Fundsmith Equity and Scottish Mortgage (LSE: SMT) are two of the UK’s most popular investment funds. Both have delivered terrific long-term performance, but lately things have been a bit bumpy.
In calendar year 2022, Scottish Mortgage suffered a meltdown, crashing by half. It had quietly transformed itself into a tech-heavy fund, which was almost 10% invested in just one stock, hyper-volatile Tesla. As a result, it got swept up in last year’s brutal US tech sell-off.
So which has done better?
The odd thing is that it has failed to benefit from this year’s recovery. The Scottish Mortgage share price has actually fallen another 4.06% year to date. That’s quite some feat, given that Tesla, Nvidia and Amazon make up three of its top six holdings. These stocks are up 127%, 239% and 61% respectively year-to-date.
That suggests the rest of the portfolio is doing just as badly as last year, although it’s hard to tell, given so much of the fund is invested in private equity. Scottish Mortgage continues to fall, down 9.8% measured over a year, and has a long journey back to respectability. Its five-year total return is 26%. If I’d invested £5k in the investment trust five years ago, it would be worth £6,300 today. That’s a respectable return, but I would have hoped for much better.
Fundsmith Equity is a different beast. Manager Terry Smith resisted getting sucked into the tech frenzy, sticking to his strategy of buying quality businesses “with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return”. Top holdings include Novo Nordisk, Microsoft, L’Oréal and LVMH.
The fund also has a hefty US exposure at 66.8% of the portfolio, plus some European and UK stocks. After years of outstripping the market, it fell 13.8% in 2022, a rare negative return from Mr Smith. Yet he’s made a better fist of 2023, with the fund up 8.6%. It’s trailing its MSCI World benchmark, which rose 10.2%, but only just.
At least I’ve made money
Fundsmith is up 6.7% over one year and over five years its total return is 53%, which would have turned my £5k into £7,650. Combined, these two funds would have turned £10k into £13,950 since September 2018. Scottish Mortgage increased my stake by £1,300, Fundsmith by £2,650. That’s not bad given recent woes, I suppose.
So much for recent history. The big question is where they go next. While Fundsmith hasn’t dazzled lately, few funds will succeed in all market conditions. Some have questioned whether Smith has lost his touch, but he has made it through the recent storm pretty well, and looks set for a brighter future when stock markets recover.
Scottish Mortgage has a tougher road ahead of it. Given its hefty exposure to unquoted companies, it’s a lot harder to see what lies beneath. I’m slightly worried that it could follow Neil Woodford down the private equity rabbit hole. Performance seems highly dependent on market sentiment. The share price moves faster than the market on both the ups and the downs.
I hold both investment funds in my self-invested personal pension. Fundsmith doesn’t worry me. Scottish Mortgage does. I’m crossing my fingers with that one.
