Is Fundsmith a no-brainer buy?

Fundsmith has smashed the return of its benchmark and the FTSE 100 (INDEXFTSE:UKX) since inception. Is this the perfect ‘buy and forget’ investment?

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Fundsmith Equity remains one of the most popular funds among investors and it’s not hard to see why. It has a straightforward, nonsense-free approach — espoused by manager Terry Smith — coupled with excellent returns to date. I’ve been a holder for years.

So would it be fair to suggest this is as close to a no-brainer buy as anyone is likely to find? And would I buy more today?

Fundsmith delivers

Well, the numbers speak for themselves. From inception in November 2010 to the end of last month, Fundsmith delivered a spectacular return of just under 533%.

By comparison, its benchmark — the MSCI World Index — climbed by almost 300% over the same period. The FTSE 100? Just 30% or so, excluding dividends. Yikes!

Cash has fared even worse, up by a little over 10%. Granted, historically-low interest rates for most of those 13 years haven’t helped. Still, this is further evidence that sticking money in a bank account (beyond an emergency fund) probably won’t do me any favours in the long run.

Based on this, it’s a tough ask to criticise Smith’s strategy of buying great companies, not over-paying, and then doing nothing.

For balance, let’s try.

Lucky timing?

It could be argued that Fundsmith was simply in the right space at the right time. Setting up shop not long after the Financial Crisis and enjoying a near-decade-long bull market was never going to hurt.

Indeed, the fact that the fund drastically underperformed its benchmark last year shows that Fundsmith is not immune to setbacks.

This trend has continued in 2023 so far. Alarmingly, a far better return could have been achieved by buying a bog standard S&P 500 tracker that also charges much lower fees. That index is up 17% year-to-date.

Concentration risk

Speaking of the US, a second concern is that two-thirds of Fundsmith’s portfolio is invested across the pond. Since that rise in the S&P 500 appears based more on sentiment rather than actual earnings (and Fundsmith holds just 26 stocks), perhaps the risk profile of the fund is higher than it initially appears.

If the US market were to crash, Fundsmith might do better than the S&P 500 tracker but it wouldn’t get away unscathed.

All this is why I continue to believe that a degree of diversification is vital in every portfolio.

If we’re going to nit-pick, Smith also openly acknowledged that he was (very) slow to buy tech titans like Amazon and Apple. Clearly, these would have juiced Fundsmith’s returns even more.

Is there a risk of this happening again as the market salivates over themes like artificial intelligence, electric cars and renewable energy?

Quality rules OK

I’m not sure I’d ever go so far as to say any stock or fund is a no-brainer buy. Every potential investment must be judged according to individual financial goals and tolerance for risk.

That aside, I continue to regard Fundsmith as a core holding within my portfolio. That 13-year return simply can’t be ignored.

True, the past may not be a guide to the future. To jettison evidence that companies exhibiting quality characteristics are able to massively compound wealth over the long term (think decades, not years) however, would be a mistake.

Recent underperformance aside, I’ll be adding to my holding when I have the money to do so.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK has recommended and Apple. 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.

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