It’s been a great year for global markets. While the “superstar funds” of recent years — Fundsmith Equity and Lindsell Train Global — have both done pretty well they’ve tailed off in recent months.
I looked at these two funds back in April — and I own both despite their many similarities in investing style.
With 2019 drawing to a close, I thought it was worth a quick check-up on their progress and comparing their performance to a few similar funds.
Similar but not identical
First, let’s recap what you get with Fundsmith and Lindsell Train Global.
They both aim for concentrated portfolios with 25-30 positions of what they regard as high-quality companies that they can hold for the very long term.
Both have a global remit but Fundsmith has a much higher weighting of US-listed stocks (65%) compared to Lindsell Train (30%). Lindsell Train has higher weightings for UK- and Japan-listed.
However, using the country of listing is a little misleading as most of the companies these funds invest in are truly global.
Neither fund trades very often, on average perhaps buying one new position and selling out of an existing one each year.
They have a few holdings in common (Diageo, Unilever, PayPal, Intuit, Brown-Forman, and PepsiCo) accounting for around 20-30% of their respective portfolios.
Lindsell Train seems to take slightly larger positions and be more focused on companies with big consumer brands.
Are they getting too big?
Both funds have sucked in billions of pounds of new cash in the past few years on the back of their strong performance. To date, because they mostly invest in large companies with multi-billion market caps, this doesn’t seem to have affected their performance.
However, if they continue to attract new funds at the same rate, this could become an issue in, say, 3-5 years (that’s just a rough guess on my part).
If this does start to become a problem, I suspect the managers of both funds to take some sort of action, perhaps even closing the fund to new money for a time.
Both managers seem to be very aware of the issue of becoming too big, regularly giving their thoughts on whether they are still able to take the position sizes they like to.
If anything, the Lindsell Train UK Equity fund, at £6.6bn, seems more likely to run into size constraints first. This could prove a useful dry run for those of us in these popular global funds.
The young upstart
It’s useful to compare these two funds against some rival offerings.
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Blue Whale Growth Fund was launched in late 2017 and is obviously looking to emulate the success of Fundsmith and Lindsell Train. It’s run by Stephen Yiu and is backed by Peter Hargreaves of Hargreaves Lansdown fame.
It’s considerably smaller at £223m, compared to Lindsell Train’s £8.5bn and Fundsmith’s £19bn.
Blue Whale takes the same concentrated approach with its investments but right now seems to have more of an overlap with Fundsmith’s holdings. Facebook, Intuit, Microsoft, PayPal and Visa are held by both Blue Whale and Fundsmith.
Intuit and PayPal seem to be the only positions held by all three funds.
One notable difference is that Blue Whale seems much more inclined to trade in and out of its positions, primarily on grounds of valuation.
On an ongoing cost basis, Blue Whale is 0.89%, Fundsmith 0.95%, and Lindsell Train 0.5% although these charges may be a little higher depending on which type of units you invest in.
The investment trust equivalents
There are a few investment trusts that could be compared to these funds.
Lindsell Train Investment Trust is one of course, although over half its assets comprise of its stake in the Lindsell Train fund management business. And it usually trades at a very large but highly volatile premium. This year, for example, its premium has ranged from 15% to 100%!
Scottish Mortgage is perhaps the most logical comparison, due to its larger size and popularity. With assets of £8.5bn, it is the same size as Lindsell Train Global but has a much longer tail of smaller holdings alongside its major positions in the likes of Amazon, Illumina, Alibaba, Tencent, Tesla, and Netflix.
Others from the global investment trust sector such as Mid-Wynd, Monks, and Manchester & London favour similar stocks. The first two are a little more conservative and diversified — Manchester & London is perhaps more concentrated and also shorts baskets of poor-quality stocks to juice things even further.
Looking back at 2019…
Here’s how these funds have performed in 2019 up until 13 December (so including a single day of post-election reaction).
I’ve thrown in a Vanguard global tracker as a base-line comparator and, as usual, you can click on the chart to enlarge it.
Blue Whale leads the way with 23% so far this year. Fundsmith has tracked it pretty close throughout and comes in second at 21%.
Lindsell Train Global was up nearly 30% for the year as recently as September but has fallen considerably in the last few months. Its returns, at 17%, are now a couple of percentage points below the global tracker.
Scottish Mortgage has performed the worst of this bunch at 13%, partly due to its shares going from a small premium to a small discount. It’s bounced back strongly these past few weeks otherwise it would have been trailing even further behind.
But the chart shows how all these funds made rapid gains over the first seven months of this year before coming off the boil.
Global markets, as represented by the Vanguard fund, have largely gone sideways with small gains in the US market essentially cancelled out by a rise in the pound.
Why have these funds slipped back these past few months?
It could just the natural variation that you see in the markets from time to time. Some companies have a great run and then pause for breath before setting off again. Likewise, investing styles move in and out of fashion.
The recent rise in the pound has also had an impact, reducing the sterling value of foreign stocks. In Lindsell Train’s case, it’s also been hit by hefty falls in holdings such as Unilever, Pearson, WWE, and eBay.
The value > growth debate
A popular theory doing the rounds is that the tide is finally turning away from ‘growth’ and towards ‘value’.
Growth has done the best the last several years, while the value is the king if you look back over multiple decades.
For example, over the last ten years, the MSCI World Growth Index has returned 11.5% pa compared to 8.4% pa for the MSCI World Value Index. But since these indices began in January 1975, Growth is 10.0% pa compared to Value’s 11.6% pa.
I think it’s premature to declare such a shift has taken place. It’s only a few months.
Nevertheless, it’s worth being aware of such arguments. If value investing does have a strong few years, then that probably creates a little headwind for these funds.
Unsurprisingly, Lindsell Train co-founder Michael Lindsell is less keen about the growth/value distinction:
These badges can be overly simplistic and misleading. We would not want to be pigeon-holed as either value or growth to the exclusion of the other. In our analysis, growth is a vital input to our assessment of the value of any company.
It is true we may appear more tolerant of “higher” valuations but only for companies that pass a high quality threshold and have the ability to earn higher than average returns on capital that can be sustained for extended periods of time.
Looking back a bit further…
Here’s how the same funds look from a November 2017 start point, shortly after Blue Whale launched:
Lindsell Train is the winner over this timeframe at 35% with Blue Whale snapping at its heels with 31%. You can see that Fundsmith and Blue Whale are still tracking each other closely over this slightly lengthier period, too.
Scottish Mortgage’s recent rebound leaves it with 20%, pipping the global tracker’s 15%.
And further still…
Scottish Mortgage dates back to 1909 but Fundsmith and Lindsell Train Global are less than a decade old making longer-term comparisons trickier.
Fundsmith Equity was launched in October 2010 and Lindsell Train Global in March 2011. Since 31 March 2011, Fundsmith just has the edge at 326%. Scottish Mortgage comes in at 292% and Lindsell Train at 294%.
I’ll spare you from squinting at the chart for this one but these three funds have, very roughly, doubled the return you would have got from a global tracker.
However, small tweaks to the starting date result in the pecking order of this trio chopping and changing. So, I don’t think it’s worth getting too hung up on the exact numbers.
There are lies, damned lies, and fund performance charts.
I still regard both Lindsell Train Global and Fundsmith Equity as core holdings in my portfolio although their sheer size probably does mean that their very best days are behind them.
Blue Whale certainly looks interesting and I’m keeping an eye on it as a potential substitute, should one be called for.
I can live with the fact that certain styles of investing will move in and out of fashion. What would be more concerning to me was a noticeable shift in the investing strategy of these funds, although that doesn’t seem very likely given from what I’ve seen of the individuals concerned.
Of course, the travails of Neil Woodford mean that everyone is more sceptical of star managers these days. That’s no bad thing. A little less money flowing into these funds (as long as it’s not gushing out) might be healthy.
I suspect this will be my last article of 2019, although I might sneak out a short comment if I come across an interesting topic. I’m planning an annual review for my first piece in 2020. Until then, wishing everyone a very merry festive season!
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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