Equities  

Fund themes: To buy and to hold

Even the most experienced investment professionals benefit from a periodic revisiting of the principles that underpin sound portfolio management, doing so keeps us all on the straight and narrow.

Below are several nuggets of wisdom, borrowed from legendary investors that add up to an outline for a buy and hold investment strategy.

1. “If you want different investment performance you must invest differently,” according to US-born philanthropist and stock investor the late Sir John Templeton.

This is an unpalatable, but incontrovertible truth. If you want different performance – for which I suppose read “better performance” – then you have to do something that others do not. But investors must never lose sight of the risks that need to be taken in order to achieve that “different” return. For us perhaps the most obvious differentiator between investment managers is time horizon, as measured by levels of portfolio turnover.

A typical UK equity Oeic will experience annual turnover of close to 100 per cent. It is helpful – though not strictly scientific – to say if a given portfolio turnover is 100 per cent in a year that implies the investment manager is taking on average a one-year time horizon for each holding. By contrast, turnover of less than 6 per cent a year – as it has been for our longest UK track record for example - indicates each position will be held for 17 years or longer. The one certain benefit of a buy and hold approach such as this with its relative inactivity – although there are disadvantages too - is that total running costs will tend to be lower, potentially much lower, than for other funds with a higher frequency of costly transactions.

2. “Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever,” according to US investor Warren Buffett.

An explanation for a low-turnover approach (and the type of company in which to invest) is found in this advice from Mr Buffett. One could be forgiven for asking, how can such a simple suggestion – even from the world’s greatest investor – be the basis of a credible investment philosophy? But it is what it is and by and large it has worked – for Mr Buffett obviously and for others too. In passing, let me assure you that it is not so easy to identify, then stick with investments in even great companies. The pressure to “do something”, particularly when a great company is going through an inevitable dull patch, is intense. Unilever’s current dull share performance is one example. During such periods it helps to remember the comment below of another outstanding investor – Peter Lynch – who, just like Mr Buffett, is famous for running his winners.

3. “Other investors invent arbitrary rules for when to sell,” according to US investor Peter Lynch.

Mr Lynch argued that if a share has done well over time – like Unilever – then there is every reason to expect it to continue to do well (although always remembering that nothing goes up in a straight line). He disputes the conventional wisdom that says: “It’s never wrong to take a profit”. It can be very wrong; if by doing so you permanently reduce your interest in a great long term investment. Share prices of the best companies double, then double again and again over time. Locking into that observed propensity for wonderful businesses to compound wealth for their owners is at the heart of our approach. For instance, Diageo shares have more than doubled since our business was founded, in late 2000, but we have no doubt that Diageo shares will double again – as its cashflows grow and the pricing power of its brands protects owners against inflation.