainability fixation. But he also argues that the companies he owns have generous profit margins, and points to the above-average ‘free cash flow yields’ of Alphabet and others. This is a measure of the amount of money generated by a company and is Smith’s primary valuation yardstick.
These assurances mean I am unlikely to take my leave of Smith, for the time being. I am watching to see whether Wall Street’s tentative optimism persists.
Unease: Funds run by Terry Smith (above) and Nick Train are down by double digits this year
Others are also persuaded that Smith and Train will stage a comeback, while warning over the risks of over-reliance on the stars.
Darius McDermott of FundCalibre comments: ‘If you believe that inflation is going to stay higher for longer, then there is a good case for moving to banks and commodities, like oil. But I wouldn’t be selling Smith to make the move.’
Fundsmith and Lindsell Train UK Equity continue to be included in Interactive Investor’s top 60 funds. Dzmitry Lipski of Interactive Investor argues that the two managers’ experience and record should count for something.
Lipski suggests Artemis SmartGARP Global Equity as a complement to Fundsmith, and Stonehenge Best Ideas Equity as an alternative. Holders of Lindsell Train UK Equity could consider Jupiter UK Special Situations as a complement, or Ninety One UK Alpha as an alternative.
Smith and Train were regarded as ideal choices for anyone making a first foray into long-term stock market investing, which explains why Fundsmith is the UK’s largest fund. But they have growing competition from younger managers running smaller funds.
Ben Yearsley at Shore Financial cites Stephen Yiu at Blue Whale Growth and Zehrid Osmani at Martin Currie Global Long-Term Unconstrained. Following any star to the exclusion of others can be a source of woe, as the Neil Woodford scandal highlights. But Woodford betrayed his investors by radically changing his approach.
It is possible to be temporarily irritated that Smith and Train are committed to their strategies, while being appreciative of such consistency.