InvestmentsFeb 16 2021

Coutts CIO on why he won’t buy Smith or Train funds

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Coutts CIO on why he won’t buy Smith or Train funds

Coutts is a private bank owned by Nat West Group, whose customers include Queen Elizabeth II.

Higgins, CIO of the £30bn wealth management unit, said he admires both Train and Smith, but had concerns their level of returns achieved over the past decade may not survive another market downturn.

The £8bn Lindsell Train Global Equity fund has returned 340 per cent since launch a decade ago, compared with a return of  169 per cent for the average fund in the IA Global Sector in the same time period. 

The £23bn Fundsmith Equity fund has returned 448 per cent in the decade to February 12, compared with a return of 168 per cent for the average fund in the IA Global sector in the same time period. 

Higgins said: “They are both very good managers, but we wouldn’t want to own them right now, the key to their success has been identifying the quality investment style, that is companies with low levels of debt and high levels of free cash flow.

"And coming out of the global financial crisis, that was exactly the style that worked, and coming out of the last bear market, in March 2020, it was exactly the style that worked, but there is no guarantee that it will be the style that works next time there is a bear market, the next sell-off could resemble that which happened in the early 2000s, and then the right place to be would be in a different style.” 

Commenting on the relatively high management fee charged by the giant Fundsmith equity fund, which sits at close to 1 per cent, Higgins said the charge was “high, but a client wouldn’t object to paying that fee for the performance it has had".

He added: "That is perhaps what is missing from the wider conversation about fees in our industry, clients are happy to pay for good performance.”

But he added the level of returns achieved by both Smith and Train in their respective funds over the past decade may not survive though another market downturn, “especially when you consider the valuations at which many of the stocks they own trade at.”

Fundsmith has performed strongly over the past decade

The quality growth type of fund Higgins has chosen over those of Train and Smith is run by  the US investment firm Capital International.

He said: “They have a good track record and are an employee owned business, which is something we like when it comes to asset managers, as we think the culture is better.”

But Higgins said he has generally reduced the proportion of portfolios which are invested with quality growth fund managers, and introduced more managers who deploy the value style of investing.

Higgins said: “If a client came in and they had all of their portfolio in value strategies we would certainly think they should add in more of the growth funds, a balance is about right now.”

Lindsell Train Global Equity has performed well

The value fund he cited was Schroders Income, a £1.4bn fund run by Kevin Murphy and Nick Kirrage.  

This fund strongly underperformed relative to its peers in 2019 and 2020, losing 15 per cent in the latter year, though over the past three months, roughly encompassing the period since the first Covid-19 vaccine was announced, the fund is among the top performers in its sector. 

Higgins said: “We don’t just want funds that go up because of the manager's style, we want funds that can do a bit more than that.” 

The Schroder Income fund is a UK mandate, while the funds of Train and Smith mentioned above are global mandates. 

Darius McDermott, managing director at Fund Calibre, said: “Fundsmith and Lindsell Train funds are definitely still worth owning, the managers have a very clear and very proven process, but if we had a decade where their style underperformed, then you would expect them to underperform.”

david.thorpe@ft.com