The Motley Fool

Why Imperial Tobacco Group PLC, Unilever plc And Reckitt Benckiser Group Plc Are Terry Smith’s Top Holdings In This Record-Breaking Fund

Terry Smith has a loyal following amongst private investors. His Fundsmith fund has been highly successful, doubling investors’ money since its launch in 2010 with annualised returns of 19%.

Just three UK companies make it into the fund’s top ten holdings: Imperial Tobacco (LSE: IMT), Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB). What can stockpickers learn from this?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The fund has a distinctive investment style, identifying good quality companies and holding them long term. Quality is measured by:

  • Sales of small-ticket items with a high repeat business and defensive nature;
  • High Return on Capital and cash conversion;
  • Competitive advantages that are difficult to replicate;
  • Ability to generate returns without significant leverage;
  • Ability to grow through reinvestment;
  • Resilient to change, particularly technological innovation;
  • Attractive valuation.

Whilst Imperial’s products are, bluntly, addictive, Unilever and Reckitt are consumer durables companies par excellence. The products people devour, clean with, bathe in and pamper themselves with are very much necessities of 21st century life, and seem resilient to trading down.

Intangibles are valuable

All three companies have tremendous market power — and hence pricing power — through their strong consumer brands, established distribution channels and bargaining power over retailers. Mr Smith emphasises the value of such intangible assets. Private investors often prefer tangible asset backing but when intangibles represent true market power, rather than a history of expensive acquisitions, they are of real value.

Both Unilever and Reckitt generate outstanding returns on invested capital, 28% and 21% respectively, within the top 10% of all UK companies. Imperial’s more modest 11% is within the top 30%. All three companies throw off cash, with operating cash flow per share higher than earnings. Gearing is low at Reckitt (24%), moderate at Unilever (73%) and higher at Imperial (168%) after it borrowed to acquire market share in the US.


In recent years emerging markets have provided the ideal platform for Unilever and Reckitt to grow: Unilever had a great initial advantage thanks to the Lever Brothers’ overseas forays in the 19th century — some competitive advantages really endure — but Reckitt has been playing catch-up.

Imperial, too, expanded in emerging markets, but I’m not sure I share Mr Smith’s confidence in the ability of Big Tobacco to resist technological change. Imperial’s sales are shrinking and it is being milked for cash: long-term prospects depend on capitalising on the disruptive technology of e-cigarettes and not being cannibalised by it. It’s a moot point whether the new technology needs the old players’ competitive advantages.


That’s recognised in Imperial’s cheaper valuation: a prospective PE of 14.9, against 22.1 and 23.8 for Unilever and Reckitt Benckiser respectively. Quality doesn’t come cheap. Fundsmith’s approach to valuation is based on free cash flow yield (free cash flow per share as a percentage of the share price).

Some of the success of Fundsmith’s performance is undoubtedly due to the rise in valuation multiples in the US, which accounts for 60% of the fund. Some think that’s getting toppy. But the philosophy of buying and holding good quality companies is one I wholeheartedly endorse.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Tony Reading owns shares in Unilever. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.