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Is Fundsmith’s Terry Smith as good as he’s cracked up to be?

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Terry Smith is an unusual cult figure. First, there’s the name. Ordinary, bloke-ish and humble, like the man himself. Everybody knows a Terry Smith, except the Terry Smith you and I know does not manage £17bn of other people’s money.

Meet Mr Smith

There is nothing too showy about his top portfolio holdings such as PayPal, Microsoft, Facebook, Philip Morris International, Novo Nordisk and Reckitt Benckiser Group. These are names we know and probably have exposure to, one way or another.

Mr Smith doesn’t stray far from the ‘Anglo-sphere’ either. Some 63.2% of the fund is in the US, while 17.9% is in the UK. That makes 81.1% in total, plus a smattering in Spain, Denmark, Finland and France. His investment philosophy is as simple as can be: “Just a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time, and in which we invest our own money.”

Best fund ever?

Commendably, his flagship fund has no initial charges and no performance charge, and turns its back on index hugging, trading and shorting. The ongoing charges figure is 1.05%, not that expensive for a unit trust, although investment trusts are cheaper.

The talented Mr Smith has a touch of the showman. When he launched Fundsmith on 1 November 2010 he showily pledged it would be “the best fund ever” and promised to give the “fat and complacent” fund management industry a bloody nose. Plenty of fund managers talk big but he has delivered, repeatedly. Over five years, Fundsmith Equity is up 159%, more than double the 68.7% from his benchmark index Investment Association Global, according to Trustnet.com.

Son of Smith

He has trounced that benchmark again and again so news that he has is launching a small and mid-cap vehicle called Smithson Investment Trust should have us rushing to invest, shouldn’t it? Well let’s calm down a little first.

Terry Smith has done brilliantly but Fundsmith has massive exposure to the hugely outperforming US market. This is the top performing sector over the last 10 years with a total return of 315%, according to Fidelity. The Scottish Mortgage Investment Trust has a similar regional balance and has returned 205% over five years. Maybe that is the best fund ever.

Question of trust

Mr Smith deserves kudos for calling the US so accurately, but performance would suffer very quickly if the S&P 500 plunges.

He has done less well when drifting into unfamiliar territory. Fundsmith Emerging Equities Trust has returned 28.8% since launch in 2014 compared to 47.6% from the MSCI Emerging and Frontier Markets index, AJ Bell notes. That hasn’t deterred investors, with the trust now trading at a small premium. Reputation sweeps all.

Star man

Smith is commendably putting his money where his mouth is with Smithson, investing £30m as part of the targeted £250m fundraiser. But he isn’t running the show, that job will be delegated to Simon Barnard and Will Morgan, who joined last year from Goldman Sachs.

Again, that is sensible. We all know the dangers of a one-man show. Terry Smith is an ordinary, extraordinary man, but nobody is a winner forever. Just ask Neil Woodford.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Facebook and PayPal Holdings. 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.