What ceos have generated best investor returns

The Fundsmith Equity manager says that as a long-term investor, he is in effect sub-contracting to the CEOs of the companies he invests in.

Terry Smith has claimed the CEOs of the companies he owns in Fundsmith Equity are better investors than most fund managers.

The £27bn Fundsmith Equity fund typically invests in companies that offer between 25 and 30% return on capital employed [ROCE]. This means that the CEOs of these companies have managed to invest cash into their business and generate profits far in excess of both shareholder equity and its long-term debt.

“If you own a bond, you want to know the redemption yield. If you invest in a fund, you want to know what sort of returns it can deliver. Why would you ignore this for a company?

“Plus, if you own shares for long periods of time, the returns they deliver will gravitate towards the company’s return on capital.”

So, if these CEOs can generate a return on capital of 25 to 30%, does this mean they are better investors than most fund managers, who often fail to beat their benchmark?

Yes, according to Smith, although he admitted they have one advantage over fund managers.

“They are investing within a powerful franchise in a good business which is capable of delivering good returns,” he explained.

“It still requires skill, but if they stick to their knitting, it should pay off. When you are a long-term investor, you are in effect sub-contracting to the CEOs of the companies you invest in.”

Smith is known for his buy-and-hold approach to investing, but he does exercise a sell discipline when CEOs are no longer able to allocate capital in a way that delivers the returns he is after.

“We aim to buy good companies and hold them forever, but sometimes circumstances change,” he said. “Many of our sales have been involuntary – the company has been taken over.

“In other cases, we have determined that the management is no longer allocating capital or running the business in a manner which should deliver the sort of compound returns we seek.

“We also continually scour our investable universe to see if there are any other good companies which seem to offer better value and returns, and if so, we switch into them. This is particularly likely to happen when we have periods of market volatility, such as in the second quarter of 2020.”

However, that does not mean he is straying from his well-known investment mantra of “do nothing” once he has bought a quality company. The benefit of this approach is that it reduces the costs of trading, helps him avoid the pitfalls of market timing and maximises the long-term benefits of compounding.

“Every year we publish a list of the stocks which have been the top five contributors to our fund’s performance,” he said.

“Microsoft has appeared in that list for six years. PayPal and Stryker for four. Idexx for three. Clearly, doing nothing was the correct course of action with these stocks.

“It’s said that no one ever became poor as a result of taking a profit, but I suspect that they didn’t become rich either.”

In recent weeks, the types of growth stocks that Fundsmith invests in have sold off amidst rising US Treasury yields, as markets have begun to use higher discount rates to write down the value of any future earnings.

When asked about whether investors should be worried about valuations, Smith said: “Whilst we worry about valuation, it is not only the stocks we own which have been revalued. A rising tide floats all ships.”

He also hinted that future interest rate rises might be inevitable: “Investors should indeed be concerned about the impact on valuations of an eventual rise in interest rates. The problem is that I doubt anyone knows when that will occur.”

Fundsmith Equity has returned 486% over the last decade, more than double the IA Global sector’s average of 219.8%.

 Performance of Fundsmith Equity v sector over 10yrs

  Source: FE Analytics

Great money managers are like the rock stars of the financial world. The greatest investors have all made a fortune off of their success and in many cases, they've helped millions of others achieve similar returns.

These investors differ widely in the strategies and philosophies they applied to their trading; some came up with new and innovative ways to analyze their investments, while others picked securities almost entirely by instinct. Where these investors don't differ is in their ability to consistently beat the market.

Ben Graham excelled as an investment manager and financial educator. He authored, among other works, two investment classics of unparalleled importance. He is also universally recognized as the father of two fundamental investment disciplines—security analysis and value investing.

The essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in fundamental analysis and sought out companies with strong balance sheets, or those with little debt, above-average profit margins, and ample cash flow.

One of the past century's top contrarians, it is said about John Templeton that he bought low during the Depression, sold high during the Internet boom, and made more than a few good calls in between. Templeton created some of the world's largest and most successful international investment funds. He sold his Templeton funds in 1992 to the Franklin Group. In 1999, Money magazine called him "arguably the greatest global stock picker of the century." As a naturalized British citizen living in the Bahamas, Templeton was knighted by Queen Elizabeth II for his many accomplishments.

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Thomas Rowe Price Jr. is considered to be "the father of growth investing." He spent his formative years struggling with the Depression, and the lesson he learned was not to stay out of stocks but to embrace them. Price viewed financial markets as cyclical. As a crowd opposer, he took to investing in good companies for the long term, which was virtually unheard of at this time. His investment philosophy was that investors had to put more focus on individual stock-picking for the long term. Discipline, process, consistency, and fundamental research became the basis for his successful investing career.

Neff joined Wellington Management Co. in 1964 and stayed with the company for more than 30 years, managing three of its funds. His preferred investment tactic involved investing in popular industries through indirect paths, and he was considered a value investor as he focused on companies with low P/E ratios and strong dividend yields. He ran the Windsor Fund for 31 years (ending in 1995) and earned a return of 13.7%, versus 10.6% for the S&P 500 over the same time span. This amounts to a gain of more than 53 times an initial investment made in 1964.

Jesse Livermore had no formal education or stock trading experience. He was a self-made man who learned from his winners as well as his losers. It was these successes and failures that helped cement trading ideas that can still be found throughout the market today. Livermore began trading for himself in his early teens, and by the age of sixteen, he had reportedly produced gains of over $1,000, which was big money in those days. Over the next several years, he made money betting against the so-called "bucket shops," which didn't handle legitimate trades—customers bet against the house on stock price movements.

Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which the fund's assets grew from $18 million to $14 billion. More importantly, Lynch reportedly beat the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29%.

Often described as a chameleon, Peter Lynch adapted to whatever investment style worked at the time. But when it came to picking specific stocks, Peter Lynch stuck to what he knew and/or could easily understand.

George Soros was a master at translating broad-brush economic trends into highly leveraged, killer plays in bonds and currencies. As an investor, Soros was a short-term speculator, making huge bets on the directions of financial markets. In 1973, George Soros founded the hedge fund company of Soros Fund Management, which eventually evolved into the well-known and respected Quantum Fund. For almost two decades, he ran this aggressive and successful hedge fund, reportedly racking up returns in excess of 30% per year and, on two occasions, posting annual returns of more than 100%.

Referred to as the "Oracle of Omaha," Warren Buffett is viewed as one of the most successful investors in history.

Following the principles set out by Benjamin Graham, he has amassed a multibillion dollar fortune mainly through buying stocks and companies through Berkshire Hathaway. Those who invested $10,000 in Berkshire Hathaway in 1965 are above the $165 million mark today.

Buffett's investing style of discipline, patience, and value has consistently outperformed the market for decades.

Bogle founded the Vanguard Group mutual fund company in 1975 and made it into one of the world's largest and most respected fund sponsors. Bogle pioneered the no-load mutual fund and championed low-cost index investing for millions of investors. He created and introduced the first index fund, Vanguard 500, in 1976. Jack Bogle's investing philosophy advocates capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover, and passively managed.

Carl Icahn is an activist and pugnacious investor that uses ownership positions in publicly held companies to force changes to increase the value of his shares. Icahn started his corporate raiding activities in earnest in the late 1970s and hit the big leagues with his hostile takeover of TWA in 1985. Icahn is most famous for the "Icahn Lift." This is the Wall Street catchphrase that describes the upward bounce in a company's stock price that typically happens when Carl Icahn starts buying the stock of a company he believes is poorly managed.

Considered the "king of bonds," Bill Gross is the world's leading bond fund manager. As the founder and managing director of the PIMCO family of bond funds, he and his team have more than $1.92 trillion in fixed-income assets under management.

In 1996, Gross was the first portfolio manager inducted into the Fixed-Income Analyst Society Inc. hall of fame for his contributions to the advancement of bond and portfolio analysis.

As any experienced investor knows, forging your own path and producing long-term, market-beating returns is no easy task. As such, it's easy to see how these investors carved a place for themselves in financial history.