I’ve been talking to Terry Smith again. The ex-chairman of broker Collins Stewart has just announced the formal launch of his fund management group, Fundsmith. And he has mildly disappointed me.
I wrote here a month or so ago that I hoped his launch would be the slap in the face the fund-management business needed to start really competing on cost. My dream? That when he announced his new fund it would come with a flat fee. That hasn’t happened. Instead, there is to be a 1% annual management fee (1.5% if you go via an independent financial adviser – that’s irritating too), which isn’t even particularly low – hordes of the best investment trusts charge less.
However, there is good news. First, Smith is working to keep other costs down. Trading can add another 1.5% or so to the costs of most funds. But by keeping the portfolio focused on 20 stocks or so, Smith reckons he can get that down to around 0.3%. He also hasn’t given up on the flat fee thing. When he has £200m-£300m under management, an amount he considers to be critical mass, he tells me he will revisit it. He says he wants the fund to get cheaper as it gets bigger, not more expensive. I’ll keep watching.
In the meantime, should you be one of the investors who pushes Smith towards his first £300m? If you want to be heavily in the market, the answer might be yes. Smith is chucking in £25m of his own money – it’s always nice to see managers risk their own money in the same way they risk ours. He is aiming to build a “concentrated portfolio of high-quality, resilient, global growth companies”, which sounds perfectly good.
His fund might also end up being cheaper than most. And best of all, spend a bit of time on his website and you will at least understand how your money is being invested and how much you are paying for it to be invested (the fund comes with an ‘owners manual” – see www.fundsmith.co.uk).
However, the tougher question is whether you want to be in equities at all. We worry about inflation, so we think the answer is, in part, yes. Getting a good dividend yield with all the tax advantages that implies gives you a fighting chance of making a real return on your money over the next decade.
So, just like Smith and James Ferguson, we like what Troy’s Sebastian Lyon calls “slow burn, high-quality stocks”, many of which are cheap in absolute terms right now. But we aren’t ready to jump in wholesale yet. Why?
Because while cash isn’t attractive, the equity market as a whole isn’t either – note that the dividend yield on the UK market is now below 3%; the average of the last 90 years is more like 4.4%. That won’t last for ever.
So I’m tempted to hang on to some cash until Smith introduces his flat fee in two to three years. Then it’s all his.
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