It’s been a very strong five years for Terry Smith and the Fundsmith Equity Fund. Smith launched his fund in November 2010 based on the principles that MoneyWeek routinely urges managers to follow: a concentrated portfolio, low turnover and an active approach to investing instead of hugging the benchmark.
Since then, it has returned 116%, an outstanding performance in a period when global shares have gone up by 60% and rival funds have only averaged of 38%. Trustnet ranks it as third out of 213 funds during this period.
So what’s behind the fund’s success? Smith focuses on what he believes are exceptional companies and aims to hold these for the long term. There is a small pool of these (he has said that there are only 75 stocks in the world worth buying) and many are expensive, hence the fund holds just 28 shares. “I am surprised how many investors assume that it is better to be diversified across low-quality investments than to be concentrated in high-quality ones,” he says.
The fund has benefited from having 60% of the portfolio in the US, which has done better than other developed markets. It is heavily invested in large consumer, technology and healthcare stocks, and many of these holdings are comparatively expensive.
However, Smith’s whole philosophy is that they are worth paying a premium for – as an investor, you either feel the same or you don’t invest. Our main criticism is that the annual fee is steep, at 0.9% for the cheapest “I“ share class (the total expense ratio is 0.99%). With more than £4bn in assets, Fundsmith could afford to cap fees. Nonetheless, this is a fund that follows a commendably different strategy to the herd.
Tel: 0330-123 1815
Fundsmith Equity Fund top ten holdings
Microsoft
Imperial Tobacco
Dr Pepper Snapple
Sage
Pepsico
Philip Morris
Stryker
Johnson & Johnson
CR Bard
Unilever