It is times like now where investors should think hard about using the services of a fund manager to help pick the best companies and, perhaps more importantly, avoid the worst ones.

Terry Smith-steered Fundsmith Equity (B41YBW7) proved to be a winner during the bull market with significant outperformance. However, it has never been tested in a proper market correction – until now.

When everything is going well with the stock market you want an actively-managed fund that can outperform a basic tracker fund. When things are going badly with equities, you want your fund to fall by less than the market.

Fundsmith is managing to do both of these things. From launch it November 2010 to the end of 2019 it achieved 364.4% total return versus 181% from the MSCI World index – so it generated twice as much for investors than the market.

So far this year, up to 23 March, the accumulation version of the fund has only fallen 14.1%, compared to a 21.4% decline in the MSCI World index.

FOCUS ON CASH

A key reason why Fundsmith is doing better than the market in the coronavirus pandemic is its focus on cash-generative companies that have historically made very strong returns on the money they invest in their business. It also avoids companies that require significant borrowings to generate returns, hence why you won’t see banks or utilities in the portfolio.

The market is punishing companies with large debts at present for fears of a cash flow crisis, so Fundsmith has managed to distance itself due to its preference for financially-strong businesses. The fund also benefits from having a third of its holdings in consumer companies whose products are often bought in both good and bad times.

The portfolio includes technology group Microsoft which benefits from recurring revenue thanks to customers paying a subscription for services such as Office. Its laptops are also likely to be in hot demand as millions of people suddenly find themselves working from home and needing equipment.

Other positions in the portfolio include insulin producer Novo Nordisk and Idexx Laboratories, a designer of diagnostic testing equipment for monitoring animal health and analysing dairy products.

There is no guarantee that Fundsmith will continue to outperform the market on a relative basis, but its proven investment process gives it an advantage.

Investors should only consider putting money into the fund near-term if they understand the risks that it could fall in value and that they don’t need the cash for essentials like paying the bills or paying down debts.

DISCLAIMER: The author has a personal investment in Fundsmith Equity

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