Since Fundsmith Equity launched 10 years ago, the fund has become a well-known favourite amongst UK investors and has swelled to become one of the largest funds on the market with assets of £21.6bn.
The approach of manager Terry Smith – who has a buy-and-hold, concentrated, quality-growth philosophy – has resulted in 10 years of consistent outperformance when compared to the fund’s IA Global peers and the benchmark.
Whilst the active fund management industry has been facing criticism due to the number of funds delivering mediocre performances that fail to justify their fees, Tilney Investment Management Services’ Jason Hollands said “investors have been well rewarded for placing their faith – and cash – with manager Terry Smith and his team”.
Indeed, since launch a decade ago, Fundsmith Equity has delivered a total return of 414.93 per cent after costs, far ahead of the 138.99 per cent from the average fund in the IA Global sector and the 183.87 total return on the MSCI World index.
Performance of fund since inception
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Source: FE Analytics
It is worth bearing in mind that these gains have been delivered against the backdrop of strong returns across global stock markets in an environment of ultra-low interest rates put in place in the after the global financial crisis of 2009.
As Hollands explained: “This environment has been a great period for the sorts of high-quality growth companies that the Fundsmith Equity fund backs, as low bond yields have driven cautious investors towards business with predictable and stable income streams instead.”
However, he noted the fund’s strong performance against benchmarks that focus on global growth companies, namely the MSCI World Growth index, which returned 275.6 per cent over the last decade.
“The team have added a lot of value and have not just benefitted from operating in an overall market sweet spot,” he said.
Performance of fund versus MSCI World Growth Index
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Source: FE Analytics
The enormous size of the fund has been one area of concern cited by some commentators. Hollands said it was right to carefully monitor funds that grow significantly in size because “successful investment approaches can often have natural limits on capacity”.
But in the case of Fundsmith Equity, he argued that the approach is very scalable because the fund “has always invested in big global companies and the approach is a long-term, buy-and-hold one that does not entail frequent trading of stocks”.
Dave Winckler, associate director in the investment strategy team at Kingswood Investment, said: “In our view and not having met Terry or a member of the investment team, the outperformance appears to have come from making great stock specific calls in the early days of the strategy and letting those companies compound over time.
“From an investor perspective, you have to ask yourself how sustainable the outperformance is, given the size of the fund, continued inflows and ultimately, the new Covid-induced market landscape.”
Hollands added: “No matter how strong a fund is, it does make sense not to become too exposed to a single holding, particularly where the strategy itself is concentrated in a relatively small number of stocks.
“There isn’t a magic percentage that investors should stick to but I would generally suggest limiting exposure to any single fund to around 10-15 per cent of a portfolio. “
Given this, below are six funds that can achieve something similar without the change of style, for investors who do not wish to diverge away from the quality-growth approach.
Loomis Sayles Global Growth Equity
One fund Hollands highlighted was the $334m Natixis Loomis Sayles Global Growth Equity fund, run by FE fundinfo Alpha Manager Aziz Hamzaogullari.
Loomis Sayles’ Boston-based team undertakes its own extensive stock research and rigorous in-house peer review with a focus on analysing barriers to entry, profit margin, top line revenue growth, free cash flow and return on invested capital.
Companies that pass strict quality and growth requirements are added to the team’s "bench" of stocks to watch until the price is right – i.e. where valuation is compelling.
Hollands said: “The outcome of this process is a concentrated portfolio of high quality, high growth stocks, trading at a discount to intrinsic value, with low portfolio turnover and significantly different from the benchmark US index.”
Some of the fund’s largest holdings are in e-commerce companies Amazon, Mercadolibre and Alibaba Group.
Performance of fund vs sector & benchmark since launch
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Source: FE Analytics
Natixis Loomis Sayles Global Growth Equity returned 120.42 per cent since launch in June 2016, compared with 64.69 per cent from the benchmark and 61.28 per cent from the average peer in the IA Global sector. It has an OCF of 0.95 per cent.
GuardCap Global Equity
Another fund Hollands said investors should consider holding is the $1.9bn GuardCap Global Equity fund, managed by Michael Boyd and Giles Warren, who have worked together since 1997.
The managers have honed an approach to invest in a concentrated portfolio of circa 20-25 stocks with an emphasis on quality, growth and value.
Hollands said: “The result is a portfolio focused on growth companies that are relatively resilient to the economic environment and which is slightly more diversified across sectors than Fundsmith Equity.”
Some of its largest holdings include Mastercard, Google’s parent company Alphabet and financial derivatives exchange company CME Group.
Performance of fund vs sector & benchmark over 5yrs
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Source: FE Analytics
GuardCap Global Equity returned 119.21 per cent over the last five years, against 76.54 per cent from the benchmark and 69.23 per cent from the IA Global sector.
It has an OCF of 1.1 per cent.
TB Evenlode Global Income
Another fund Hollands highlighted was the £679m TB Evenlode Global Income fund, run by Ben Peters and Chris Elliott. It is the global version of Evenlode’s successful UK focused fund.
He said: “It is a concentrated portfolio of highly cash-generative companies from around the world that are typically operating with ‘capital-lite’ business models i.e. they don’t have to burn shareholder capital in replacing heavy machinery and equipment.”
“The approach leads to a bias to more stable sectors such as consumer goods and health care and away from more volatile industries like mining and banks.”
Some of its largest holdings include German chemical and consumer goods firm Henkel AG & CO, as well as well-known UK companies such as Unilever and Reckitt Benckiser Group.
Performance of fund vs sector & benchmark since launch
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Source: FE Analytics
TB Evenlode Global Income returned 21.36 per cent since launch, compared with 21.95 per cent from the benchmark and 20.59 per cent from the average peer in the sector. It has an OCF of 0.85 per cent.
Fundsmith Sustainable Equity
Another fund that investors could consider is the £404m Fundsmith Sustainable Equity fund.
Teodor Dilov, fund analyst at interactive investor, said: “For those who would like to keep identical exposure, but within a more nimble vehicle Fundsmith Sustainable Equity could be a good fit.
“The fund has a high-conviction portfolio of 25 stocks, run by the same manager, and employs ESG filters into its process.”
Some of its largest holdings include the online payments company Paypal, personal care company L’Oreal, and accounting and tax software firm Intuit.
Performance of fund vs sector & benchmark since launch
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Source: FE Analytics
Fundsmith Sustainable Equity returned 45.22 per cent since launch. Over the same period, its benchmark has made 21.71 per cent and its average peer is up 20.77 per cent. It has an OCF of 1.05 per cent.
BMO Responsible Global Equity
Another global alternative Dilov highlighted was the £869m BMO Responsible Global Equity fund, run by Jamie Jenkins and Nick Henderson.
He said: “The fund is managed by Jamie Jenkins who has the support of the well-resources equity team at BMO.
“In terms of regions, similar to Fundsmith it has more than 60 per cent of its assets invested in US-domiciled companies with global presence and diversified income streams.
“On a sector level, the fund has reasonable exposure to technology, healthcare and industrials with some of the top 10 holdings including the tech giant Microsoft and the chemical leader Linde.”
Due to its size and, Tilov said it still has “plenty of capacity”.
Performance of fund vs sector & benchmark over 5yrs
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Source: FE Analytics
BMO Responsible Global Equity returned 101.12 per cent over the past five years, compared with 76.54 per cent from the benchmark and 69.23 per cent from the average peer in the IA Global sector. It has an OCF of 0.79 per cent.
Lindsell Train Global Equity
Kingswood’s Winckler, who also recommended GuardCap Global Equity, suggested the £7.8bn Lindsell Train Global Equity fund.
He prefers Nick Train, Michael Lindsell and James Bullock’s fund from a valuation perspective and because of its lower correlation to global equities.
He said that while the Fundsmith, GuardCap and Lindsell Train funds provide similar outcomes, these three funds are ‘quite different’ in terms of the underlying companies and ultimate tilts to sectors and regions.
“In terms of stock cross over, Fundsmith has around 15 to 20 per cent stock similarity to both funds while Guardcap and Lindsell Train have no cross over in their concentrated portfolios,” he said.
Winckler said that Lindsell’s lower performance is explained by its relative underweight to the US region and overweight to the UK region.
“Many of the Lindsell Train companies like Diageo and Unilever are top quality companies with diversified earnings from all around the globe but are trading at significant discounts to peers merely because they are listed outside the United States,” he explained.
Performance of fund vs sector & benchmark over 5yrs
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Source: FE Analytics
Lindsell Train Global Equity returned 105.82 per cent over five years, compared to 76.54 per cent from the benchmark and 69.23 per cent from the average peer in the IA Global sector. It has an OCF of 0.65 per cent.