Investing for long term value

Warren Buffett CEO of Berkshire Hathaway, probably the most successful investor of his generation, has always maintained that you should not invest into any company you do not understand.

Moreover you should not buy a stock merely because you believe it will go up in price as it is impossible to predict how  the stock market will perform; rather you should only invest in companies you understand and believe will offer long term value.

Another investor who will only invest into stocks he understands is Nick Train who, with his partner Michael Lindsell, runs the Lindsell Train Global Equity Fund whose aim is to increase shareholder value over the longer term by investing in global equities. Over the last five years to the beginning of this year their fund has grown by +141 % and has significantly outperformed both the MSCI World Index and the S&P 500 indices*. Remarkably he has achieved this despite not holding any of the large American technology giants who have performed so well this year. Instead, he has favoured firms with unique brands and loyal followings such as Diageo (Guinness, Smirnoff), Unilever (Marmite, Hellmann’s), Mondelez (Cadbury’s) and Heineken.

This year so far, he has trailed both indices because of the boom in technology stocks but he is not about to change his modus operandi as he feels such companies fall outside his level of expertise. Whilst technological developments have the capacity to buffet any business, the long established firms he invests into have survived and prospered across generations worth of challenges. They have emerged fitter than ever and their proven ability to weather storms engenders confidence in their ability to overcome future challenges. Nick Train is a great example of a global equities fund manager who has a highly selective approach to stock picking, only buying those companies with sustainable competitive advantages, high barriers to entry against competitor firms, and where long-term prospects are bright. He then lets compounding do the rest.

Another investor who takes a similar approach to Lindsell Train is Terry Smith of Fundsmith. He too looks to invest into businesses that are resilient to change and is again highly stock selective. However, he owns very different stocks to those to be found in Nick Train’s fund. You might be surprised to learn that over the same five-year period Nick Train has outperformed Terry Smith, but this year the roles have been reversed due to Terry Smith’s holdings in Microsoft and Facebook which have served his fund very well.

What does this tell us? There are over 1600 companies that make up the MSCI World Index and it is therefore impossible for fund managers to realistically analyse all of them, even those with large research teams. Filtration is vital but most important is the quality and discipline of the in-house investment process. Potential investments are placed on a watch list and huge research effort goes into understanding all the angles surrounding these companies. Good fund managers often take years to follow a company before they feel the fit and the timing is right. The best active fund managers in the world have portfolios containing only 25-30 highly researched positions. The amount of due diligence completed before shares are purchased means that the fund manager will be confident in looking through the inevitable volatility that is part and parcel of equities markets.

Both the Lindsell Train Global Equity Fund and Terry Smith’s Fundsmith Equity Fund are held in Irongate client portfolios as managed by Rowan Dartington and have contributed significantly to returns.

You should remember that past performance refers to the past and is not a reliable indicator of future results. The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

*FE Analytics (01/01/2015-01/01/2020)

Source: MSCI.  MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products.  This  report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.