3 months ago • 7 mins
No two fund managers in Britain are as well known as Terry Smith and Nick Train. Both have more than four decades of experience in the investment industry and run two of the largest active global funds, both with their names on the strategies.
They are, of course, Smith’s £23.7 billion Fundsmith Equity fund and Nick Train’s £5.2 billion Lindsell Train Global Equity, which also counts James Bullock and Michael Lindsell as co-managers.
The funds employ a similar investment approach, focusing on “high-quality” companies. That means firms with established businesses, reliable profits, and steady growth, that should also be able to withstand an economic downturn. Such companies demand a premium price, but Smith and Train argue that it is worth paying up as these companies, if held for long periods, will outperform the market.
But that’s not to say the portfolios are the same, or performance has been similar. In fact, 12 years of shared data put one fund about 150 percentage points ahead of the other, with most of the gap appearing after April 2020, following the stock market recovery from the Covid crash.
Here’s everything you need to know about the two funds to help you decide which to invest in.
While following a similar investment philosophy, there are some key differences between Train and Smith’s portfolios.
First, Smith prefers US shares, with about two-thirds of the portfolio invested there. Just 5% is in the UK and 25% is in Europe. In contrast, Train has just one-third invested in the US, with 30% invested in the UK and 22.5% in Japan. Only 13% is invested in Europe. Smith’s bias toward the US, where companies tend to have higher valuations, means that his portfolio is more expensive relative to profits than Train’s rival fund.
The price-to-earnings ratio of Fundsmith Equity is 27, according to fund data provider Morningstar, while Lindsell Train Global Equity is on a multiple of 22. The typical Global Large-Cap Growth Equity global fund trades at 23.6 and the Morningstar Global Growth index is on 26 times, according to the data group.
This shows that Train’s bias toward the UK and Japan means the portfolio is not as expensive as Smith’s, which is more concentrated in the US. For investors concerned about overpaying for shares, Train’s portfolio could be more appealing for this reason.
In terms of sector breakdown, Smith has 33.8% in consumer staples, 24.7% in healthcare, 10.5% in consumer discretionary, and around 10% in both technology and communication services. Train has 39.54% in staples, 17.6% in communication services, 14.2% in financials, 12.7% in technology, 7% in consumer discretionary, and just 2.2% in healthcare.
At first glance, the main difference is that Smith has been willing to own more healthcare shares than Train. Novo Nordisk, the Danish pharmaceutical giant now Europe’s second-largest company, is Smith’s second-largest position. He counts medical device company Stryker, and IDEXX Laboratories, a pet healthcare firm, in his top 10.
Another more subtle difference is that while their weighting to the tech and communication services sector is similar, Smith has been more willing to pay up for America’s largest companies: Apple, Meta (formerly Facebook), Alphabet, and Microsoft are all in his portfolio. Microsoft, the top stock and held since launch in 2010, has been one of the key drivers of his success.
Train’s technology stocks include Nintendo and Intuit, the accounting software group. Train is also happier than Smith to own finance companies. He owns the London Stock Exchange Group, Schroders, and Rathbones, while Smith has only Visa in the sector, which is more of a technology company due to its payments processing business model.
Companies held by both funds include Unilever, Diageo, and PepsiCo. Both funds hold around 30 companies and are therefore very concentrated compared with other global funds.
One recent difference is that Smith has been more willing to chop and change his portfolio. He sold his entire stake in Amazon in May locking in a loss since he first bought shares in October 2021.
Smith also recently sold out of Adobe and Intuit, and has bought shares in Procter & Gamble, which is a company he had previously owned.
In terms of fees, Train charges 0.66% and Smith charges 0.94%. That’s a 42% jump to own Fundsmith over Lindsell Train, but it’s been worth it for investors.
Lindsell Train Global Equity was launched in March 2011 and Fundsmith Equity was launched in November 2010.
Shared data from March 2011 shows that Terry Smith convincingly has the upper hand. His fund has returned 517% since then compared with 375% for Lindsell Train Global Equity. That is not to say that Lindsell Train investors will have been disappointed: the typical global fund rose 188% over this period and the MSCI World index of developed world shares rose 276%.
Fundsmith Equity leads Lindsell Train Global Equity over one, three and five years as well, showing how Smith's focus on US companies has paid off, while Train’s backing of UK and Japanese shares has affected performance.
Despite being 70 and 63, respectively, Smith and Train show no signs that they are ready to retire. However, they have both put succession plans in place.
Smith has plans to hand over control of the fund to head of research Julian Robins. Smith has said that he will pass on most of what he owns in his investment firm to employees.
Train and co-founder Lindsell have committed to at least seven more years running money, and have promoted home-grown portfolio managers at the firm. There are now five additional members of the investment team, including a portfolio manager and two deputy portfolio managers.
James Bullock manages the newly launched LF Lindsell Train North American Equity fund, the first strategy not run by Train or Lindsell.
Fundsmith has proven the more successful fund over a substantial period, but that does not necessarily mean it will continue to outperform its benchmark or Train’s fund. Over three years, Fundsmith Equity trails the MSCI World Index, and it is only just ahead of it over five years.
Fundsmith Equity is one of interactive investor’s Super 60 investment ideas, while Nick Train’s rival fund is not (although his UK Equity fund is included).
Dzmitry Lipksi, head of funds research at ii, says: “Fund performance since launch has been strong, but the fund has benefited from some strong style tailwinds. The concentrated nature of the portfolio and the strong quality-growth style bias are likely to result in returns that deviate from those of the benchmark from time to time."
“The fund benefits from an experienced manager who adopts a structured and disciplined investment approach that has served investors well over the long term. Smith is an original thinker and has often demonstrated his willingness to bet against the crowd by taking a longer-term view.”
For investors worried about overpaying for shares, Train’s fund owns cheaper companies. For investors keen to own the most premium “quality growth” shares, then Fundsmith could be a better option.
There are a number of passive and active alternatives to Fundsmith Equity and Lindsell Train Global Equity.
A passive option could be the iShares Edge MSCI Wld Qual Fctr ETF $Acc GBP (IWFQ). The £2.1 billion exchange-traded fund screens global shares for quality characteristics, such as low levels of debt and consistent earnings. Over five years, three years and one year it is in the first quartile of global fund performers. It costs just 0.3%.
An active alternative is Stonehage Fleming Global Best Ideas. This £1.8 billion fund also focuses on “sustainable growth”, looking for characteristics such as strong management, free cash flow, and the ability to grow dividends every year. Like Fundsmith, it buys predominantly large-cap businesses, with a buy-and-hold approach, but also has a sell discipline when valuations go up too much.
Its top stocks are Microsoft, Alphabet, and LVMH Moet Hennessy Louis Vuitton. The fund is a top-quartile global sector performer over five years.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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