Fund manager benchmarking

I’ve now been tracking the performance of my portfolio for three years. Lately, I’ve been doing a bit too much agonising over recent mistakes and worrying about possible impending market doom and whether my strategy will weather different conditions. So to lift my spirits and put things into perspective, I’m going to pour myself a whisky and compare my performance so far against some of the professional fund managers I follow for investment ideas.

Quality Share Surfer

Top 10 Holdings: Games Workshop, Arista Networks, Amazon, Portmeirion, Somero Enterprises, Cranswick, Alphabet, Liontrust Asset Management, Mastercard, On the Beach

  • 1 year performance: 41.9%
  • 3 year performance: 133.6%

Looking back over the three years as a whole, I’m happy with the overall results. The above figures (based on the Stockopedia fantasy fund set up to track my actual portfolio) are an approximation of my actual returns. They don’t include dividends and the fantasy portfolio generally achieves somewhat worse prices when buying and selling than I get through my broker. I think my actual total return must be well north of 140% over the three years taking this into account, so almost double that of the better performing professionals I’ve profiled below. I might have been a bit lucky with recent market conditions favouring my strategy, but the evidence is mounting that I’m doing something right. I would be extremely happy if I could keep up this level of outperformance over the next three years, though don’t really expect to.

The main thing I take away is how much of an advantage you have as a private investor managing small amounts of money over a professional fund managers managing billions. The professionals just don’t have the liquidity to take advantage of momentum or run concentrated positions in smaller businesses, like small private investors can.

Terry Smith (Fundsmith)

Top holdings: PayPal, Amadeus, Microsoft, Novo Nordisk, Dr. Pepper Snapple, Waters, CR Bard, Intercontinental Hotels, Stryker, Philip Morris

  • 1 year performance: 22.0%
  • 3 year performance: 80.9%

Terry Smith is probably my favourite fund manager at the moment and his philosophy and reasoning for only buying high quality businesses resonates with me. Indeed my approach is motivated by the same rationale. His approach is similar to mine in that he focuses intensely on quality rather than on valuation. His definition of quality is also similar to mine and focuses on competitive advantages and returns on capital. I admire how rigorously and consistently this philosophy is implemented in practice. The Fundsmith portfolio is tilted to a greater extent towards defensive businesses with repeat consumer purchases, while I probably tilt a bit more to technology. This difference is pretty minor and I have many Fundsmith holdings on my watchlist or in my portfolio – his portfolio is a useful source of inspiration.

Where we differ most significantly is that I also try to take advantage of my much smaller portfolio size by also trading momentum.  While Fundsmith minimises portfolio turnover to less than 10% a year, I do nothing of the sort.

Nick Train (Lindsell Train UK equity)

Top Holdings: RELX, Diageo, Unilever, Hargreaves Lansdown, LSE, Mondelez, Schroders, Heineken, Burberry, Sage

  • 1 year performance: 20.7%
  • 3 year performance: 49.7%

The Lindsell Train UK Equity fund has an exceptional long term track record. It also focuses on quality but the approach to this differs somewhat to Terry Smith and myself – broadly, the focus is more on long term asset quality rather than cash profitability. Exactly how this is done is a bit of a mystery to me but I think it implies a longer term perspective to identify high quality undervalued assets which may not yet be experiencing high profitability.

The fund is very concentrated and proudly has very low turnover. This seems to have worked out very well.

As an aside, I find the preoccupation that high quality ‘buy and hold’ fund managers have with keeping portfolio turnover super-low and proudly trumpeting about this to their clients somewhat ironic. I understand the logic of minimising trading costs and recognise that trading is a zero sum game across the stock market as a whole. Buy and hold is a perfectly sensible strategy. But why would I want to pay management fees to a fund manager who is basically going to do nothing most of the time? It seems a bit of a waste of time when you could just copy his portfolio and then do nothing yourself without paying the management fees.

Keith Ashworth-Lord (UK Buffettology)

Top Holdings: Games Workshop, AB Dynamics, Bioventix, RWS, Scapa, Trifast, Dart Group, Victrex, Liontrust Asset Management, Air Partner

  • 1 year performance: 25.6%
  • 3 year performance: 79.6%

The UK Buffettology fund has only been around a few years but has been performing very well. Similar to Fundsmith, it has a clear focus on quality, particularly on profitability, but mostly trades in UK small caps. I’ve got most of its top ten shares on my watchlist and find it useful to keep track of for potential new ideas.

For the large part, I’m a keen admirer of this fund, but I have noticed an occasional tendency for the principle of only buying high quality to be compromised. There have been quite a few investments in value stocks and cyclicals (e.g. Dixons, Revolution Bars, Provident Financial, Lavendon) where the quality is questionable. These investments seem to be motivated more on valuation grounds and generally haven’t turned out very well.

Neil Woodford (Woodford Equity Income)

Top Holdings: Astra Zeneca, Imperial Brands, Legal & General, Prothena, Lloyds, Burford Capital, Barratts, Purplebricks, Provident Financial, IP Group

  • 1 year performance: 0.8%
  • 3 year performance: 20.8%

I used to think of Neil Woodford as a ‘quality’ investor but I’m not sure about that any longer. He now seems to be more of a value / dividend investor with little regard for quality. His recent performance has been very poor.

Recently he seems to be getting overly preoccupied with trying to allocate across undervalued sectors in response to his assessment of macroeconomic issues, rather than on identifying high quality businesses. He famously did well during the crash by avoiding tech stocks, so he does have some form for big macro calls. For a while now, he has been saying that growth and quality stocks look exceptionally overvalued, while the UK economy looks very strong and undervalued (based on a belief that Brexit fears are overblown). He has consequently been investing in low quality UK cyclicals (e.g. house builders and banks, Provident Financial, Capita!?) This hasn’t worked out well. I used to be a fan, but in getting distracted by macroeconomic issues and market timing Woodford seems to have lost his way.

Harry Nimmo (Standard Life UK smaller companies)

Top Holdings: NMC Health, First Derivatives, Dechra Pharmaceuticals, Sanne Group, Cranswick, JD Sports, Workspace Group, XP Power, Abcam, FDM Group

  • 1 year performance: 30.7%
  • 3 year performance: 75.5%

Harry Nimmo has an excellent long term track record and an approach apparently very similar to my own. From what I understand his fund employs uses a statistical screening approach, primarily focused on quality and momentum, with valuation being secondary. The fund needs to be much more diversified as it is a large fund focused in small caps. The track record is particularly impressive given this. There is quite a lot of overlap with my watchlist and is another useful fund to follow for investment ideas.




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