With the 2021/22 ISA deadline not far off, I’ve been thinking about investment funds to buy for my Stocks and Shares ISA. Buying funds within this kind of account can be an effective wealth-building strategy, as all capital gains and income are tax-free.

Here, I’m going to highlight two that strike me as great ISA investments now. I think they have the potential to boost my wealth significantly in the future.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

A top fund for my ISA

When it comes to top picks for an ISA, it’s hard to look past Fundsmith Equity, in my view. This is a global equity fund with an incredible long-term track record.

Fundsmith is managed by portfolio manager Terry Smith, who has a very strict investment process. Unlike a lot of other portfolio managers, who try to get in and out of hot sectors, Smith sticks to investing in high-quality businesses that have solid growth prospects, are very profitable, have strong balance sheets, and are resilient in the face of change.

This approach seems to work very well. Since the fund was launched back in late 2010, it has generated strong returns when markets have been rising. And it has often minimised falls during periods of market weakness. Overall, it has produced a return of around 17% per year since launch, which is very impressive. However, past performance is not an indicator of future performance, of course.

One issue to consider with Fundsmith is that it tends to avoid highly cyclical areas of the market, such as oil companies and banks. Most of it is invested in three main sectors – consumer staples, technology, and healthcare. This could potentially lead to periods of underperformance at times. This year, for example, oil stocks are flying.

Overall, however, I see Fundsmith as a top fund. I’d be very comfortable investing some of my ISA allowance in it this year.

A high-growth fund

For a more adventurous ISA play, I like the Sanlam Artificial Intelligence fund. This aims to provide long-term capital growth through diversified exposure to one of the global economy’s most important and enduring investment themes – artificial intelligence (AI).

When it comes to powerful long-term growth themes, it’s hard to ignore AI. In the years ahead, it’s likely to have an enormous impact on a wide range of industries, transforming many business models in the process. This is likely to create some lucrative opportunities for investors.

I see this fund from Sanlam Investments as a good way to get exposure to the theme. That’s because it seeks to invest in companies whose engagement with AI is likely to make a material difference to their value. Top holdings at present include the likes of Alphabet, Tesla, and Nvidia, all of which look set to be major players in AI. 

It has a good performance track record since its launch in 2017 (an annualised return of 22%), However, I’d expect it to be volatile going forward as it’s a higher-risk product. And if tech stocks continue to fall on the back of interest rate rises, it could underperform in the short term.

However, as a long-term investor, I’m not concerned about what the fund does in the next six months. I’m looking for gains over a five-to-10 year period. And over that timeframe, I expect this fund to generate good returns for my ISA.

The post 2 top funds to buy for an ISA this year appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares in Alphabet (C shares) and Nvidia and has positions in Fundsmith Equity and Sanlam Artificial Intelligence. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), and Tesla. 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.

1. Great businesses rarely go bad overnight

Despite its popularity, Fundsmith Equity’s recent performance hasn’t been particularly great. Based on its most recent factsheet, Terry Smith’s flagship fund fell 13.2% in the first two months of the year. That’s a lot worse than its benchmark (the MSCI World Index) which fell ‘just’ 6.8%.

Does this concern me? Not really. As a committed Fool, I’m far more interested in returns over the long term. Here, Fundsmith has excelled. It’s returned 482% from inception (2010) to the end of February.

Smith continues to attribute these gains to owning the right companies. To drive the point home, he reflected this week that he and colleagues were ‘business-pickers’ rather than stockpickers.

The reason for this, Smith said, is that “returns are persistent“. Great companies — those that have barriers to entry — tend to stay great, even if they cost more to acquire. Therefore, he sees little point in getting involved in the rotation to lower-quality ‘value’ stocks we’ve seen in 2022 so far.

As a quality growth investor myself, I can’t help but agree.

2. Buy the dip

At a human level, the current situation in Ukraine is clearly appalling. Seen purely from an investment perspective, however, Terry Smith believes we should look at the situation “historically“. Smith used the annual meeting to point out that the past shows that buying shares during times of military conflict usually pays off.

As evidence, Smith picked out a number of examples, including the Gulf War. In August 1990, the S&P 500 hit a low not long afterward before recovering strongly. The same thing happened earlier in the century during the Six Day War in 1967 and also during the Korean War. In Smith’s words, “The sweep of history suggests to us that buying on the cannon is the right thing [to do]“. 

There are exceptions, of course. Smith’s noted the similarities between the Ukraine/Russia conflict and the Yom Kippur war in the 1970s. The latter happened at a time of inflation and soaring oil prices. Stocks went down and continued falling. Clearly, no one knows if that may happen again. However, I’ll certainly bear it in mind. 

Speaking of rising costs…

3. Own stocks that have pricing power

Inflation in the UK hit its highest level in 30 years back in February. That’s enough to rattle the most sanguine of investors. For Terry Smith, however, there’s a way of tackling rising prices. It involves owning businesses that have high gross margins.

Gross margin is simply the difference between how much it costs to make something compared to how much it gets sold for. So, if a product costs 50p to produce and it’s sold for £1, the gross margin is 50%. 

As Smith succinctly puts it, gross margin is “the single biggest defence” against inflation. It won’t come as a surprise then that the Fundsmith portfolio owns companies with higher than average gross margins.

Knowing this, I’m satisfied that Terry Smith is probably doing a good job of protecting my capital. I have no issue remaining invested.  

The post 3 takeaways from Fundsmith’s annual shareholders meeting appeared first on The Motley Fool UK.

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Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. 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.

Here are three take-home messages I’ve spotlighted from his latest letter to shareholders. 

Running winners

The real Warren Buffett once quipped that his ideal holding period was ‘forever‘. While Smith hasn’t gone this far, he has frequently made it very clear that part of Fundsmith’s strategy is not to trade very often and run its winning picks.

He made this point again last month:” Someone once said that no one ever got poor by taking profits. This may be true but I doubt they got very rich by this approach either.“

As an illustration of his commitment to not jumping in and out of stocks on a whim, Smith still holds seven companies that were originally bought when the fund kicked off in 2010. That might not seem like many. However, his fund is highly-concentrated, only holding between 20 and 30 shares at any one time.

A quick check reveals that I’m a lot worse at running profits than Smith. Positively, I am getting better, having held Somero Enterprises, IG Group and Greggs for a few years now. I’ve no intention of selling up either!

Buy quality

Buffett famously bought into very cheap stocks early in his career and made a killing. That said, his investment strategy would later change to buying only the highest-quality companies he could find. These had some kind of ‘moat’, or competitive advantage, over rivals. This may take the form of a very strong brand or enormous marketing budget or control over distribution. Think Coca-Cola. 

Smith adopts a similar approach, name-checking Buffett in January’s letter. In his view, “the biggest problem with any investment in low-quality businesses is that on the whole, the return characteristics of businesses persist.” 

This is why Fundsmith’s leader vehemently refuses to temporarily invest in stocks that may benefit the most from the post-pandemic recovery in economic activity. So no IAG or easyJet for Smith.

Having owned one, two or seven real stinkers in my time, I’m now a fully signed-up member of ‘Team Quality’. In addition to my stake in Fundsmith Equity, I’ve been topping up my holding of Smithson — the small/mid-cap-focused investment trust that also adopts Smith’s strategy.  

Don’t obsess over price

Having highlighted the importance of buying good businesses, Smith then turns his attention to the issue of valuation. In his view, “highly rated does not equate to expensive any more than lowly rated equates to cheap.“

For me, this has links to Buffett’s suggestion that it is better to buy a great company at a reasonable price than the other way around. 

Not obsessing over the price I’m required to pay for a stock has taken me years of practice. I’ve lost count of the number of times I’ve waited for the prices of great stocks to ‘correct’ only for this to never happen. More often than not, a top growth company’s valuation has remained fairly constant while its share price has soared. 

However, I do think that I’m steadily getting better at it. In fact, there’s one FTSE 100 stock that I’d be very happy to buy right now, despite still being very highly rated. 

The post I’m listening to ‘Britain’s Warren Buffett’ and buying these stocks appeared first on The Motley Fool UK.

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Paul Summers owns shares in Fundsmith Equity, Smithson Investment Trust, Greggs, IG Group and Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

The Meta Platforms (NASDAQ: FB) share price fell off a cliff yesterday. That came as a less-than-encouraging quarterly report alarmed already-battered tech investors. Revenue in Q1 is expected to be somewhere between $27bn and $29bn, rather than the $30bn expected by analysts. The number of active users also declined, a first in the company’s 18-year history. 

Should I be using this weakness as an opportunity to load up on the owner of Facebook, WhatsApp and Instagram? Like the relationship status on some of its users’ home pages, “it’s complicated“.

Meta share price: is the reaction overdone?

In certain respects, I think the reaction is too extreme. A fall from 1.93bn to 1.929bn active users in the last three months of 2021 is nothing to worry about, I feel. But the market reaction suggests Facebook’s growth is history. That strikes me as somewhat ludicrous.

In reality, I expect the company will adapt and overcome, as any good business does. Meta owns a staggering amount of data and information on users that it can then sell to advertisers. It also remains a hugely profitable business.

Like him or not, founder Mark Zuckerberg isn’t going anywhere either. At just 37, this isn’t the first challenging period faced by Meta’s chief and it won’t be the last. For me, the Cambridge Analytica scandal in 2018 was far more concerning. Even the best stocks miss earnings targets now and then.

Reasons to be fearful

This isn’t to say the company doesn’t face substantial challenges going forward. Some or all of these could put further pressure on the Meta share price. 

The popularity of rival apps such as TikTok and Alphabet-owned YouTube will certainly be playing on owners’ minds. The introduction of the App Tracking Transparency Policy by fellow tech titan Apple is another potentially huge headwind. Yes, the so-called metaverse being created by the company could be the solution to both problems. But this will take time to develop and cost billions of dollars in the process. 

And if all of this weren’t enough, there’s the much-discussed rotation into value stocks in 2022. Investors become rattled over the prospect of quicker-than-expected interest rate hikes are leading this. Meta may get back on track in the next quarter. But wider market sentiment could still delay a recovery. The mere whiff of increased regulation won’t help.

I’m a buyer (sort of)

On balance, I’m inclined to think Thursday’s movement in the Meta share price was another example of stock market myopia. A good company doesn’t become a bad one in three months. Being able to look further ahead than a few weeks is one of the few, very powerful, advantages I have over professional investors whose careers are on the line.

I’m perfectly content to increase my exposure to the company via quality-focused funds such as Fundsmith Equity and LF Blue Whale Growth rather than buy the stock directly. This strategy may reduce my gains in the event of Meta making a strong recovery. But it’s much easier than trying to time my entry when growth stocks are being hammered across the board.

The post The Meta share price has crashed. Here’s what I’m doing about the earnings bombshell appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, 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 Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Paul Summers owns shares in Fundsmith Equity and LF Blue Whale Growth. The Motley Fool UK has recommended Alphabet (A shares) and Apple. 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.

Fundsmith portfolio manager Terry Smith is often called ‘Britain’s Warren Buffett’ and it’s not hard to see why. Since Smith launched his fund back in 2010, he’s turned £10,000 of investor money into more than £60,000.

Here I’m going to examine Smith’s current portfolio and discuss where he’s investing in 2022. Let’s take a look at where this top money manager is putting capital to work right now.

Where ‘Britain’s Warren Buffett’ is invested in 2022

Fundsmith’s latest factsheet reveals Smith is currently invested in three main areas:

• Technology and Communication Services

• Healthcare

• Consumer Staples and Consumer Discretionary

Combined, these areas of the market represented about 98% of the Fundsmith portfolio at the end of January.

Let’s now look at some of the stocks he has invested in within these sectors. 

Technology and Communication Services

Within Technology and Communication Services, two of Smith’s largest holdings are BigTech companies Microsoft and Meta Platforms (Facebook). At the end of January, these two were in his top 10 holdings. But these aren’t the only BigTech stocks Smith owns. Last year, he bought Amazon and he’s just bought Alphabet (Google) for his portfolio. Clearly, Smith is bullish on BigTech.

Smith has exposure to other areas of technology though. He also has exposure to the FinTech market through PayPal and Visa, as well as the software industry through smaller tech companies such as Intuit.

Healthcare

In the healthcare space, Smith has exposure to a diverse mix of companies. One of his largest holdings here is Novo Nordisk, which specialises in diabetes products. Another large holding is Idexx Laboratories, which specialises in pet healthcare. Both of these stocks were also in his top 10 holdings at the end of January.

Other healthcare holdings include Stryker, which makes medical equipment, Coloplast, which specialises in continence care and wound care, and Johnson & Johnson, which is a diversified healthcare company.

Consumer goods

Within the consumer goods space, Smith appears to have taken a ‘barbell’ approach. On one hand, he owns companies that make everyday essentials such as Unilever, McCormick, and Church & Dwight, makers food and cleaning products. On the other hand, he owns a number of companies that make premium/luxury products such as Diageo, LVMH, L’Oréal, and Estée Lauder.

My take on Smith’s holdings

As a Fundsmith investor, I like this mix of investments. I like the fact that Smith has plenty of exposure to the tech sector, given where the world is heading.

I also like the fact that Smith has plenty of exposure to healthcare. With the global population ageing, demand here is likely to rise in the years ahead. Healthcare is also quite defensive. 

Finally, I like the barbell approach to the consumer goods space. Companies like Unilever and Church & Dwight tend to be recession-proof, due to the fact they make everyday essentials. Meanwhile, companies like LVMH and Estée Lauder appear well-placed to benefit from rising wealth across the world.

Overall, I think Smith has a nice mix of investments for 2022. So I’m very comfortable holding the Fundsmith Equity fund in my portfolio right now.

The post Here’s where ‘Britain’s Warren Buffett’ is investing in 2022 appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, 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 Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Alphabet (C shares), Amazon, Diageo, Idexx Laboratories, Visa, PayPal, Intuit, Microsoft, and Unilever and has a position in Fundsmith. The Motley Fool UK has recommended Alphabet (A shares), Amazon, PayPal, Diageo, Idexx Laboratories, Microsoft, and Unilever. 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.

As scary as such drops can be, I’ve been taking the opportunity to load up on a fund whose performance prior to the start of 2022 had been excellent.

Solid gains

Managed by Stephen Yiu, LF Blue Whale Growth returned 20.8% in 2021, according to its most recent fact sheet.  That’s a better return than its benchmark. The IA Global Sector average was 18%. All told, the fund has more than doubled investors’ money in a little over four years.

One reason for this stellar performance is the number of tech-related stocks owned by Blue Whale. These include Microsoft, Adobe and Alphabet. Another relates to just how concentrated the fund is.

Blue Whale’s portfolio is made up of just 27 holdings, almost 73% of which are US-listed firms. You probably don’t need me to tell you any strategy that embraced being overweight in stocks from across the pond paid off handsomely in 2021.

Unfortunately, the first month of 2022 has taken a rather large chunk out of last year’s gains. So the question to ask is whether the current market crash is a great opportunity to buy more. 

New bear market?

On the one hand, the recent rout in tech stocks could continue if the Federal Reserve keeps giving out signs that it’s ready to shift its monetary policy. That’s potentially problematic for Blue Whale’s portfolio, given how concentrated (and potentially more volatile) it is.

Regardless of what the Fed does, it’s possible traders will move more of their money into value stocks hit most by the pandemic anyway. Rising tensions in between Ukraine and Russia, while seemingly not all that relevant to the performance of a US-focused fund, could also push investors to the exit as a cautionary measure.

Is this the dawn of a new bear market? It’s entirely possible.

Back quality

Of course, there are reasons to stay bullish too. One argument is that all this will prove transitory. With so many US stocks now at least in correction territory, the worst could already be over.  And when we get big sell-offs, the recovery can be just as swift. Thanks to inflation, staying in cash is hardly appealing. 

Perhaps the biggest motivation for feeding my money into Blue Whale specifically is its attitude to stock selection. Like rival Fundsmith Equity, Yiu looks for high-quality shares. He also avoids those “at the mercy of cyclical economic gravity“. The fund has a strict approach to valuation too. This means investors don’t need to worry about owning unprofitable story stocks.

Another potential tailwind is Blue Whale’s size. As a relatively young fund with ‘just’ £1bn in assets, Yiu has considerable flexibility in what he is able to buy. I’d be amazed if he hasn’t put some money to work in recent days.

Long-term focus

The reversal in the fund’s fortunes is a reminder of how quickly sentiment can change. So long as I adopt a long-term mentality (not dissimilar to Yiu) while also maintaining a degree of diversification, I’m confident that increasing my investment here will pay off. I’m still backing Blue Whale.

The post 1 fund I’ve been buying during the market crash appeared first on The Motley Fool UK.

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Paul Summers owns shares in LF Blue Whale Growth and Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. 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.

Great start

Don’t mistake me for some kind of stock market masochist. No one actually enjoys seeing the value of the biggest holding in their Self-Invested Personal Pension (SIPP) fall by a double-digit percentage. In fact, Smithson’s decline has the potential to hurt more than most. given that investors like me have been spoiled by performance for the majority of its existence. 

The small- and mid-cap-focused fund was launched back in October 2018. No doubt helped by its link to star money manager Terry Smith (Smithson comes from the Fundsmith stable and adopts the same strategy), investors were queueing up to throw their money in the ring. And up until recently, this confidence has been richly rewarded. 

From inception to the end of 2021, the trust delivered an annualised gain of 24.5%. That compares very favourably to the 13% achieved by its benchmark — the MSCI World SMID Index. It also more than justified the 0.9% annual management charge, in my opinion.

What’s gone wrong?

The recent wobble may be due to a number of things. First, there’s the issue of valuation. As a quality-focused fund, Smithson doesn’t look for cheap stocks.

Like its big brother, Fundsmith Equity, it targets companies with valuable brands and huge market shares that generate consistently high returns on the money they put to work. This includes property website Rightmove, mixer-drinks supplier Fevertree Drinks and Domino’s Pizza Group. Unfortunately, such businesses are rarely without friends and priced accordingly. That’s fine when markets are behaving themselves. Less so when investors are fretting over earlier-than-expected interest rate rises.

The fact that almost half of Smithson’s portfolio comes from the IT sector probably doesn’t help either. By sharp contrast to last year, companies in this space have now fallen out of favour. Thankfully, Smithson makes a point of avoiding the unprofitable fluff whose share prices are now falling faster than Boris Johnson’s approval ratings. Nevertheless, investors seem to be throwing the baby out with the bathwater.

The aforementioned performance of its shares may have also seen a few profit-takers emerge from the shadows. After all, Smithson’s market-cap had grown to £3.5bn by the end of December. That’s already pretty large for a trust that is designed to invest in companies lower down the food chain. In fact, the median size of business in the portfolio is actually £10bn! Moreover, manager Simon Barnard’s investment strategy is still to be comprehensively tested and some people may be getting out while the going’s good.

Loading up for the recovery

While I wouldn’t mind being proven wrong, I certainly don’t expect Smithson’s annualised return to remain at the percentage it stood at in December. As a fuss-free way of accessing high-quality businesses from around the developed world however, it still strikes me as a perfect core holding.

I believe that good businesses tend to outlive bad ones. I also regard myself as a long-term growth investor. As such, it makes sense for me not to panic about Smithson’s sticky patch just yet.

The post Top investment trust Smithson is flagging and I’m buying appeared first on The Motley Fool UK.

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Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity. The Motley Fool UK has recommended Dominos Pizza, Fevertree Drinks, and Rightmove. 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.

I’ve been invested in Fundsmith for a number of years now and I’ve always viewed the fund as a core holding in my portfolio. Currently, it’s one of my largest fund positions. But is Fundsmith still one of the best funds for me (a long-term, growth-oriented investor) to invest in going forward? Let’s take a look. Here’s my view for 2022.

What type of fund is Fundsmith?

Let’s start with a basic review of what Fundsmith Equity is and what it invests in. It is a global equity fund, meaning it invests in companies all over the world and not just those listed in the UK. As a concentrated fund (it holds just 20-30 stocks), it only invests in companies that meet its strict investment criteria.

Specifically, Fundsmith seeks to invest in high-quality companies that:

• Can sustain a high return on operating capital (they are consistently very profitable).

• Have advantages that are difficult to replicate.

• Are financially strong.

• Have a good chance of generating growth.

• Are resilient to change and technological innovation.

• Have attractive valuations.

It then aims to invest for the long term.

Overall, I really like this approach to investing. Since the fund’s inception, this approach has managed to generate strong returns, outperforming its benchmark comfortably while, at the same time, minimising downside during periods of volatility.

Having said that, there are likely to be periods where this style of investing underperforms the market. I’ll discuss this later in the performance and risks section of this review.

Which companies are in Fundsmith?

Looking under the bonnet (its the latest factsheet), we can see that as of 31 December 2021, the top 10 holdings in the fund were:

• Big Tech giant Microsoft

• Pet diagnostics firm Idexx

• Diabetes specialist Novo Nordisk

• Beauty group L’Oréal

• Beauty group Estée Lauder

• Payments firm PayPal

• Big Tech company Meta Platforms (Facebook)

• Accounting software specialist Intuit

• Tobacco giant Philip Morris

• Medical technology company Stryker

My own research tells me that other stocks in the portfolio  include Nike, Visa, PepsiCo, Starbucks, Unilever, Diageo, and Amazon.

Is this a good mix of companies? I think it is. There are a couple of companies I’m not the biggest fan of for ethical reasons, such as Philip Morris (cigarettes) and Meta Platforms (referred to as the ‘new cigarettes’). However, in general, I do like Fundsmith’s portfolio holdings. I’m very comfortable owning these kinds of companies in my portfolio in 2022.

Performance

In terms of performance, this has been excellent over the long run. As we can see from the table below, the fund returned more than 20% in four out of the last six years. That’s an impressive achievement.

Source: Fundsmith

It’s worth noting however that last year, the fund did underperform its benchmark slightly. For 2021, the return was 22.1% versus 22.9% for the MSCI World. This did was largely down to the fact that 2021 was very much a recovery year and Fundsmith’s companies – which tend to be highly resilient – didn’t have much to recover from.

It’s also worth pointing out that on Hargreaves Lansdown there are a number of global equity funds that have delivered superior returns over a five-year timeframe. Baillie Gifford Global Stewardship and Rathbone Global Opportunities are two examples. However, Fundsmith’s returns tend to be more consistent than some of these other top performing funds. For example, some rivals actually generated negative returns last year.

Overall, I’m very happy with the performance here.

Risks in 2022

In terms of the risks as we start 2022, I see a few. One is that Fundsmith tends to avoid highly cyclical areas of the market, such as oil companies and banks. Most of the fund is invested in three main sectors – consumer staples, technology, and healthcare. Looking at the current economic environment, I think there’s a decent chance cyclical stocks could lead the market in 2022. So I have to be prepared for some underperformance from Fundsmith in the short term.

Another risk is the concentrated nature of the fund. Given that it only holds around 20-30 stocks, stock-specific risk is quite high, relative to more diversified funds. To give an example here, PayPal has been around 7-8% of the fund in the recent past. However, this stock has fallen more than 30% over the last six months. This will have impacted fund performance significantly.

Some investors also believe the fund’s size (£29bn at 31 December) is a risk. They worry that this could limit investment opportunities. Personally, I’m not too concerned about this risk, given the fact that companies like Microsoft and Amazon are worth several trillion dollars.

Is Fundsmith worth the fee?

Finally, let’s take a look at fees. Personally, I pay an annual fee of 0.96% to invest in Fundsmith through Hargreaves Lansdown. I also pay Hargreaves Lansdown’s fund charges (0.45% per year).

These fees are relatively high. They’re significantly higher than the fees I’d be paying if I was invested in cheap index tracker funds.

However, I think the excellent long-term performance here justifies the higher fee.

Is Fundsmith a good investment for 2022?

Putting this all together, I’m convinced Fundsmith remains a great choice for my investment portfolio in 2022. The long-term track record is excellent and I’m very comfortable with the fund’s holdings.

There is a chance the fund could underperform the market in 2022 if cyclical stocks have a great run. However, I’m comfortable with any short-term underperformance. As a long-term investor, I’m more concerned about what this fund does over the next five-to-10 years. And I’m confident it can continue to generate strong returns for me.

The post Fundsmith Equity review: is it a good investment for 2022? appeared first on The Motley Fool UK.

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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 Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Amazon, Diageo, Hargreaves Lansdown, Idexx Laboratories, Microsoft, PayPal Holdings, Unilever, and Visa and has a position in Fundsmith. The Motley Fool UK has recommended Amazon, Diageo, Hargreaves Lansdown, Idexx Laboratories, Microsoft, Nike, PayPal Holdings, and Unilever. 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.

Having delivered an annual return of over 18% since Fundsmith Equity was launched in 2010, Terry Smith is widely regarded as one of the UK’s finest fund managers.  I think I can benefit from his approach, especially if I have a limited amount of cash at my disposal.

Buy quality

£1,000 is a great sum to begin investing. That said, any mistakes I make can have a far more significant impact than if I had a larger amount at my disposal to buy a greater number of stocks. For this reason, I’d be tempted to prioritise parking my cash with established businesses of the sort favoured by Fundsmith’s manager.

First and foremost, Terry Smith looks for quality. For this reason, he steers clear of what may be regarded as ‘value’ stocks. In Smith’s view, the vast majority of lowly-priced companies tend to be cheap for a reason. Instead, he looks for blue-chip companies that will “shoot the lights out” by generating high returns on the money they invest in themselves. They also tend to have a competitive advantage of some kind and are resilient to change. Think tech titan Microsoft and payments firm Paypal.

By adopting this approach, Smith has generated a return of 534% in 11 years according to Fundsmith’s latest factsheet. Put another way, my £1,000 will have turned into a little over £6,000. This shows that I don’t need to take outrageous risks to outperform the market.

No trading

Terry Smith is about as far removed from a trader as you can get, describing Fundsmith’s transaction frequency as a ‘black armband’ day for the brokerage industry. In other words, Smith buys and sells very irregularly. Theoretically, this should mean a better return for holders because Fundsmith pays out less in fees.

Of course, this approach isn’t new. US investing legend Warren Buffett has adopted the same ‘buy and hold’ mentality for decades. Armed with £1,000 to invest, I’d try to do the same.

In addition to not ramping up costs unnecessarily, I’d also consider actively saving money where I can. This could involve taking advantage of regular investment plans offered by brokers. These invest a proportion of my cash at a fixed date every month at a far lower cost than I’d pay for buying on the fly. Depending on the provider, there might not be any fees at all! 

No market timing

A final thing that Terry Smith has taught me is the folly of trying to time the markets. The fact is, nobody knows what will happen in the world next. Anyone waiting for a crash in arguably-overvalued US tech stocks in 2021, for example, will have been disappointed. Bar the odd wobble, their value has only increased.

Smith encourages investors to recognise that, over time, “it’s what the companies do that matters, not what you do“. Accordingly, he urges us to focus more on the potential long-term returns of staying invested in great businesses rather than speculating about the exact moment to buy or sell them.

This is not to say that he doesn’t take advantage of opportunities when they do appear. No investor wants to pay more than they have to. But staying on the sidelines for too long is dangerous, especially if inflation is galloping upwards. It’s better to get started than never start at all.

The post What can Fundsmith’s Terry Smith teach an investor with £1,000? appeared first on The Motley Fool UK.

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• Now below £12, are Rolls-Royce shares an unmissable bargain?
• Tesla stock just got a little cheaper, but why? And should anyone care?
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares of Fundsmith Equity. The Motley Fool UK has recommended Microsoft 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.

I didn’t start investing until my late 20s. What followed was a steep learning curve, albeit helped by following the thoughts and dealings of some of the best money managers in the business. One in particular — Fundsmith Equity‘s Terry Smith — has probably served a bigger role in my education than any other.

Terry Smith on quality

Terry Smith looks for winners. In practice, this means surveying the market for companies that already possess a strong/leading share of their market and can be depended on to protect it. This is why many of the stocks that make up the Fundsmith Equity portfolio have been around for many decades. Past performance might not be a guide to future returns but it can help when looking for resilient businesses that have consistently managed to grow revenue and profit.

These days, I’ve a penchant for smaller companies flying under the radar. That said, I’m still applying a quality criterion like Terry Smith. Aside from the characteristics already mentioned, I’m on the hunt for businesses generating high returns on capital and big margins. This means I now steer clear of capital-intensive businesses like airlines (which Smith labels “machines for losing money“). 

Like Smith, it also means I’m very selective about what makes it into my ISA portfolio these days. Only 29 holdings make up Fundsmith Equity right now. So long as I’ve picked well, operating a concentrated portfolio can turbocharge my returns. Of course, the opposite is also possible! 

Price matters…to a point

‘Buy low, sell high’: that’s the rule that every investor tacitly learns on entering the market.

Terry Smith doesn’t go against the grain here. However, the UK fund manager has frequently pointed out that focusing too much on valuation can prove detrimental to returns. For Smith, a stock’s price is of secondary importance to how good a company is (see above). A cheap stock can always stay cheap while a more expensive stock can go on increasing in value. In other words, contrarians/value hunters don’t always prosper. This is why Smith picked up stocks like Nike and Starbucks in the 2020 market crash rather than buying ‘bargain’ travel stocks. 

As an investor, I’ve come around to the idea that simply trying not to overpay is preferable to buying what’s cheap. This is also why I’m wary of unprofitable, flavour-of-the-month companies such as cybersecurity firm Darktrace even when its prospects look undoubtedly solid. So long as I’m paying a not unreasonable price, I know the risk/reward should theoretically be (more) in my favour.

No gimmicks

A final thing I like about Smith is his no-nonsense approach. He picks stocks that he expects to generate a better return for holders than the market. He doesn’t short (bet against) any companies. Nor does he use derivatives or get involved in any creative financial practices like some managers might.

Most importantly, Smith has taught me that investing is as much about what you don’t do as what you do. In practice, this means buying stocks with the intention of holding for years rather than attempting to ‘time the market’.

Not only is predicting the short-term movement of a share price very difficult, it only guarantees fees. As Smith frequently highlights, Fundsmith has very low turnover, meaning that investors ultimately get to keep more of the profits made.

The post No savings at 30? Here’s how I’m using Terry Smith’s strategy to build wealth appeared first on The Motley Fool UK.

More reading

• £2k invested in Vodafone shares after the last full-year results would currently be worth…
• Now below £12, are Rolls-Royce shares an unmissable bargain?
• Tesla stock just got a little cheaper, but why? And should anyone care?
• I’m targeting an £8,299 annual income from £20,000 in this transformed FTSE energy star!
• Love bargains? 4 stock market gems to consider this new ISA year

Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. 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.