One of the most interesting aspects of my job as a Research Analyst is gaining an insight into how fund managers select shares. In my view, learning from the techniques used by the most successful investors and applying these principles to our own portfolio can help us all to become better investors.
Below I highlight some of the methods used by three of our favourite fund managers and highlight some common themes.
Nick Train (Manager, Lindsell Train UK Equity and Global Equity Fund)
Nick Train has a simple philosophy – "great companies make great investments". Buying and holding the shares of great companies is an approach used by several highly successful investors. Warren Buffett famously said "Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with the managers of the highest integrity and ability. Then you own those shares forever".
According to Nick Train, one of the hallmarks of a great business is a great brand. The fund holds Unilever, which offers a range of well-known global consumer brands. It also has a very broad footprint in emerging markets. Nick Train notes that the company should reach billions of new customers over the next 20 years, driven by increasing wealth in emerging nations.
Another favoured holding is Diageo, which according to Nick Train has the best collection of drinks brands in the world. Why does this make Diageo such a good share to hold? In his own words: "Ask yourself – do you think Guinness and Johnnie Walker will still be enjoyed in twenty years' time? If you answer yes – which you should – then, in all seriousness, you have just discovered why Diageo will be a great investment."
Anthony Cross (Co-manager, Liontrust Special Situations Fund)
Anthony Cross looks for companies he believes have an 'economic advantage'. That is, distinctive competitive strengths others will struggle to replicate. These characteristics include a company's ability to generate recurring revenue, from after sales services and maintenance, for example, and their ability to increase prices without affecting demand for their products. Equally important are intangible assets and intellectual property such as the sense of quality and prestige associated with a brand or a patent for new technologies.
According to Anthony Cross and his co-manager, Julian Fosh, a relatively rare instance of a company which fulfils all these criteria is Rightmove. I quote:
"Over the thirteen years since its launch, Rightmove has established a dominant position in the online property advertising market and has built a distribution capability that acts as a strong barrier to competition. Rightmove.co.uk is the UK's largest property portal and – according to Experian's Hitwise study – at the start of 2013 it became the UK's 6th most popular website (by page views) behind only the global brands of Facebook, Google, YouTube, eBay, and Amazon, and ahead of BBC News. The company also has substantial intellectual property associated with its web and mobile platforms, and generates more than 70% recurring revenue from its estate agents listing subscriptions."
Angus Tulloch (Manager, First State Asia Pacific Leaders Fund)
Over the last 25 years Angus Tulloch has proved himself to be an exceptional stock picker. His success is based on his conservative investment approach with a focus on large, high quality businesses with strong cash flows. He places particularly strong emphasis on the quality of management. Recent purchases include Dr Reddy's, a well-managed Indian drugs company with a growing international business, and Tata Consultancy Services, which, according to Angus Tulloch, is one of the most successful companies in its field and benefits from an excellent management team.
Angus Tulloch's conservative approach may seem rather dull, but it really comes into its own in tough market conditions. Paul Samuelson, an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences once said: "Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."
How can you invest like the experts?
There is no right or wrong way to select shares – the three investors above each have their own style and it is important you adopt an approach you are comfortable with. However they, like many successful investors, also have several things in common:
- A disciplined investment approach
- A long-term investment strategy
- A focus on high quality businesses with enduring business models
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.