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Get global diversity with Fundsmith Equity

Investing in a global fund helps to spread risk across a range of countries and currencies, and can provide access to higher growth.

Recent UK market turbulence in the run-up to Scotland's referendum on independence, months of tension over the situation in Ukraine and ongoing instability in the Middle East are a reminder to investors of the merits of holding a geographically diversified portfolio to spread risk across a range of countries and currencies. Global investment also provides access to higher growth economies such as emerging markets and sectors under represented on an individual local market such as the UK.

IC TIP: Buy at 179p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Good performance
  • Low turnover
  • Low costs
  • Geographic diversity
Bear points
  • Concentrated portfolio
  • Exposure to currency fluctuations

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM

However, many private investors find it difficult to access global investments directly or may struggle to know how much to allocate to each region, so will instead use a global equity fund. One good option is IC Top 100 Fund Fundsmith Equity (GB00B4Q5X527) which we first tipped in November last year.

Read the tip

The fund has 62 per cent of its assets listed in the US, 14 per cent in Europe, and 24 per cent in the UK, but the companies it invests in derive their revenues globally, and some get a significant portion from developing markets.

"This can enable us to obtain some of the benefits of developing markets exposure, mostly growth, whilst benefiting from the governance structure of a large, international company; mostly but not always listed in one of the world's major stock markets," explains Terry Smith, manager of Fundsmith Equity Fund.

The fund launched in November 2010 and has posted good returns: it is among the top 25 per cent of performers in the Investment Management Association (IMA) Global sector over one and three years, and it also beat the MSCI World NR GBP Index over these periods.

"We believe this fund offers exposure to the sorts of companies that should continue to produce attractive and resilient returns in a low growth environment, and warrant the premium rating on which they trade," comment analysts at broker Killik & Co.

Mr Smith looks for what he considers to be high quality businesses which can sustain a high return on operating capital employed. He also looks for attributes such as:

■ Advantages which are difficult to replicate;

■ Businesses which do not require significant leverage to generate returns;

■ A high degree of certainty of growth from reinvestment of cash flows;

■ Resilience to change, particularly technological innovation; and

■ Attractive valuations.

Mr Smith doesn't try to time the market so avoids sectors which are highly cyclical. Businesses which don't sell direct to consumers or make goods consumed at short and regular intervals generally don't qualify for the portfolio.

As a result, a limited number of shares qualify for the fund's stringent criteria, and it only holds between 20 and 30 shares.

Mr Smith aims to minimise trading costs by holding shares for the long-term. Trading costs eat into a fund's returns, so the lower these are, the better for returns.

FundSmith also aims to keep fees low and does not charge an initial fee. Investors who come to the company to buy the fund directly can access its 'T' share class with an annual charge of only 1 per cent, and self-directed investors can also buy the fund via platforms such as Alliance Trust Savings and Hargreaves Lansdown.

Funds with concentrated numbers of shares can be more volatile, while investing in good quality businesses can mean a fund lags its peers when cyclical shares rally. Shares with earnings from overseas can also have their profits reduced by currency movements, though so far this has not stopped FundSmith Equity from making good returns.

So if you are a long-term investor, Fundsmith Equity Fund looks like a low cost way to achieve global diversification and generate strong returns. BUY.

Read more on ways to protect your portfolio

FUNDSMITH EQUITY FUND (GB00B4Q5X527)

PRICE:179pMEAN RETURN:18.28%
IMA SECTOR:GlobalSHARPE RATIO:1.73
FUND TYPE: Open-ended investment companySTANDARD DEVIATION:9.45%
FUND SIZE:£2.1bnONGOING CHARGE:1.1%*
No OF HOLDINGS:26*12-MONTH YIELD:1.15%
SET-UP DATE:1 November 2010MINIMUM INVESTMENT:£1,000*
MANAGER START DATE:1 November 2010MORE DETAILS:fundsmith.co.uk

Source: Morningstar & *Fundsmith

 

 1-year cumulative total return (%)3-year cumulative total return (%)
Fundsmith Equity T Acc14.867.3
MSCI World NR GBP12.459.9
IMA Global sector average9.343.3

Source: Morningstar, as at 11 September 2014

 

Top 10 holdings as at 31 August 2014

Microsoft
Reckitt Benckiser
Dr Pepper Snapple
Unilever
Stryker
Imperial Tobacco
Kone
Pepsico
Becton Dickinson
InterContinental Hotels

 

Sector breakdown

Consumer staples43%
Technology19%
Healthcare17%
Consumer discretionary11%
Industrials8%
Cash2%