Nevertheless, faith in that long term has been shaken, for many, by the recent Woodford scandal – for it is nothing short of that – with one side-effect that investors are now paying much more attention to their exposures to other star fund managers. Just as Neil Woodford’s star power meant that he could attract billions of pounds into his funds, so the likes of Nick Train and Terry Smith have proved incredibly popular draws, the latter’s Fundsmith fund now boasting approaching £19bn of assets under management – far too big, some suggest.
The worry is that, like Mr Woodford, after shining brightly for so long other stars will fade – or worse, like Woodford Equity Income, go supernova. Fundsmith has beaten its benchmark, the MSCI World Index, more than twice over since its inception exactly nine years ago, returning 365 per cent on a total return basis. Lindsell Train has delivered three times the market return since it was launched in mid-2006. Yet critics of active management – who are in the main, naturally, advocates of index tracking – suggest they will at some point suffer a reversion to the mean, and indeed both have suffered weakness in recent months – Fundsmith lost 3.2 per cent in September when its benchmark delivered a gain of 0.9 per cent; Lindsell Train lost 2.9 per cent.
Of course, one month of poor performance hardly sounds their death knell. But some argue that their huge scale means they now lack the flexibility to continue beating the market, given few companies meet their managers’ stringent selection criteria. Others point to a shift in the market mood that has seen a rotation from the kind of quality/growth companies favoured by Messrs Smith and Train to the value companies they do not – an emergent trend noted by Algy Hall in his recent momentum stock screen, which saw lumbering Vodafone emerge as one of the hottest three-month stocks.
If that is true, then Fundsmith and Lindsell Train could continue to struggle for a while yet. But the resurgence of value is a trend that has struggled to put down roots for several years, and investors should only really start to worry if they shift their strategies to pander to the market – an approach widely blamed for Neil Woodford’s travails. Indeed, if a short period of underperformance is the price to be paid for owning some of the world’s highest-quality businesses that will win through multiple economic and market cycles, surely it is a price worth paying.
