For many investors, particularly those with smaller portfolios, investing in global equities funds that give exposure to a range of investment areas in one holding makes sense. Low-cost tracker funds can be a good way of doing this, unless you can find an active fund that beats the index return for a reasonable charge.
- Strong performance
- Reasonable charges
- Low turnover
- Exposure to resilient businesses
- May lag in strongly rising markets
An example of the latter is IC Top 100 Fund Fundsmith Equity (GB00B41YBW71), which has beaten the MSCI World, the S&P 500 and the FTSE 100 indices over one, three and five years. It is also among the top 10 best performing funds in the Investment Association (IA) Global sector over these periods, out of more than 240 funds. In fact, it has made strong positive returns in every full calendar year since its launch.
The fund's manager, Terry Smith, aims to invest in businesses with the following attributes:
■ High quality and can sustain a high return on operating capital employed.
■ Advantages that are difficult to replicate.
■ Don't need significant leverage to generate returns.
■ Highly certain of growth from reinvesting cash flows at high rates of return.
■ Resilient to change, particularly technological innovation.
■ Attractive valuation.
IC TIP RATING | |
---|---|
Tip style: | GROWTH |
Risk rating: | MEDIUM |
Timescale: | LONG TERM |
The Share Centre points out that, due to the stringent criteria shaping the fund, the manager steers clear of sectors such as banks, real estate, biotech, insurance, oil and mining. The portfolio is therefore defined more by the companies it will not invest in than those it will. Lack of exposure to oil and gas shares has recently been beneficial.
Fundsmith Equity's main sector exposures are consumer staples, technology and healthcare, including large household names such as Microsoft (US: MSFT), Johnson & Johnson (US: JNJ) and Unilever (ULVR).
"We are seeing growth but at a steadier pace, so in this period of realignment after the financial crisis we want broader global exposure and the benefit of regions where they have sorted themselves out," adds Andy Parsons, head of investment research at The Share Centre. "We also want to be in businesses that have strong managements, high barriers to entry and repeatable business, and are well financed and not heavily leveraged. This lends itself to more defensively aligned investments such as those Fundsmith Equity invests in."
The fund does not use derivatives or hedging, which can increase risk, and takes a long-term approach resulting in low turnover and meaning trading costs eat less into returns.
Fundsmith Equity can be bought on a number of platforms, including Alliance Trust Savings and Hargreaves Lansdown for an ongoing charge of 0.99 per cent, which is more than a tracker but reasonable for an active fund, and well compensated for by the strong outperformance.
Although the fund does well in an environment of slow to moderate growth, and is likely to outperform in tough times, when markets are rising strongly it may lag as rallies tend to be led by smaller and medium-sized companies. But it can still deliver a reasonable return.
Although ranked as a global fund, Fundsmith Equity has nearly 60 per cent of its assets in the US and more than a quarter in the UK. However, the companies it invests in derive their revenues globally and some get a significant portion from developing markets.
The fund has a concentrated portfolio typically of 20 to 30 stocks, which is arguably higher risk. But Mr Parsons says these are "large corporate players that won't disappear overnight".
So if you want a core holding offering exposure to major markets and some of the world's stronger companies, Fundsmith Equity is a low-cost way to get this together with outperformance over the long term. Buy.
FUNDSMITH EQUITY (GB00B41YBW71) | |||
---|---|---|---|
PRICE | 229p | MEAN RETURN | 20.75% |
IMA SECTOR | Global | SHARPE RATIO | 1.58 |
FUND TYPE | Open-ended investment company* | STANDARD DEVIATION | 11.68% |
FUND SIZE | £4.3bn* | ONGOING CHARGE | 0.99% |
No OF HOLDINGS | 28* | YIELD | 1.25% |
MANAGER | Terry Smith | SET UP DATE | 1 Nov 2010 |
MANAGER START DATE | 1 Nov 2010 | MORE DETAILS | www.fundsmith.co.uk |
Source: Morningstar, *Fundsmith Equity.
Performance
1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | |
---|---|---|---|
Fundsmith Equity I Acc | 11.1 | 70.6 | 116.3 |
MSCI World NR GBP Index | 3.4 | 45.9 | 56.9 |
S&P 500 TR GBP Index | 7.2 | 68.9 | 97.6 |
FTSE 100 TR GBP Index | -3.1 | 18.4 | 30.2 |
IA Global sector average | 1.2 | 34.2 | 36.7 |
Source: Morningstar as at 4 December 2015
Top 10 holdings as at 7 December 2015
Microsoft |
Imperial Tobacco |
Sage |
Dr Pepper Snapple |
Philip Morris |
PepsiCo |
Stryker |
CR Bard |
Johnson & Johnson |
Amadeus |
Sector breakdown (%)
Consumer staples | 38.3 |
Technology | 23.6 |
Healthcare | 21.2 |
Industrials | 10.2 |
Consumer discretionary | 3.3 |
Cash | 3.4 |