Fundsmith - simply the best?

Writer,

Fundsmith has been a tremendous success story both in terms of popularity and performance. Terry Smith has become the poster boy for active management and has broadened the appeal of selective investing at a time when low cost index trackers have bitten off a huge chunk of the funds market.

Fundsmith Equity’s quality growth approach has been in-vogue with the market for a long time now. Perhaps the one challenge Terry Smith hasn’t yet faced is a sustained period of underperformance and outflows, which is the pressure cooker test for fund managers.

If and when that day comes he’s got quite a bit of credit in the goodwill bank having turned £1,000 invested at launch into £5,412 today. What’s also impressive is he’s managed to do that with one of the lowest risk scores in the sector too.

Despite the exceptional performance investors do need to be mindful that they don’t plough too much of their portfolios into one fund, particularly one as concentrated as Fundsmith Equity.

It pays to have a spread of managers so that if one does start to go through a sticky patch, the others can keep your portfolio on the right track. There are other quality growth fund managers out there to hold alongside Fundsmith and investors should keep some exposure to the value camp too, after all, every dog has its day.

Perhaps the one gripe that could be levelled at Fundsmith Equity is the relatively high annual charge of 0.95%, particularly given the ginormous size of the fund. Smith makes the argument that his long term buy and hold approach reduces portfolio turnover and therefore lowers the overall cost of ownership.

Perhaps so, but there are other active managers who take a similar long term approach and charge less. Notably Scottish Mortgage investment trust has delivered higher returns than Fundsmith Equity and has an ongoing charge of just 0.36%. On the other hand there are other funds in the global sector with higher charges than Fundsmith and worse performance. In any case, as long as Fundsmith continues to deliver stellar performance, charges aren’t likely to be a major sticking point for investors.’

Risk and Return Analysis

Fundsmith Equity has turned £1,000 invested at launch into £5,412 today. That means the £25 million capital Terry Smith used to seed the fund in 2010 would now be worth £135 million if left untouched, though the manager may have made deductions and additions over the last ten years.

The fund is also one of the lowest risk in the sector which makes it even more impressive it’s stacked up such high returns.

  Total return Sector rank Volatility Sector rank
Fundsmith Equity 441.2% 3/148 13.1% 19/148
MSCI World 199.1%   14.0%  

Source: FE total return 01/11/2010 to 20/10/2020. Volatility ranking runs from 1 (lowest risk) to 148 (highest risk).

The fund sits in third place in the IA Global sector when looking at performance since launch. The two funds which beat it are Baillie Gifford Global Discovery and the Wellington Global Healthcare Equity fund, returning 551.7% and 468.4% respectively.

These two funds aren’t direct competitors of Fundsmith Equity however. They are more specialist in nature than Fundsmith Equity, and the Global sector at large. Baillie Gifford Discovery focuses on small cap companies, which is reflected in its benchmark, the S&P Global Smaller Companies Index. As the name suggests, the Wellington Global Healthcare fund is a specialist thematic fund investing in healthcare companies across the globe. They are therefore fishing in very different pools from the Fundsmith Equity fund and so aren’t good comparators.

However if we include investment trusts in our analysis, two similar large cap funds, Lindsell Train Investment trust (run by Nick Train and Michael Lindsell) and Scottish Mortgage investment trust (run by James Anderson) have returned more, albeit with higher volatility.

  Total return £1,000 invested Volatility
Scottish Mortgage 793.10% £8,931 21.70%
Lindsell Train 546.80% £6,468 26.30%
Fundsmith Equity 441.20% £5,412 13.10%

Source: FE total return 01/11/2010 to 20/10/2020.

Scottish Mortgage Investment Trust has returned 793.1% since November 2010 turning £1,000 into £8,931, and Lindsell Train Investment Trust has returned 546.8% turning £1,000 into £6,468. Volatility over the period was 21.7% and 26.3% respectively.

Comparing returns from open-ended funds (like Fundsmith) and closed-ended funds (like the investment trusts Scottish Mortgage and Lindsell Train) is not straightforward. Investment trusts benefit from gearing (borrowing) which exacerbates returns in rising markets. Open-ended funds usually only price once a day whereas investment trusts price throughout the day and can trade at a discount or premium, which increases their volatility numbers.

Moreover almost half of the Lindsell Train investment trust is now invested in the unlisted Lindsell Train fund management group, which makes it a bit of an oddity as an investment proposition. The open-ended Lindsell Train Global Equity fund is a better comparator with Fundsmith Equity and a better fit for most retail investors but that doesn’t quite have a ten year performance record as yet. Looking back to the launch of this fund in March 2011, it’s performed very well, and with relatively low volatility like Fundsmith Equity, but the latter has outperformed considerably.

  Total return since March 2011 Volatility Ongoing charge
Scottish Mortgage 753.5% 21.9% 0.36%
Fundsmith 429.2% 13.2% 0.95%
Lindsell Train Global Equity 332.1% 13.2% 0.65%

Source: FE 16/03/2011 to 20/10/2020

James Anderson and Nick Train have a similar investment approach to Fundsmith, namely buying strong companies with reliable growth prospects and holding them for the long term. Anderson and Train can boast a longer track record than Terry Smith and lower charges. All three of these managers have delivered exceptional performance in the last decade and are worthy of consideration by investors.

Risk v return chart

Return is measured on the y axis with risk (volatility) on the x axis. The further up the chart a fund is, the more it has returned. The further left on the chart, the lower the volatility. The top left hand corner is the sweet spot of high returns and low volatility.

Source: FE 01/11/2010 to 20/10/2020.

Fund options to go with Fundsmith

While Fundsmith’s performance has been spectacular, investors shouldn’t have too many eggs in one basket lest performance starts to turn. Terry Smith has done an excellent job of articulating his Buffett-esque approach through the ‘buy good companies, don’t overpay, do nothing’ mantra. But there are a number of funds which have a similar investment approach to Fundsmith, namely buying reliable growth companies for the long term which could sit alongside it. While this approach has beaten value managers hands down for a considerable time, investors should also consider having a blend of fund manager styles to avoid a boom and bust portfolio.

Growth funds:

(These are funds with a similar investment philosophy to Fundsmith).

Scottish Mortgage investment trust – fund manager James Anderson looks for strong companies offering durable growth that the trust can hold for the long term. He picks investments from across the globe, including unlisted private companies, and runs a high conviction portfolio where the top 30 holdings account for 79% of the fund. Like Smith it has a high exposure to the tech stocks which has served it well in recent years but is at risk if there’s a sell-off in this sector. At an annual charge of 0.36% it’s also cheap as chips.

Evenlode Global Income – the Evenlode team seek out companies with strong finances that offer predictable earnings growth and the ability to pay a growing dividend. Again this is a concentrated portfolio of 30-40 stocks which the managers want to hold for the long term.

Value funds

(These are funds which take a different approach to Fundsmith, investing in companies which they deem to be undervalued).

Jupiter Global Value Equity - manager Ben Whitmore is a disciplined value investor, looking for companies that are out of favour and trading at attractive valuations, but which have strong finances to see them through the tough times. It’s a concentrated portfolio of 30-40 stocks, but unlike Fundsmith its approach means it has almost no tech and is very underweight the US compared to the world index. Needless to say this has dented performance of late.

Schroder Global Recovery - this fund is not for the faint-hearted as the managers run a high conviction portfolio in really unloved areas of the market. It’s underperformed the world index since launch, but an especially large dose of patience is required for funds like this as they are targeting beaten up companies they think will recover in the long term. Again a very different approach to Fundsmith.

These articles are for information purposes only and are not a personal recommendation or advice. Past performance isn't a guide to future performance, and some investments need to be held for the long term.


ajbell_laith_khalaf's picture
Written by:
Laith Khalaf

Laith Khalaf is Finanial Analyst at AJ Bell. He began his financial services career in 2001 at Hargreaves Lansdown, where he worked a variety of roles across pensions and investments, covering both DIY and advised business. Laith began to focus on research and investments in 2007, becoming a leading industry commentator. He’s provided daily business bulletins on LBC, is a regular contributor to the financial pages of the national press, and a frequent guest on TV and radio. He has a degree in Philosophy from Cambridge University.