When it comes to active managers, few are as well-known as Terry Smith and Nick Train. These stockpickers have established a reputation over many years by delivering attractive returns to investors through their Fundsmith and Lindsell Train funds. Their global equity funds have become particularly popular for Isas. Smith and Train focus on investing in “high-quality” companies that are established, consistently profitable, and resilient to economic shocks. While both managers have achieved strong long-term returns, their funds are not identical. Smith holds two-thirds of Fundsmith Equity in US shares, while Lindsell Train’s global equity fund holds just over a third. In this article, we will examine the performance of these global equity funds and explore some UK-focused options for investors seeking to add high-quality funds to their portfolios. Is it time to consider UK funds as a bargain? Despite being out of favor, these funds could offer attractive returns.
How have Fundsmith and Lindsell Train performed this year? The current economic regime, characterized by high inflation, has presented both opportunities and volatility for investors. However, global markets have remained resilient, with the MSCI World Index gaining 19% year to date, compared to a -17.7% return in 2022. A decline in US inflation and the surge of interest in artificial intelligence have pushed tech stocks higher, contributing to the overall market performance. The S&P 500 is up 18.06% year to date, while the Nasdaq has gained 35%. Both Fundsmith and Lindsell Train’s global equity funds have benefited from the tech stock rally this year. For Fundsmith, Meta has been the top contributor from January to July 2023. Terry Smith emphasizes that while fund price performance is important, he remains focused on the fundamental performance of the companies in the portfolio. Lindsell Train’s global equity fund, co-managed by Train, James Bullock, and Michael Lindsell, has a higher allocation to the UK market. Its most recent factsheet shows 35.5% invested in the US, 30.3% in the UK, and 21.3% in Japan. Train has also benefited from the tech rally, with PayPal and Intuit gaining 12% and 11% respectively in July alone. Bullock notes that while they have not invested in obvious mega-cap tech winners like Nvidia, several less obvious beneficiaries have harnessed AI’s power to enhance their products and services. Can the UK market offer similar returns? Smith and Train have built their names by identifying strong companies and delivering long-term returns. This approach can also be applied to the UK stock market, despite its current lack of popularity. UK funds have shown dismal performance in recent years, with even the best-performing UK funds failing to outperform the worst-performing global funds over the last decade. However, investors should still consider allocating some of their portfolios to the UK market as the performance gap between global and UK funds may naturally re-balance in the future. Additionally, the UK market remains undervalued, making it an attractive place to find opportunities. UK funds will differ from Fundsmith and Lindsell Train due to the unique characteristics of the UK market. The FTSE All-Share trades at a lower earnings multiple compared to the global market, mainly due to its higher exposure to energy, banks, and mining instead of tech stocks. Despite this, there are many high-quality UK-listed businesses that trade at attractive valuations. Various fund managers take a similar approach to Fundsmith and Lindsell Train, identifying these companies and delivering strong returns through different market cycles. Terry Smith founded Fundsmith in 2010, while Train himself manages Lindsell Train’s UK equity fund, which has delivered a return of 15.85% in the year to June 30, 2023. The fund’s holdings in defensive consumer companies, financials, and industrials have helped it navigate through challenging times. Can any UK funds replicate Smith and Train’s success? While it is not possible to replicate their strategies entirely, there are some funds that follow a similar approach of investing in companies with strong fundamentals. One such fund is Evenlode Income, which identifies businesses with strong economic moats, strong balance sheets, and high cash flow generation. It has a similar exposure to defensive consumer businesses and industrials as Lindsell Train, with a greater stock diversification. Another notable fund is Royal London Sustainable Leaders, led by Mike Fox, which focuses on investing in UK-listed companies supporting the transition to a low-carbon economy. While it has less exposure to consumer businesses, it has significant holdings in financials, industrials, and healthcare. Over five and ten years, the fund has demonstrated strong absolute and risk-adjusted performance, outperforming both peer funds and benchmarks. These UK-focused funds offer investors the opportunity to sustainably navigate the UK market while potentially achieving strong returns.
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