Terry Smith’s Fundsmith Equity is 10 years old. Here’s why I’d hold for the NEXT decade

In just 10 years, Fundsmith Equity has become one of the largest funds in the UK. Paul Summers thinks Terry Smith is worth backing for a while yet.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Terry Smith’s Fundsmith Equity fund celebrates its 10th birthday at the start of November. Based on its performance to date, I can see many shareholders holding for another decade.

Has Fundsmith performed?

So, how well has Fundsmith done? The short answer is, ‘very well indeed’. 

Since it launched at the beginning of November 2010, Smith has achieved a return of 427% (based on Fundsmith’s most recent factsheet). By comparison, the MSCI World Index which the fund uses as its benchmark has returned ‘just’ 192%.

Had investors shunned equities completely and stayed in cash, they’d have grown their wealth by a frankly awful 6.3%. This, in my opinion, is yet more evidence that the Cash ISA is the last thing one should be using to build a nest egg for retirement

Gains to date clearly give credence to Smith’s strategy of buying shares in established, quality businesses, trying not to pay too much for them, then doing as little as possible.

At around £21bn, Fundsmith is already one of the largest funds in the UK. Nevertheless, there are a few reasons why it should continue to make good money for patient investors. 

Just getting started

For one, Smith rarely does much buying or selling. This helps keep transaction costs extremely low, meaning the fund holds on to more of its gains. 

That said, he’s not afraid to adapt. Fundsmith’s exposure to technology stocks, for example, has vastly increased over the years. Think tech titan Microsoft and social networking giant Facebook. This willingness of Smith to move with the times should be reassuring for those prepared to stay invested until 2030.   

Like Warren Buffett, Smith has also been true to his word and bought great shares when others are selling in a panic. Coffee chain Starbucks and sportswear label Nike have been two new additions this year, captured during March’s market meltdown

The fact Smith holds a concentrated portfolio with just 29 holdings also means Fundsmith should do far better than a passive fund tracking, say, the FTSE 100. As he’s remarked many times over the years, good investing is as much about avoiding the rubbish as it is with finding the winners. Sadly, the market’s top tier contains some absolute stinkers.

As an aside, it’s notable that Smith has always advised avoiding the airline sector completely. Those invested in Fundsmith over 2020 will be glad he did. 

So, nothing can go wrong?

I wouldn’t go that far. As investors, we must accept past performance is no guide to the future. This applies as much to celebrated fund managers as it does to any shares we buy.

Fundsmith could certainly become a victim of its own success. As we know, expecting too much from any fund or individual share normally leads to disappointment. With over two-thirds of its portfolio exposed to the arguably-still-overpriced US market, Fundsmith is hardly devoid of downside risk.

Should performance slide, investors may become more vocal over the management fees. Some already believe these are too high, considering the fund’s size.

At 67 years of age, there’s the possibility Smith may decide to retire (or take a backseat) at some point in the next decade. That said, I take huge comfort from his no-nonsense approach and track record to date. I have no hesitation in committing my cash for the next 10 years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK owns shares of and has recommended Facebook, Microsoft, Nike, and Starbucks and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short November 2020 $85 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Businesswoman calculating finances in an office
Investing Articles

Is BP’s 6.7% dividend yield good value after the recent share price fall?

Despite the fluctuating oil price and BP's volatile shares, City analysts predict strong ongoing annual dividend payments ahead.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Up 42% from their 12-month low, is it time for me to buy this much-fancied FTSE growth stock after a 2% dip?

This FTSE 100 distribution firm achieved a lot in the past year and has good earnings growth prospects, but is…

Read more »

Investing Articles

Here’s the HSBC share price forecast through to 2026

Shares in this FTSE 100 bank have surged in 2024, but what’s next for the HSBC share price? Dr James…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Can Rolls-Royce shares continue to outperform in 2025?

Stephen Wright thought Rolls-Royce shares were undervalued heading into 2024. After a 90% rally, is this still the case with…

Read more »

Investing Articles

Here’s what Warren Buffett says is ‘always a bad investment’

Working out what to invest in can be difficult. But there’s one asset that Warren Buffett says long-term investors should…

Read more »

Investing Articles

Up 40%! Is it too late for me to grab some shares of this skyrocketing FTSE 100 giant?

With the share price soaring, our writer’s kicking himself for not buying this FTSE 100 share when he reported on…

Read more »

Investing Articles

Down 54%, here’s one of my favourite FTSE 100 bargain shares for 2025!

The FTSE 100 remains packed with value shares despite its strong showing this year. Here's one fallen angel I think…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

A cheap FTSE 250 share I think could fly during the Santa Rally!

The FTSE 250 has historically delivered its best results during December. Value shares like this one could be in prime…

Read more »