Investors are selling Fundsmith. Should I?

Terry Smith’s Fundsmith Equity has seen big outflows over recent months. It is time to ditch one of the UK’s most popular and successful fund managers?

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 is the UK’s largest fund. It’s not hard to see why. Smith achieved an annualised return of 18.4% from launch (November 2010) to the end of April this year for investors.

Despite this stellar performance, there are signs that some want out. Almost £360m was taken out of the fund in the first three months of 2021. Let’s look at why this might be happening.

Why is Fundsmith out of favour?

The most obvious cause of Fundsmith’s outflows is down to the rotation into value stocks. Having made a lot of money from Covid-proof tech giants in 2020, investors now want to recycle profits into companies that could recover strongly as the coronavirus pandemic comes to an end. 

Fundsmith is about as far as you can get from being a value-focused fund. Instead, Terry Smith only buys what he believes to be the best companies around. These are firms that generate high returns on the money they invest in themselves. They’re resistant to competition, resilient in the face of change and boast strong brands. They’re also not cheap. This helps to explain why Fundsmith hasn’t benefited from the rebound as much as other funds. 

So, what are some of the arguments for me staying in or moving out of Fundsmith now?

Fundsmith: The bear case

Well, there’s a chance that the switch to value stocks could continue. As economies fully reopen, investors are still bargain-hunting. Airlines — which Terry Smith is particularly scornful of as investments — could register big gains. 

There’s also something to be said for the fact that the average size of a company in Fundsmith’s portfolio is almost £165bn. It’s not easy for these to double revenue and profits (and share prices) overnight. Small-cap stocks, however, can provide outsized returns if picked well. 

At the risk of sounding ageist, it’s also worth remembering that Smith, like most successful managers, is no spring chicken. While he’s not expected to retire soon, I doubt he’ll want to still be managing investments into his 90s like Warren Buffett. As football teams replace star players, so must investors. 

Fundsmith: The bull case

On the flip side, Smith has always been very clear that there will come a time when Fundsmith will underperform the market. Using the Tour de France as an analogy, the UK fund manager has said that he’s looking to win the race for his investors, not every stage of the race. Smith is not a market-timer. Nor will he buy/sell on a whim. As a holder, that gives me confidence. I’m also comforted by the fact that Terry Smith has a large amount of his own money invested. 

When it comes to addressing Smith’s inevitable retirement from Fundsmith, investors should know that there’s already a succession plan in place. While his eventual replacement is still to be confirmed, there’s a decent chance it will be his long-serving head of research, Julian Robins. Again, this consistency is reassuring. 

Bottom line

Terry Smith won’t be concerned over recent outflows from Fundsmith. On reflection, I’m not concerned either. As a long-term investor, I believe that good businesses will always trump bad businesses eventually. Fundsmith’s investment strategy is to buy the former, not overpay, and then do nothing. For me, the third step is particularly relevant today. Growth will come again.

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.

Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing Articles

Can the filthy cheap BP share price rocket in 2025? Here’s what the experts say

Harvey Jones took advantage of a tough year for the BP share price to add the stock to his portfolio…

Read more »

Investing Articles

I aim for a million buying just 10 or so shares!

Rather than investing in dozens of different companies, our writer is focussing on finding a few great ones to help…

Read more »

British Pennies on a Pound Note
Investing Articles

Has this 6% yielding penny share fallen too far?

After a testy few days for a penny share our writer holds, he revisits the investment case and weighs management…

Read more »

Investing Articles

These are the 3 top-yielding FTSE 250 stocks in my passive income portfolio

Mark Hartley explains why these three mid-cap stocks make good additions to his passive income portfolio, despite lacking the stability…

Read more »

Investing Articles

3 stock market pitfalls for beginners to look out for

When investing in the stock market it's easy to fall foul of these three big mistakes. Our writer considers some…

Read more »

Growth Shares

The second phase of AI’s started. I expect these UK shares to benefit

Edward Sheldon believes these UK shares could do well as artificial intelligence solutions are introduced within the corporate world.

Read more »

Investing Articles

How much will be needed to start buying shares in 2025?

Christopher Ruane explains why he thinks it need not cost the earth to start buying shares and details some considerations…

Read more »

Investing Articles

Can the Next share price defy the odds and grow another 25% next year?

Harvey Jones is in awe of the Next share price, which has shrugged off the troubles hitting retail for another…

Read more »