Smith, who is a well-known City figure as a result of his high ranking positions at Collins Stewart and Tullett Prebon, launched the global equity fund in November 2011 in an attempt to shake-up the “broken” fund management industry.
He and his team’s ‘keep it simple’ approach has so far worked as the now £2.5bn portfolio has been among the best performing funds in the IMA Global sector since its launch. Nevertheless, Smith says he is still baffled by how many of his peers are treating their underlying investors. “I continue to be amazed by the baloney that is spoken by so many so-called investment professionals and at the fund management industry’s tendency to add unnecessary complexity to financial products that merely seems to serve to justify high fees,” Smith (pictured) said.
“Conversely, it is pleasing that the simplicity of our fund has appealed to over 11,000 investors, ranging from some of the world’s largest, most sophisticated investors to regular monthly savers.”
“We are also pleased that, as a result of our scale, we estimate that the ongoing charges will be less than 10 basis points [0.1 per cent] over our flat fees for the 12 months ending 31 December 2014.”
According to FE Analytics, the five crown-rated Fundsmith Equity fund has been the fourth best performing portfolio in the 210-strong IMA Global sector since its launch with returns of 82.75 per cent. The only three funds to have beaten it are specialist global healthcare portfolios.
It has also beaten its benchmark – the MSCI World index – by more than 30 percentage points over that period.
Performance of fund versus sector and index since Nov 2010
Source: FE Analytics
Smith attributes those returns to his disciplined process for picking stocks.
The fund is made up of just 26 stocks and Smith will only buy companies which are of high quality, whose advantages are hard to replicate, do not need leverage to outperform and are resilient to change.
These tend to be global mega-cap stocks which are market leaders. For example, he counts the likes of Microsoft, Unilever, PepsiCo and Imperial Tobacco as top 10 holdings. He then likes to hold the companies that fit his investment criteria for the long term – meaning his portfolio turnover is extremely low.
“We continue to employ exactly the same stringent investment process that we did on day one,” Smith said.
“Firstly we identify good companies, secondly we buy their shares at a fair or better price and lastly we seek to do the most difficult thing of all – nothing. In this way we allow the great returns that our portfolio companies generate to mount up and compound their share prices.”
“The rise in the fund’s price over the past year has not been achieved through market timing (something we rigorously eschew) or trading in positions. We only added two new positions and sold one.”
“It is virtually impossible for us – and probably anyone else – to say which way markets are headed in the next 12 months, but we can be certain that the wonderful positions that our portfolio companies occupy will allow them to continue to grow their intrinsic value.”
Smith’s focus on quality is reflected in his fund’s return profile over the years.
According to FE Analytics, Fundsmith Equity has delivered a positive return in every calendar year since its launch.
Source: FE Analytics
As the table above demonstrates, the fund has more or less kept up with the sector and its benchmark during strongly rising markets like in 2012 and 2013. However, it has really come into its own during times of market stress.
Our data shows in 2011 – when the eurozone was on the verge of collapse – the sector and index lost 9.27 per cent and 4.84 per cent respectively, while the fund delivered a 7.81 per cent gain. Also, the fund is up 14.43 per cent in this year’s turbulent market.
It has been top decile for its annualised volatility since launch and has had a top decile maximum drawdown score, which measures how much an investor would lose if they bought and sold at the worst possible time, of 12.85 per cent.
Smith’s approach has also been genuinely active as it has been top decile for its alpha generation, relative to its benchmark, and its information ratio since inception.
The fund has garnered a lot of attention among the fund-picking community and in a recent FE Trustnet article, Chris Metcalfe (pictured) – investment director at IBOSS – said that he was using Fundsmith Equity due to Smith’s unique approach.
“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.” Metcalfe’s only reservation, however, is the growing size of its AUM. Though it is £2.5bn, Metcalfe points out that Smith’s approach of focusing on mega-caps and keeping turnover to a minimum is conducive to running a large pool of money.
Fundsmith Equity has an ongoing charges figure (OCF) of 0.99 per cent.
