"There are two types of investor," says Terry Smith, "those that can't time the market, and those that don't know they can't." It’s just the sort of bold statement that you might expect from the outspoken stockbroking veteran, a man who has time and again backed his own ideas over City convention. It's no coincidence that he writes a financial blog called Straight Talking.
Last month Mr Smith announced his retirement from stockbroker Collins Stewart, ending an 18-year stint at the City-based firm where he was chief executive from 2000 to 2006, then chairman until this year, overseeing its growth into one of the UK's biggest stockbrokers.
Mr Smith has never been afraid to rock boats. He joined Collins Stewart after being sacked in 1992 from UBS Phillips & Drew following the publication of his book, Accounting for Growth, which tore into company accounting practices, using real clients as examples. That followed his ruffling of feathers as a banking analyst for BZW, where he notoriously penned a ‘sell’ note on the firm’s parent company, Barclays. The bank later cut its dividend.
With a little more time to spare now (he remains chief executive of interdealer broker Tullett Prebon) Mr Smith has turned his attention, and criticism, to the £542 bn UK fund management industry.
Short-sighted
He believes the industry has become stuck in the rut of follow-the-herdism, as well as short-termism, and that fund performance has suffered significantly as a consequence. He also argues that fund managers have allowed their cost structures to rise to the point where "they need [large management fees] just to keep running."
This sounds like a breakdown of competition within fund markets. "Yes, it is," Mr Smith responds, "that's an extremely good point." He compares the fund management backcloth to the way cars used to be made in the US. A motor manufacturer "could build a mid-range car for, say, $15,000 (£9,342.97) so they'd sell for $18,000." Then the Japanese moved in with a different way of working. "The Japanese wanted to sell a car for $14,000, so they asked themselves, how do we make it for $12,000?" Eventually, they found a way through efficiency, allowing them to hugely uncut US manufacturers. He's looking forment a similar revolution in funds.
Birth of Fundsmith
His new venture, Fundsmith, will be the vehicle. It aims to provide investors with a clear investment strategy, and more transparent and cheaper charging. Fundsmith aims to offer retail and institutional investors a long-term, buy-and-hold strategy using a portfolio of between 20-30 shares of largely household names. Just one fund, with one high-conviction strategy - and low charges.
That means 1 per cent management fees for direct investors (going through an independent financial adviser will mean an extra 0.5 per cent a year), no performance fees, no initial fees, no redemption fees, and above all, no over-trading. "Over trading kills returns," says Mr Smith. He is backing Fundsmith with £25m of his own cash. Investors can gain exposure with as little as £1,000. Fundsmith is also aiming to tap into the ‘cyber' generation, allowing deposits directly through its website (fundsmith.co.uk), including individual savings accounts (Isas) and self-invested personal pensions (Sipps).
Fundsmith is not the first active fund manager to offer low charges; Troy's Trojan Funds have been doing just that for several years (Keeping volatility in check, 12 November 2010) but, as Mr Smith concedes, "it's not a new way, it's the right way".
| TERRY SMITH CV |
|---|
Terry Smith is a former investment analyst who was rated as London's number 1 for the banking sector for most of the 1980s. In 1990 he became head of UK Company Research at UBS Phillips & Drew. He joined Collins Stewart in 1992, became a director in 1996 and was appointed chief executive in 2000. He led the management buyout of the company and subsequent stock market flotation, and forged the acquisitions of Tullett Liberty and Prebon Group, creating the world's second largest inter-dealer broker, Tullett Prebon, which was demerged from Collins Stewart in 2006. He remains chief executive of Tullett Prebon. |
The overall investment strategy may not sound spectacular, aiming for companies with "predictable, if pedestrian growth," he says, but history shows that slow burners produce the most heat.
Small-caps are out ("You won't see anything with a market value below $2bn."), as are sectors where the investment team have little experience or expertise. Technology, for example. Contrary to some impressions, Mr Smith isn't completely anti-tech, but he does recognise his own limitations in being able to successfully invest in this area. Some overseas markets will also fail the Fundsmith test since he's reluctant to plough funds into markets which pay little or no heed to "world standards of corporate governance".
Good governance
But what about the huge growth potential of China and India? Mr Smith's answer is to seek out large companies, most likely in the UK, Europe or North America, that have plenty of experience of running operations in fast-growing emerging markets. But they'd be based in the developed world, and will comply with the developed world's rules and regulations.
Tesco is a good example, with its established business here in Britain, relatively new US operations and a fast-growing retail business across south-east Asia. "That's exactly the kind of thing we'd look at." Another possibility might be in say, Domino's Pizza. "But we might not buy the UK shares, we might look at franchise opportunities in Mexico or South Korea," he says.
It will be some time before investors will have the chance to judge Fundsmith's performance, though. "The reality is, you should judge the performance once it's been through a bull run, and bear run," he says.
So, was it important to have his name plastered across the fund, a bit of an ego trip? "I hope not," he says, it was meant to be "a bit of a pun," he says, "like Goldsmith, or Blacksmith." Does exactly what it says on the tin, you might say. Still, it seems just as well that he wasn't called Terry Slump.
