Anthony Hilton: A funds switching tip that should see you beat market

Brian Dennehy says you do not have to be a genius to make money on the stock market: Suzanne Plunkett/Reuters
Brian Dennehy says you do not have to be a genius to make money on the stock market: Suzanne Plunkett/Reuters

Terry Smith has been one of the best fund managers of the past decade and he gets results by sticking with a simple strategy. At least it appears simple from the client’s point of view, but there is a lot of hard work in the background.

He invests in a small number of high-quality, resilient, global-growth companies which he can buy at good value.

He has a concentrated portfolio of up to 40 stocks. He does not worry about guns or oil or tobacco or defence-oriented stocks. He thinks it is up to the client if he or she wants to divest.

He almost never sells. If a share goes down but he still believes its fundamentals are sound, then he is more likely to buy more than to sell out.

He thinks a good company can cope with bad management, and at some point management is likely to be dire even if it is good at the moment.

When in another life he inherited the Tullett Prebon pension fund about 15 years ago, it was in a bad way. He used these techniques and within a few years it was not only in surplus but more or less top of its class.

So he started Fundsmith, an equity fund, and history repeated itself. It began in 2010, tops the charts, and currently manages around £18 billion. So now he is launching another fund but this time it is for small-to-medium-sized companies, hence the name Smithson Investment Trust. That means it will invest in companies worth between £500 million to £15 billion, with an average of £7 billion.

Small to mid-cap companies have more volatility but normally outperform their larger peers — by 80% over a 20-year time horizon.

Having a few larger companies also helps dampen that volatility. There are fewer analysts covering them too, so the opportunity to spot value is greater. His fund is open to offers until October 12.

That is one strategy but there is another quite different one courtesy of Brian Dennehy, an investment adviser with

He has written a book, Clueless, which tells it as it is as far as fund management is concerned. Some 92% of funds are mediocre at best, he says. There are far more investment funds than there are shares in the index, and the vast majority don’t deliver.

But there is a solution. Momentum investing is one of the strategies used by hedge funds in which, if a share is going up, it carries on going up, until it doesn’t.

The trick is to know when to get out. Dennehy has crunched the numbers over 20 years and agrees that momentum works.

He says that an investor should look for the three most profitable funds (not shares) over the past six months in their relevant shares sector, and buy those. Having bought, the investor leaves them for six months.

Half a year later he or she then looks for the three funds which have again been in the leaders in that second period. He or she then switches to those.

And so it goes on. Every six months the investor selects the top three funds, buys them and sells the others.

It has to be six months, not three or 12. In three months there is too much volatility; in 12 months the momentum is beginning to fade and the funds do not give as much return. Six months is just right.

It also does not matter what sector the investor chooses, though obviously the relevant funds will represent that particular sector so the performance will differ. A bond fund will typically do less than an equity growth or equity income fund.

There are some sectors which are just too small so they don’t really have enough funds to make a choice. And it does not seem to work in Asia, for reasons which he cannot fathom. But other than that, investors are away at the races.

Dennehy says you do not have to be a genius to make money on the stock market. In fact it requires little intellectual input, which admittedly some investors don’t like. But they do have to be disciplined and always switch funds every six months.

But if they do that, then his book says that you should comfortably beat the index.