Fundsmith is one of the most popular investment funds in the UK. For many investors, it’s a core holding.
I have a large chunk of money in the global equity fund myself. Is now a good time to invest more? Here’s a concise analysis of the fund.
Fundsmith: investment philosophy
Let’s start with Fundsmith’s investment philosophy. This is quite simple. Portfolio manager Terry Smith likes to break it down into three basic steps:
-
Buy good companies
-
Don’t overpay
-
Do nothing
When he talks about ‘good’ companies, Smith is referring to companies that are highly profitable, financially strong, are resilient to change, and whose advantages are difficult to replicate.
I really like this approach to investing. I’m happy to invest in Fundsmith knowing that this is the investment philosophy.
Portfolio breakdown
Taking a look under the bonnet, I like what I see. At 30 September, Fundsmith’s top 10 holdings were:
Microsoft
Paypal
Facebook
Idexx
Novo Nordisk
Philip Morris
Intuit
Estée Lauder
McCormick
There are some great companies on that list. I’m particularly bullish on Microsoft and PayPal.
I’ll point out that there are plenty of other great companies in the portfolio that aren’t in the top 10 holdings such as Unilever and Diageo. Last year, I took a look at the full holdings here. There hasn’t been a great deal of portfolio turnover since then.
Sector-wise, the top three sectors at 30 September were:
-
Consumer Staples (29.5%)
-
Technology (29.1%)
-
Healthcare (22.5%)
I’m very comfortable with Fundsmith’s sector exposure. Given what’s going in the world right now (Covid-19, recessions, digitalisation, etc.) I think these are three of the best sectors to be in.
In terms of geographic split, the top three countries at 30 September were the US (67.6%), the UK (14.6%) and Denmark (6.8%). Personally, I’m comfortable with the high weighting to the US.
Performance
Fundsmith’s performance over the long run has been very good. Between launch in late 2010 and 30 September 2020, the fund returned 18.2% per year. It smashed its benchmark, the MSCI World index (11.4%).
It’s worth pointing out that when global equity markets tanked in Q1 2020 due to Covid-19, Fundsmith performed very well. It delivered a return of -7.9% for the first three months of 2020 versus -15.7% for the MSCI World index. The FTSE 100 index returned -23.8% over that period. The strong focus on high-quality businesses worked wonders.
This long-term performance, and the performance during the 2020 downturn, is reassuring.
Risks
As with any investment, there are risks I have to consider.
One risk worth highlighting is the concentrated nature of the portfolio. Fundsmith only held 29 stocks at 30 September. That’s not many. That means that exposure to some stocks is quite high. If one or two stocks in the portfolio underperform badly, performance could be impacted quite substantially.
Another risk is the high exposure to the US. If the US market underperforms, Fundsmith’s performance could be impacted.
Fees are also worth mentioning. I invest through Hargreaves Lansdown where the annual fee is 0.95% plus platform fees. That’s quite high.
I’ll keep investing in Fundsmith
Overall, however, I like Fundsmith and will continue investing in it. I see it as a good core holding.
That said, I don’t see it as a ‘one-stop shop’. With just 29 holdings, it’s not going to provide me with full diversification. So, I will continue to invest in other funds, as well as high-quality individual stocks, as well.
