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Metcalfe: The ideal equity fund for cautious investors

21 September 2014

IBOSS’s Chris Metcalfe explains why he is considering adding the popular Fundsmith Equity fund to his portfolio.

By Alex Paget,

Senior Reporter, FE Trustnet

Investors should consider Terry Smith’s five crown-rated Fundsmith Equity fund if they are concerned about high valuations in global equity markets, according to IBOSS’s Chris Metcalfe (pictured), who is contemplating adding the fund to his recommendation list due to its defensive characteristics.

ALT_TAG Metcalfe, investment director at the firm, has been looking to add to his global exposure and to find a possible alternative to Stephen Thornber’s Threadneedle Global Equity Income fund, which has been through a difficult period recently.

He is sticking with Threadneedle portfolio for the time being, but met with Terry Smith, who launched the £2.2bn Fundsmith Equity fund in October 2010, as he has been impressed by the manager’s ability to protect capital.

“The Fundsmith fund came onto the radar because we are always looking for diversification in our investment approach, and you certainly get a different investment approach with Terry Smith,” Metcalfe said.

“It ticks the different strategy box, ticks the performance box and it’s also got a very good maximum drawdown figure. If you have concerns about the heights of global markets generally, then this is one you want to be looking at.”

According to FE Analytics, Fundsmith Equity has been the fifth best performing portfolio in the highly competitive IMA Global sector since its launch in November 2010 with returns of 74.76 per cent, beating its benchmark – the MSCI World index – by 23 percentage points in the process.

Performance of fund vs sector and index since Nov 2010

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Source: FE Analytics


The fund has also beaten the sector and its benchmark in each calendar year since its launch.

As Metcalfe points out, Smith has a good track record of defending capital. Our data shows it has had the ninth best maximum drawdown figure in the sector, maximum drawdown, which measures how much an investor would lose if they bought and sold at the worst possible time, of -12.85 per cent.

The maximum drawdown figures for the sector and index have been around 18 per cent over that time.

Metcalfe says that one concern about the fund is that its track record doesn’t include any major market crash like 2008, though he points out the pension version of the portfolio, which has a longer track record, held up much better than most during the crisis.


The only falling market the fund has witnessed was in 2011 when fears of a eurozone collapse and concerns about slowing growth in China intensified, causing the sector and the index to lose 9.27 per cent and 4.84 per cent, respectively.

Fundsmith Equity delivered a 7.81 per cent return that year.

Performance of fund vs sector and index in 2011

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Source: FE Analytics


Smith’s fund’s strong capital preservation characteristics stem from the managers relatively unique approach to running money.

He has a developed an almost cult following among retail investors due to his vow to shake-up the “broken” fund management industry by offering a fund that has no performance fee, no upfront fee, is truly active and generally has “no nonsense” attached.

Smith owns just 26 stocks which are of high quality, whose advantages are hard to replicate, don’t require leverage, can deliver high rates of return on capital and are resilient to change, according to the manager.

These tend to be global companies with recognisable franchises and brands.

His list of top 10 holdings includes likes of Microsoft, Unilever, Imperial Tobacco, Reckitt Benckiser and Pepsico.

Smith describes the portfolio as “just a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time, and in which we invest our own money.”

The fund is index agnostic, which has meant it has generated the seventh highest amount of alpha, relative to its benchmark, since its launch and it has been top decile for both its Sharpe and information ratios.

Metcalfe currently holds various global funds, such as Threadneedle Global Equity Income, SVM World Equity and Invesco Perpetual Global Equity Income.

The reason he has just a high weighing to the sector is because he has given up on allocating to the US market.

A recent FE Trustnet study revealed that the large majority of funds within the IMA North America sector had failed to beat the S&P 500.

Metcalfe thinks they will struggle to do so in the future and therefore investors might as well use global funds as the US makes up such a large proportion of the likes of the MSCI World and FTSE All World indices.

His final decision is yet to be made, however he says Fundsmith Equity would add to his current blend of funds.

“It’s a completely different fund to the Old Mutual or SVM funds as it is managed in a very different way, which is what we like. We like different versions of success and this would help us to take a little bit of risk of the table,” Metcalfe said.

“Whatever style you are running, it’s never going to the best approach all the time. It’s just as long as they get there in the end.”


Metcalfe’s only major concern about the Fundsmith Equity portfolio is its £2.2bn AUM.

The investment director and his team are firm believers that the larger a fund gets, the harder it is for a manager to deliver superior returns like they may have done when they were running a smaller pool of money.

Though there is no clear-cut evidence that size does ultimately impact performance as yet, Metcalfe says that backing a big fund is a risk he doesn’t need to take.

According to FE Analytics, Fundsmith Equity has been one of the top 20 best-selling funds in the IMA universe so far this year, taking on £430m worth of inflows.

However, even though Smith’s fund has grown from just £161m this time three years ago, Metcalfe says that as the manager invest in predominantly large-cap names and has very low portfolio turnover, the strategy is genuinely scalable.

Performance of fund vs sector and index in 2014


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Source: FE Analytics


The flows certainly haven’t affect performance so far, as Fundsmith is top decile in 2014 with returns of 9.47 per cent, beating its benchmark by 3 percentage points.

Fundsmith Equity has an ongoing charges figure (OCF) of 0.99 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.