Terry Smith remains the UK’s undisputed star fund manager and his flagship vehicle Fundsmith Equity is still much-loved by investors. Its long-term track record is terrific, and when I was loading up my self-invested personal pension (SIPP) plan this summer, I started by putting a big chunk into his fund.
I did that for several reasons. First, because Mr Smith’s well-known investment strategy has plenty of crossover with what we try to do at The Motley Fool: buy good companies, don’t overpay, then do nothing.
Smith has other rules too. They include no upfront fees, no performance fees, no shorting, no market timing, no index hugging and no trading. I’m down with all of that.
Smith’s law
Fundsmith was good value at first, with an annual charge of 1%. It now looks relatively pricey as charges fall across the board, driven by the exchange traded fund (ETF) revolution.
Few were willing to quibble. Since launch in 2011, Fundsmith has delivered an annualised return of 15.1% to 30 November. That compares to 11.2% on its benchmark index, MSCI World. Over the period, that’s the difference between 527.6% and 300%.
Mr Smith doesn’t always beat the market. Who does? In 2022, Fundsmith fell 13.8%, while the world fell just 7.8%. Despite that, he still made money, as the financial press sniffily pointed out. He pocketed £31m in the year to March 31, despite profits falling 14%.
Fundsmith is trailing this year too. It’s up 8.5% in the year to 30 November, while the MSCI World is up 12.1%. Somebody who bought a global tracker would have paid lower charges too. The iShares MSCI Index charges just 0.24%.
Naturally, past performance is no guide to the future. As Smith himself said, in January’s semi-annual newsletter: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable”.
I’ll give him time
Fundsmith was hit by last year’s tech sell-off, with Meta Platforms, PayPal, Microsoft and Amazon all hurting performance. The tech recovery has helped lift the portfolio, with Microsoft the biggest holding, and Meta the fourth-biggest. However, it’s still underperforming because the MSCI World’s top eight holdings are all tech stocks, including 2023’s runaway winner Nvidia.
If Fundsmith was a pure tech fund then I’d be worried, but it isn’t. I already have enough exposure to that sector, via Vanguard S&P 500 ETF and the L&G Global Technology Index Trust. I chose Smith’s fund for its broader remit, as top 10 holdings include Danish obesity pill maker Novo Nordisk, beauty firm L’Oréal and luxury goods maker LMVH.
Novo Nordisk is up 47.48% this year while L’Oréal is up 29.38%, LMVH has gone nowhere but another Fundsmith holding, Estée Lauder, has crashed 47.98%. There’s always one.
To misquote Oscar Wilde, to underperform for one year, Mr Smith, may be regarded as a misfortune. Two years looks like carelessness. Yet I wouldn’t accuse him of that. My big worry is that success goes to his head. Or that his time has simply passed. Nobody stays at the top forever. Yet I’ll stick with Fundsmith for now. A generally solid year has been overshadowed by tech sector success. In time, I think events will swing back in Fundsmith’s favour. We’ll see.
