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OPINION

Life after Terry Smith

Life after Terry Smith
March 5, 2021
Life after Terry Smith

This year Terry Smith and Fundsmith research head Julian Robins tackled a variety of subjects, from company valuations to bitcoin, the economics of the car industry and why Fundsmith Equity (GB00B4LPDJ14) doesn’t hold Amazon (US:AMZN). Yet one of the most noteworthy moments came when Smith took a question on succession planning.

While there is no suggestion the star manager will step back any time soon, he is certainly considering some future-proofing. Smith, now in his late 60s, said he wanted to “take the majority of what I own in the firm and pass it on to other people in the firm in due course”. He also described Robins as “the first line of defence” when it came to succession and suggested some fairly recent recruits to the firm could be "worthy successors in due course".

This matters. Simply put, Smith is one of those few remaining 'star' fund managers who, putting it crudely, is so integral to the firm’s brand that his eventual departure becomes a threat – even if the investment process can carry on without him.

His presence is likely a minor detail for the huge companies he tends to buy. As Smith put it: “I would like to think that my passing would lead to such a catastrophe that things like Microsoft (US:MSFT) would cease business as a result, but I’ve got a feeling that it won’t happen.” But a sudden departure could still cause havoc for the £22.5bn Fundsmith Equity fund if it prompted investors to exit. Those who worship the industry's remaining few star managers might also worry that the magic touch disappears with them, without a worthy replacement.

All of this means that succession planning is another thing to look out for if you back funds that benefit from the gravitas of their big names. Invesco learned this to its cost when Neil Woodford upped sticks a few years back, triggering a wave of outflows from the equity income funds he previously ran.

Fortunately, asset managers have grown much better at providing some degree of continuity over the years, whether it comes to big names or small. Nick Train, one of the few other especially high-profile managers, last year told Interactive Investor that while he and Michael Lindsell were in "no hurry" to move on, other fund managers hired to the Lindsell Train business would be able to take over when needed.

Firms now tend to stress the importance of teams and repeatable investment processes over the star power of one or two big names, and often new investment managers will be introduced to a fund before a stalwart steps back.

Take Troy Asset Management: last year it hired Blake Hutchins as a co-manager on the large Trojan Income fund (GB00BZ6CQ176). This established his presence at the firm in advance of the recent announcement that the fund's lead manager, Francis Brooke, would step back from his investment responsibilities in 2022. Hutchins will take over as lead manager on Trojan Income in January 2022.