Fundsmith’s investment principles were always likely to resonate strongly with Investors Chronicle's readers, but now the fund has proved itself on performance terms with a great three-year track record.
- Strong investment principles
- Low costs
- Low turnover
- Good performance
- Concentrated portfolio
- Manager risk
The Fundsmith Equity Fund (GB00B4Q5X527) was launched on 1 November 2010 by Terry Smith, who used the launch to declare war on high charges in the industry. The fund has no benchmark or sector constraints and invests in a high-quality concentrated portfolio of 20-30 resilient global growth companies which are held for the long term.
The fund has delivered a compound return of 17.3 per cent a year since inception and a total return of 61.2 per cent to investors who bought in three years ago. Assets invested in the fund now total £1.5bn.
Since launch, the fund has outperformed the MSCI World Index GBP Gross by 19.4 per cent, and the average IMA Global Equity Fund by 33.7 per cent, placing the fund 4th in the IMA Global Growth sector out of 244 funds.
Earlier this year, Fundsmith Equity Fund won a place in the IC Top 100 funds and we feel its three-year record justifies our decision to include it in our list of best actively managed funds.
IC TIP RATING | |
---|---|
Tip style: | GROWTH |
Risk rating: | HIGH |
Timescale: | LONG TERM |
The fund aims for high conviction stockpicking, citing modern portfolio theory, which says close to optimal diversity can be achieved in most developed markets with just over 20 stocks.
It also aims to hold for the long term - avoiding churning the portfolio and market timing. Investors should be wary of fund managers who turn over their portfolios too much, as they can incur large additional costs that are not stated in their annual management charges. A 2008 report by Lipper found that the average annual portfolio turnover level for actively managed equity funds is 56.6 per cent, reflecting a typical stockholding period of just under two years. By contrast, of Fundsmith’s original 22 stock portfolio, 16 remain the same. Two of the six stocks which exited the portfolio were subject to takeover offers that allowed the fund to realise its investment at a premium. Fundsmith sold three holdings: Schindler, Serco and Sigma-Aldrich in the first half of 2013.
Fundsmith has published its own version of its total cost including dealing costs which it terms the total cost of investment (TCI). For the first half of 2013 this amounted to 1.22 per cent based upon an annual management charge of 1 per cent.
Fundsmith Equity Fund invests in companies with high returns on operating capital employed - in cash. This approach rules out most businesses that do not sell direct to consumers or which make goods which are not consumed at short and regular intervals. The companies also have to have advantages that are difficult to replicate in the form of brand names, trademarks, high market shares, patents, licences, distribution networks, installed bases and client relationships.
Terry Smith says: "We do not seek to find tomorrow’s winners, rather to invest in companies which have already won. We invest in large, well established businesses which make their money through a very high volume of relatively small, repeat, predictable everyday events. Companies such as Colgate, Unilever and Domino's Pizza which have already won dominant positions in their respective sectors."
If you want to buy the fund, cheapest via its T Class, which has an annual management charge of 1 per cent, then you’ll need to buy it direct from Fundsmith.
However, self-directed investors can also buy the R Class of the fund, which has an annual management charge of 1.5 per cent (includes 0.5 per cent annual trail commission to the advisor) on the Alliance Trust Savings platform and via Fidelity’s Fund supermarket.
The fund's high conviction concentrated portfolio may not be to everyone's taste and there is a high degree of manager risk attached to this fund. However, we like the principles and feel the performance record strenghtens our conviction that this is a fund to hold for the long term. Buy.
Fundsmith Equity Fund T Acc (GB00B4Q5X527) | |||
PRICE | £1.61 | SET-UP DATE | 1 January 2010 |
IMA SECTOR | Global | MANAGER START DATE | Terry Smith (01/11/10) |
FUND TYPE | Oeic | ANNUAL MANAGEMENT CHARGE | 1.00% |
FUND SIZE | £1.5 billion | 12 MONTH YIELD | 1.33%* |
No OF HOLDINGS | 22-Jan-00 | MINIMUM INVESTMENT | £100 per month |
MORE DETAILS | www.fundsmith.co.uk |
Source: Investors Chronicle, Fundsmith and *Morningstar
Total returns % | 2011 | 2012 | 2013 (to 31 October) |
Fundsmith Equity Fund | 8.4 | 12.5 | 24.6 |
Outperformance vs MSCI World NR USD | 13.2 | 1.8 | na |
Source: Morningstar
Top 10 holdings October 2013 | % as at 30 June 2013 | % as at 31 December 2012 |
Stryker | 5.75 | 5.28 |
Microsoft | 5.35 | 4.79 |
Domino's Pizza | 5.77 | 5.18 |
Dr Pepper Snapple | 5.72 | 5.6 |
Reckitt Benckiser | 5.17 | 5.6 |
Becton Dickinson | 4.76 | 4.82 |
Unilever | na | na |
Imperial Tobacco | 4.84 | 5.24 |
Procter & Gamble | 4.45 | na |
Intercontinental Hotels | na | na |
Source: Fundsmith
Geographical breakdown (as at 30 June 2013)
Country | % |
US | 63 |
UK | 22 |
European | 15 |
Sector breakdown (as at 30 June 2013)
Sector | % |
Consumer staples | 45 |
Healthcare | 17 |
Industrials | 11 |
Information technology | 10 |
Consumer discretionary | 13 |
Other | 4 |