Should we stick with foundation stars Terry Smith and Nick Train?

Billions have been entrusted by investors in recent years to the care of the top stars of the fund management firmament, Terry Smith and Nick Train.

But a sense of unease now grips some of those managers’ fans.

They may differ in their personalities, but their common preference for well-known consumer goods and technology stocks has underperformed recently.

Are we witnessing the twilight of two gods of fund management, renowned for their exceptional levels of outperformance between 2010 and 2020? Or will their long-term buy-and-hold approach pay off?

Smith prefers cosmetics with stakes in Estee Lauder and L’Oreal and cigarettes in the form of Philip Morris, while Train prefers alcohol, owning Diageo, Fever-Tree, Heineken and Remy Cointreau. They both back Unilever and a mix of tech stocks.

The misfortunes of the two stars are, of course, explained by the fall out of fashion for such stocks.

The appeal of these quality growth stocks has diminished due to a sharp rise in inflation and interest rates, although sentiment on Wall Street did change this week, sparking a chase for tech companies.

Despite the shift, some wonder if Smith and Train should be responding to the new craze for “value” stocks that are inexpensive but appear to have the potential for big things. Smith shared his skepticism in this assessment.

Giant Fundsmith, Smith’s best-known company, may have returned 65 percent over the past five years, compared with an average of 43 percent for similar global equity funds, but the fund’s value has fallen 18 percent since January. .

Shares in Smithson Investment Trust, which focuses on small businesses, fell 37 percent over the same period.

As a Fundsmith investor since 2015, I’m developing something of a seven-year itch, even though the total value of my monthly contributions to the fund has increased by 45 percent. I am also out of my mind regarding the Smithsonian.

Finsbury Growth and Income, Train’s investment trust, had a five-year return of 24 per cent, compared with 17 per cent for the average UK Equity Income trust.

Nevertheless, the trust’s share price has fallen by 15 percent since January. The Lindsell Train UK Equity and Global Equity funds are also underwhelming. Neither Smith nor Train seem ready to retire, as Train promises seven more years.

They also dealt – each in their own characteristic way – with criticism. Trane apologized but believes his portfolios, full of “great companies,” will recover.

The notoriously obtuse Smith took on the shadowy Unilever to fix sustainability. But he also argues that the companies he owns have strong margins and points to the above-average “free cash flow profitability” of Alphabet and others. This is a measure of the amount of money a company has generated and is the main criterion for Smith’s evaluation.

These assurances mean I’m unlikely to part with Smith at this point. I’m watching to see if Wall Street’s uncertain optimism persists.

Worry: Funds managed by Terry Smith (above) and Nick Train are down double digits this year

Worry: Funds managed by Terry Smith (above) and Nick Train are down double digits this year

Others are also convinced that Smith and Train will return, while warning of the risk of over-reliance on stars.

FundCalibre’s Darius McDermott comments: “If you believe inflation will remain high for longer, then there is a good case for moving into banks and commodities such as oil. But I wouldn’t trade Smith to make the move.”

Fundsmith and Lindsell Train UK Equity continue to feature in Interactive Investor’s top 60 funds. Dmitry Lipsky of Interactive Investor argues that the experience and track record of the two executives should matter.

Lipsky suggests Artemis SmartGARP Global Equity as a complement to Fundsmith and Stonehenge Best Ideas Equity as an alternative. Lindsell Train UK Equity holders may consider Jupiter UK Special Situations as a supplement or Ninety One UK Alpha as an alternative.

Smith and Train was seen as an ideal choice for those making their first foray into long-term fund investing, which explains why Fundsmith is the UK’s largest fund. But they face growing competition from younger managers who run smaller funds.

Shore Financial’s Ben Yearsley refers to Blue Whale Growth’s Stephen Yu and Martin Currie Global Long-Term Unconstrained’s Zehrid Osmani. As the Neil Woodford scandal shows, following any star to the exclusion of others can be a source of grief. But Woodford betrayed his investors by radically changing his approach.

One can be temporarily irritated by Smith and Train’s commitment to their strategy, and at the same time appreciate such consistency.

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Should we stick with foundation stars Terry Smith and Nick Train?

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