Terry Smith’s Fundsmith Equity fund celebrates its 10th birthday at the start of November. Based on its performance to date, I can see many shareholders holding for another decade.
Has Fundsmith performed?
So, how well has Fundsmith done? The short answer is, ‘very well indeed’.
Since it launched at the beginning of November 2010, Smith has achieved a return of 427% (based on Fundsmith’s most recent factsheet). By comparison, the MSCI World Index which the fund uses as its benchmark has returned ‘just’ 192%.
Had investors shunned equities completely and stayed in cash, they’d have grown their wealth by a frankly awful 6.3%. This, in my opinion, is yet more evidence that the Cash ISA is the last thing one should be using to build a nest egg for retirement.
Gains to date clearly give credence to Smith’s strategy of buying shares in established, quality businesses, trying not to pay too much for them, then doing as little as possible.
At around £21bn, Fundsmith is already one of the largest funds in the UK. Nevertheless, there are a few reasons why it should continue to make good money for patient investors.
Just getting started
For one, Smith rarely does much buying or selling. This helps keep transaction costs extremely low, meaning the fund holds on to more of its gains.
That said, he’s not afraid to adapt. Fundsmith’s exposure to technology stocks, for example, has vastly increased over the years. Think tech titan Microsoft and social networking giant Facebook. This willingness of Smith to move with the times should be reassuring for those prepared to stay invested until 2030.
Like Warren Buffett, Smith has also been true to his word and bought great shares when others are selling in a panic. Coffee chain Starbucks and sportswear label Nike have been two new additions this year, captured during March’s market meltdown.
The fact Smith holds a concentrated portfolio with just 29 holdings also means Fundsmith should do far better than a passive fund tracking, say, the FTSE 100. As he’s remarked many times over the years, good investing is as much about avoiding the rubbish as it is with finding the winners. Sadly, the market’s top tier contains some absolute stinkers.
As an aside, it’s notable that Smith has always advised avoiding the airline sector completely. Those invested in Fundsmith over 2020 will be glad he did.
So, nothing can go wrong?
I wouldn’t go that far. As investors, we must accept past performance is no guide to the future. This applies as much to celebrated fund managers as it does to any shares we buy.
Fundsmith could certainly become a victim of its own success. As we know, expecting too much from any fund or individual share normally leads to disappointment. With over two-thirds of its portfolio exposed to the arguably-still-overpriced US market, Fundsmith is hardly devoid of downside risk.
Should performance slide, investors may become more vocal over the management fees. Some already believe these are too high, considering the fund’s size.
At 67 years of age, there’s the possibility Smith may decide to retire (or take a backseat) at some point in the next decade. That said, I take huge comfort from his no-nonsense approach and track record to date. I have no hesitation in committing my cash for the next 10 years.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK owns shares of and has recommended Facebook, Microsoft, Nike, and Starbucks and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short November 2020 $85 calls on Starbucks. 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.