During periods of heightened uncertainty, investors often favour investments with defensive characteristics. Sectors such as consumer goods are regarded as solid, stable areas where earnings and profits are unlikely to freefall. These companies generally sell products which are in demand regardless of the wider economic environment, such as food and toothpaste, so their profits are divorced to an extent from the strength of the underlying economy. As such, they have proven popular with investors and performed well in recent years.
The Fundsmith Equity Fund, managed by Terry Smith, is highly exposed to the consumer goods sector. Investments in this area, which include companies such as Colgate Palmolive and Nestle, currently account for around 38% of the fund. The fund's performance has been aided by this high exposure. However, many of these companies now look fully valued, according to our analysis.
As a long-term investor, Terry Smith tends to make few changes to the portfolio. Over the past year, sales included Domino's Pizza and Choice Hotels, while he has invested in Waters Corp.
Domino's Pizza - the share price reached a level the manager felt was only justifiable if the business continued their rapid rate of growth. He feels this is unlikely so sold the position but would be happy to reinvest in the future should it reach a more attractive valuation.
Choice Hotels - the business is investing heavily in developing a third party reservations system, which Terry Smith feels is outside the management's skill set. He also feels the project is too high-risk for the potential reward.
Waters Corporation - the business manufactures equipment used in the testing and certification of products, such as food and pharmaceuticals. Terry Smith expects the company to do well as their business customers increasingly seek to minimize the risk of product recalls, and deliver the highest-quality products possible.
Our view on this fund
The Fundsmith Equity Fund has produced stellar returns since its launch five years ago, rising 135.9% compared with 40% for the average fund in the sector, and 64%* for its benchmark. Please remember past returns are no guide to the future.
These returns can largely be attributed to the fund's high exposure to consumer goods and services companies and, to a lesser degree, positive stock selection, according to our analysis. The fund operates a concentrated portfolio which allows each investment to make a significant impact on returns however this is a higher-risk strategy.
|Annual percentage growth|
| Feb 11 -
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| Feb 15 -
Past performance is not a guide to future returns. Source: Lipper IM* to 01/02/2016.
The Wealth 150 is reserved for managers we feel are exceptional. We feel the Fundsmith Equity Fund could deliver good returns for investors while defensive sectors continue to perform well. However, we have concerns over how performance may be affected when these areas begin to lag. Terry Smith's track record is relatively short and he is as yet untested in an environment of prolonged falling share prices. The Lindsell Train Global Equity Fund, managed by Nick Train, invests in similar areas but is a more flexible and cheaper alternative, with a highly experienced manager at the helm who has added significant value through his stock selection, according to our analysis. For these reasons, Lindsell Train Global Equity is our preferred fund for inclusion on the Wealth 150. This should not be taken as a suggestion for existing investors to switch, but explains why the Fundsmith Equity Fund, which has performed well, does not feature on the Wealth 150.
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