Terry Smith – the portfolio manager of the very popular Fundsmith Equity fund – is the man they call ‘Britain’s Warren Buffett.’ It’s not hard to see why. Since Fundsmith Equity was launched in late 2010, it has returned a total of 399.7% for investors (to the end of June). This means that had you invested £100,000 with Smith when the global equity fund was launched, your money would now be worth approximately £499,700 (minus platform fees).
That really is an incredible achievement. Over the same time period, Fundsmith’s benchmark, the MSCI World Index, has returned just 183.2%. Smith hasn’t just beaten his benchmark. He’s smashed it. So, what’s his secret? And can private investors generate these kinds of amazing results from the stock market themselves?
Terry Smith: Britain’s Warren Buffett?
What’s fascinating about Smith’s investment strategy is that it’s actually really simple.
Fundsmith Equity doesn’t try to trade in and out of stocks. Nor does it short stocks or use financial derivatives. All it does is invest in world-class companies and hold them for the long term.
Now, Smith does have strict criteria when it comes to picking stocks. Specifically, he looks for companies that:
Are poised for future growth (many of his holdings look set to benefit from powerful trends such as the ageing population and the rise of digital payments)
Can continually generate high returns on operating capital employed
Do not require significant levels of debt to generate returns
Have advantages that are difficult to replicate
Are resilient to change, particularly technological innovation
Are trading at attractive valuations
To sum up his investment strategy, he invests in high-quality, resilient companies that are consistently profitable and have strong growth prospects.
It’s worth noting that Terry Smith also invests on a global basis. Not only does he hold some of the best stocks on the London Stock Exchange such as Diageo, Unilever and Sage, but he also has exposure to winning companies listed internationally such as Microsoft, PayPal and Novo Nordisk.
Smith also tends to have a bias towards certain sectors. He tends to favour the Consumer Staples, Technology, and Healthcare sectors, while minimising exposure to sectors such as Financials (he doesn’t hold any banks), Utilities, and Oil & Gas.
All in all though, it’s a very simple Warren Buffett-like strategy. All Smith does is invest in top companies and hold them for the long run.
How you can invest like Terry Smith
Can your average investor invest like Terry Smith? Absolutely.
With the data and resources that are available to investors these days, it’s very easy to put together a portfolio of high-quality businesses.
By focusing on metrics such as revenue growth, return on capital employed (a basic measure of profitability), and debt-to-equity, you can find companies that are growing, highly profitable, and resilient.
Then, it’s just a matter of holdings these kinds of companies for the long term, as Smith does.
Edward Sheldon owns shares in Unilever, Diageo, Sage, Microsoft, PayPal and has a position in the Fundsmith Equity fund. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft, PayPal Holdings, and Unilever. The Motley Fool UK has recommended Diageo and Sage Group and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and long January 2022 $75 calls on 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.