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How to pick a winning investment strategy

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Are you a Warren Buffett or a Neil Woodford? FE Trustnet reveals some of the best known strategies used by top fund managers to help you decide the right approach for your money.

Picking an investment fund is hard work for even the most seasoned investor, and it is even tougher for those starting off in the world of investments. The UK retail investor has around 38 sectors and more than 4,000 funds to pick from, according to FE Trustnet data.

This goes a long way to explain why droves of bewildered investors repeatedly park their money with the more well-known, ‘superstar’ managers in the market. And these top managers are well-regarded for a reason.

While not all of them follow the same investment strategy, most of them are very good at what they do – and that is to make you money.

Here FE Trustnet runs through three investment strategies that some of the better known managers in the market ardently stick to:

Warren Buffett Style of investing – holding a highly concentrated portfolio of stocks with a low turnover.

Managers who like this strategy: Lindsell Train’s Nick Train, Invesco Perpetual’s Martin Walker

Nick Train has over two decades of experience in UK and global equity investing. He has an excellent track record of beating the market when it both rises and falls, which he does by holding big chunks in quality companies that he knows inside out. He is similar to Buffett in that he thinks the market undervalues durable, cash-generative business franchises. Train generally tends to look at companies that will survive over the longer-term by maintaining their competitive advantages. Train will rarely sell a stock due to short-term news flow – which means his portfolios tend to be highly concentrated with a low turnover.

One possible fund option is CF Lindsell Train Equity, which has five FE Crowns and a Gold rating from Morningstar. This fund has had impressive track record since its launch in July 2006, delivering 190.13 per cent compared to 68.39 per cent from the FTSE All Share. It has beaten the index every calendar year since launch bar 2007. The top 10 companies account for 71 per cent of assets, and include Unilever, Diageo and Heineken.

Other examples of highly concentrated portfolios: Mark Martin’s Neptune UK Mid Cap fund

Highly diversified portfolios

Managers who like this strategy: Marlbourough’s Giles Hargreave, River & Mercantile Asset Management’s Philip Rodrigs

Giles Hargreave – High conviction investing tends to work best for fund managers that concentrate on large, established companies. When it comes to small cap investing however, where the risks of loss are far greater, the best performers have tended to be those that spread risk across a number of companies.

Such an approach requires a huge knowledge base and excellent research capabilities, as well as the discipline to bank profits when bets pay off.

Hargreave has been something of a master in this department. The manager tends to hold up to 200 companies in a portfolio at any one time, with the top-10 accounting for typically less than 15 per cent of assets. As well as having a strong team and many decades of experience, Hargreave benefits from the extensive network that Hargreave Hale as a stockbroking firm possesses in the UK market.

Marlborough Special Situations has a formidable track record, and is unsurprisingly a staple choice with long-term investors for a number of years. The £895m portfolio, which specialises in sounding out new issues and turnaround stories, has been one of the best performers in the IA UK Smaller Companies sector over five and 10 year periods, returning 150% and 253%, respectively. It’s also ahead of its peers over one and three years, though the margin of outperformance is greater over the longer-term. Since launch the fund has returned well over 2,000% – almost four times as much as the average UK Smaller Companies portfolio, according to FE Trustnet data.

Other examples: Gervais WIlliams’ CF Miton UK Smaller Companies fund.

Minimise loss, sustain dividend growth stories 

Managers who like this strategy: Troy Asset management’s Francis Brooke, CF Woodford Equity Income fund manager Neil Woodford.

One way that’s often proven effective when it comes to outperforming the market is finding companies that pay sustainable and growing dividends. Businesses with the ability to grow their income payout year on year are unsurprisingly in high demand, which tends to translate into strong share price performance as well. These companies tend to perform particularly strongly when markets fall, leading funds that specialise in dividend growth stories to outperform during market crises.

A case in point is Francis Brooke, manager of the Trojan Income fund. Brooke is one of only two UK Equity Income managers that has not cut their annual dividend payout since the financial crisis. His preference for large and mid-cap UK companies with strong balance sheets, good cash flow and predictable earnings – which all translate into good dividend growth prospects – have seen Trojan Income protect much more effectively against the downside in falling markets as well. In 2008 the fund lost around 12 per cent compared to almost 30 per cent from the All Share, for example.

Overall, the fund is comfortably beating the All Share over one, three, five and 10 years, even though it tends to lag when markets are rising sharply. If a fund loses money one year it has to work much harder to make the money back he next (if it loses 50% one year it has to make 100% to break even).

Other examples: Stuart Rhodes, manager of M&G Global Dividend

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