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The importance of having a strategy

26 August 2020

6 minute read

As legendary investor Warren Buffett turns 90 we look at the attraction of fund managers that stick to an investment strategy.

Who's it for? All Investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How a fund manager’s long-term investment strategy can pay off.
  • Why a sudden change of tack may set off alarm bells.
  • It can be a mistake to trade too much.

Some of the most well-known and successful investors in the world are famed for their determination to ‘stick to their knitting’ – rarely wavering from their plan.

Perhaps the best known is Warren Buffett, the boss of US investment company Berkshire Hathaway, who turns 90 this month. He has made billions for himself and excellent returns for investors in his company by sticking to the same essential strategy over decades.

He has stood by (in the main) a disciplined approach of picking companies that he understands and have a simple, enduring business model, ones that have strong cash flow, little or no debt and long-term growth prospects - and to buy them only if he considers the share price good value when compared to the companies’ profit and long-term growth potential. 

The key is to then hold the shares for the long term as investments have the chance of being supercharged thanks to compounding – earning returns on returns as the years go by. 

Among Buffett’s longest held companies – and two of the biggest of his 45 or so holdings - are Coca Cola, which he started buying in 1988 and credit card giant Amex, first held as far back as 1964. Both tick the easy to understand box (Buffett is also said to drink a lot of the fizzy black stuff) – and have produced the goods in terms of returns. Looking just at the share prices over the last 10 years to August 2020, for example, Coca Cola had risen nearly threefold and Amex was 1.3 times higher.

The former offers predictable cash flow because of its strong brand and global reach. The latter has customers who tend to be among the better off demographic and - it is hoped - are likely to keep on spending on their plastic, even in an economic downturn.

There are plenty of other investment strategies to choose from – and remember all of them are potentially subject to losing money - but investors are more likely to have a more comfortable ride if a manager keeps to the plan. 

Stick to investment strategy for the long term

A fund manager’s strategy is one of the most important factors for Barclays when its experts select the funds to include in the Barclays Funds List.

Ian Aylward, Head of Manager Selection at Barclays, said: ‘One of the key attributes we look for in a fund manager is a robust and repeatable investment strategy.’

The Barclays team researches funds to find out whether those with a strong performance to date have achieved it simply through luck - or some kind of well-defined strategy over the way the managers choose, monitor and hold the companies the fund has invested in.

Aylward added: ‘Though past performance is no guarantee of future performance it does give you an idea of whether that process has been successful or not.’

So the process managers apply is important. It should reveal what the manager looks for in a company. Has the manager checked its balance sheet, the level of debt, dividend cover, how long the board has been in place (often board changes can lead to a change in a company’s direction)? 

Aylward said: ‘Sticking to a successful investment process is paramount. If it can be shown that a fund has delivered strong returns by sticking to the same repeatable process, we believe that so long as the process does not change and key members of the team do not leave, there is a good chance for that fund to continue to perform.’

Change of strategy can mean ejection from Barclays Funds List

There are all sorts of strategies that fund managers can apply, ranging from focusing on income generating companies going for growth or hunting cheap companies in the hope of seeing their shares leap in price. Not all of them involve low levels of trading, but it can often help.

Which strategies are appropriate for you will depend on your personal circumstances, your view of investment risk and your financial goals – and how much time you have on your side to achieve them. You may find a blend of different strategies works for you. 

If you are unsure about investing then consider seeking independent financial advice.

Of course you may need to apply a change of personal financial strategy if your circumstances alter – but that will be best done with careful consideration rather than in a rush.

When it comes to funds, a consistent strategy by the fund manager will probably increase the long-term likelihood of reaching your goals. 

If a fund manager applies a change of strategy out of the blue, this can be unsettling for investors. If the changes are marked Barclays will have no qualms in removing the fund from the Barclays Funds List – a shortlist of funds picked by its experts based on fund managers solid reputations and robust investment processes. Aylward said: ‘We would be more likely to remove a fund if we saw a manager, who had historically consistently had low trading, suddenly increase trading without suitable justification. They would clearly not be “sticking to their knitting”.

It can be a mistake to trade too much

There are other star fund managers who adopt a Buffett-style approach and stick to their strategy. One example is Nick Train of Lindsell Train, a firm that manages Lindsell Train UK Equity Fund (one of the most popular funds purchased by Smart Investor customers) and investment trust Finsbury Growth and Income. 

Train maintains a long-term buy-and-hold strategy, keeping a concentrated portfolio of shares – currently just a couple of dozen with many household brand names among them. He makes few changes.

Aylward said: ‘It makes the news when Train adds a new share, such as back in December 2019 when he bought a stake in PZ Cussons, maker of brands that include Imperial Leather soap. It was his first new purchase of a UK company for nine years.’ 

Aylward describes Train as a master of the ‘don’t just do something, sit there’ approach to investing – holding his nerve even when markets start to wobble. He added: ‘It can be a mistake to trade too much. It’s a rare skill to do nothing.’

Similarly, Terry Smith is another veteran fund manager who sticks to his approach – of buying a small number of high quality global businesses with growth potential, at attractive prices – and hanging on to them for the long term. This easy-to-understand strategy probably contributes to the fact Fundsmith is often the most purchased fund by Smart Investor customers. However, remember that this popularity does not mean that this is fund is better than any other; there are other funds which you may feel are more suitable for your portfolio, so make sure you do your own research and investigate the key details on any fund’s factpage before you choose to invest.

Any strategy is likely to hit bumps in the road – even Buffett’s has done so from time to time.

But as he reaches his landmark 90th birthday – and looks back at decades of sticking to the plan - Buffett can certainly celebrate many happy returns.

Look for inspiration from our Funds List.

Find out more about investment strategies.

 

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