- Terry Smith is approaching a decade in fund management
- He’s delivered some of the strongest long-term performance in the global sector
- He took advantage of opportunities during recent market volatility
- This fund is not on our Wealth Shortlist. You can find the funds chosen by our analysts for their long-term performance potential here
How it fits in a portfolio
This fund aims to deliver long-term growth by investing in large high-quality companies from developed countries. That means it could work well alongside other global funds investing in unloved companies with recovery potential, or those with exposure to higher-risk smaller companies or emerging markets. As a global fund it could also be used to add international diversification to a portfolio mainly invested in the UK.
Terry Smith’s had a long and esteemed financial services career, working his way from bank analyst to chief executive of broker Tullett Prebon. He was also previously adviser to the Tullett Prebon pension fund, and appointed Andy Brown of Cedar Rock Capital to manage the investments. Inspired by Brown’s investment philosophy and process, Smith launched Fundsmith Equity in 2010. He initially ran it part-time as he was still chief executive of Tullett Prebon, before leaving the business in 2014 to focus full-time on the fund.
Smith’s been the sole manager ever since but has the support of a small team who’ve worked closely with him for many years. He also manages a sustainable version of the fund and is the Fundsmith business’ chief executive and chief investment officer. As both his funds are very similar and the business is focused on a small number of portfolios, we think he’s able to devote enough time to managing the fund.
Smith has built an impressive long-term track record as he approaches a decade in fund management. We admire his simple and straightforward investment approach and would like to be given the opportunity to properly analyse the fund. Our process, however, requires access to the fund manager and up-to-date, monthly portfolio data, which some fund groups, including Fundsmith, choose not to disclose.
Based on readily-available historical data, had we been able to properly analyse the fund, it’s likely that it would have made the Wealth Shortlist. We can’t, however, make an exception to our process, so we won’t be considering the fund for the list as things stand.
Smith invests in large, high-quality companies from around the world. He likes those that have hard-to-copy advantages over competitors, reinvest their profits back into the business to grow, and are resilient through both good and bad times. Many of his companies are so-called ‘dividend aristocrats’ – businesses that’ve increased dividends for 25 years or more. These include Jack Daniels-maker Brown-Forman, which Smith invested in during the latter half of 2019, HR software provider ADP, and medical equipment supplier Becton Dickinson.
The majority of the fund is focused around three sectors – everyday consumer products, technology and healthcare. Smith currently invests in less than 30 companies, making this a concentrated fund. That means each holding can make a meaningful difference to overall performance, both positively and negatively. Smith’s always found the most opportunities in the US, which is why two-thirds of the portfolio is currently invested there, with the remainder of companies from the UK and Europe.
Investments are usually made for the long term, as Smith champions the power of compound growth over time. He rarely buys and sells many companies, which keeps transaction costs low and in turn helps improve the fund’s performance. He’s been busier than usual in recent months though as he’s taken advantage of coronavirus-related market volatility.
At the end of 2019 he invested in cleaning products-maker Clorox, whose shares did well as people become more concerned about sanitation during lockdown. He sold the shares and took profits just a few months later though. The proceeds were reinvested in sportswear giant Nike and coffeehouse chain Starbucks. Smith considers them excellent companies, and thought their shares had become attractively-priced following falls.
Fundsmith is a boutique fund group with offices in Mauritius, London and the US. It was founded by Terry Smith in 2010 with the launch of Fundsmith Equity and has expanded to include a small stable of funds and investment trusts, most of which are run along the same lines. We like the dedication to the founding investment philosophy.
The business is employee-owned, with Smith owning the largest stake, and managers all investing significantly in the funds. We view this positively as it means both the business and the funds are run with the long-term in mind, and managers’ interests are aligned with investors.
As the majority owner, chief executive, chief investment officer and fund manager, we’d question how much challenge Smith receives. We think challenge at both a fund and business level is beneficial, as it provides different perspectives and forces the manager to really think about their ideas.
The fund is available for an annual ongoing charge of 0.95%. This is higher than many other funds in the global sector, and means the manager has a higher hurdle to deliver a positive return. We recognise, however, the long-term value that Smith has added over and above these charges, although there’s no guarantee of that in the future. The HL platform fee of up to 0.45% per year also applies.
The fund’s performance since it launched in November 2010 has been excellent. It’s returned gains of 398.4%* compared with 181.8% for the FTSE World index. Remember past performance isn’t a guide to the future. Investments can fall as well as rise and you may not get back as much as you originally invest.
Smith has benefitted from style tailwinds throughout most of his tenure, but his performance is down to more than just being in the right place at the right time, and he’s shown skilled stock-picking. Although he’s usually beaten rising markets, his strongest periods of performance have generally been when markets were falling.
That’s been the case recently, as the fund’s held up better than the broader global stock market since the start of the year, which has been one of the most volatile in recent history. We’d expect Smith to continue delivering good long-term performance, particularly during market wobbles, although there are no guarantees.
Fundsmith Equity performance since launch
Past performance is not a guide to the future. Source: Lipper IM *to 30/06/2020
|Annual percentage growth|
| June 15 -
| June 16 -
| June 17 -
| June 18 -
| June 19 -
Past performance is not a guide to the future. Source: Lipper IM to 30/06/2020