This weekend marks ten years since Fundsmith Equity was launched and it has delivered a whopping 440 per cent return for its day one investors.
The fund, which is run by star manager Terry Smith, has grown to become undisputedly, the largest stock-market investment fund available to private investors in the UK.
But some experts feel it may have grown too big and that its best days may well be behind it. Are they right or are their concerns mis-placed considering the major and robust global businesses it holds?
Meanwhile, if you missed getting in early with Fundsmith is its strategy still worth backing and what are the other smaller, up-and-coming global funds you might strike just as lucky with?
1 November 2020 marks a decade since Terry Smith’s Fundsmith Equity was launched
Why has Fundsmith been so successful?
It’s safe to say Fundsmith Equity is one of, if not the, most popular investment funds available to UK investors,.
It is often top of best-selling lists and remained a firm favourite during the height of the coronavirus-induced uncertainty earlier this year.
Jason Hollands, of BestInvest, said not a month has passed during the last several years when Fundsmith Equity hasn’t been the most purchased fund on the Bestinvest platform.
He said: ‘It’s gargantuan size at almost £22billion makes the fund bigger than the size of many of the Investment Association’s fund sectors and it accounts for almost 16 per cent of the assets in the global funds sector.’
Since its launch on 1 November 2010 until 19 October this year, Fundsmith Equity is up 440%
But how has it grown so big and enjoyed so much success? During the last decade, when active management has received so much criticism for underperformance, Fundsmith Equity has rewarded investors nicely.
Since its launch on 1 November 2010 until 19 October, the fund has delivered 440 per cent after costs or 18.6 per cent on an average annualised basis, far ahead of the 198 per cent total return on the MSCI World Index, according to FE.
An investor who backed the fund at launch with a £20,000 lump sum would now be holding around a £109,000 investment and a small saver funnelling in £100 at launch and each month thereafter would be sitting on more than £32,000.
Hollands adds: ‘Of course such gains have been delivered against the backdrop of strong returns across global stock markets which have been boosted by over a decade of ultra-low interest rates put in place in the wake of the global financial crisis.
‘This environment has been a great period for the sorts of high quality growth companies that the Fundsmith Equity fund backs, as low bond yields have driven cautious investors towards business with predictable and stable income streams instead.’
Does size really matter?
Hollands feels it is right to carefully monitor funds that grow significantly in size because successful investment approaches can often have natural limits on capacity.
He said: ‘This is particularly the case where a fund has historically been successful by investing partially in smaller and medium sized companies, or where the portfolio is actively traded.
‘As such funds grow in size, liquidity constraints mean it may become more difficult to build meaningful positions in smaller companies than can be readily sold if a view changes and therefore the approach to managing the fund may have to alter, refocusing on larger companies or expanding the number of holdings.’
But having always invested in bigger names, Fundsmith Equity might be considered scalable.
The more worrying issue is the level of exposure that many individual investors now have to the fund as they have continued to invest further.
It can make up a big chunk of some portfolios.
Hollands said: ‘No matter how strong a fund is, it does make sense not to become too exposed to a single holding, particularly where the strategy itself is concentrated in a relatively small number of stocks.
‘There isn’t a magic percentage that investors should stick to but I would generally suggest limiting exposure to any single fund to around 10 per cent to 15 per cent of a portfolio.
Laith Khalaf, of AJ Bell, added: ‘While Fundsmith’s performance has been spectacular, investors shouldn’t have too many eggs in one basket lest performance starts to turn.
‘It pays to have a spread of managers so that if one does start to go through a sticky patch, the others can keep your portfolio on the right track.
‘There are other quality growth fund managers out there to hold alongside Fundsmith and investors should keep some exposure to the value camp too, after all, every dog has its day.’
Furthermore, many other options are cheaper as one gripe investors may have with Fundsmith Equity is the relatively high annual charge of 0.95 per cent, particularly given the size of the fund.
Risk can also be reduced by having a spread of managers across different funds, sectors and regions and so it wouldn’t hurt to look elsewhere regardless.
Which other global funds cut the mustard?
Jason Hollands of Bestinvest recommends the lesser-known Guardcap Global Equity fund, managed by Michael Boyd and Giles Warren who have worked together since 1997.
He said: ‘They have honed an approach to being invested in a concentrated portfolio of circa 20 to 25 stocks with an emphasis on quality, growth and value.
‘The result is a portfolio focused on growth companies that are relatively resilient to the economic environment and which is slightly more diversified across sectors than Fundsmith Equity.’
He also likes Loomis Sayles Global Growth Equity fund, whose managing team undertakes its own extensive stock research and rigorous in-house peer review which a focus on analysing barriers to entry, profit margin, top line revenue growth and other factors.
Jason Hollands of Bestinvest recommends Evenlode Global Income for global funds
‘Companies that pass their strict quality and growth requirements are added to their “bench” of stocks to watch until the price is right – i.e. where valuation is compelling,’ Hollands added.
‘The outcome of this process is a concentrated portfolio of high quality, high growth stocks, trading at a discount to intrinsic value, with low portfolio turnover and significantly different from the benchmark US index.
Meanwhile both Hollands and Khalaf like the Evenlode Global Income fund. This is a global version of the firm’s highly successful UK focused fund.
Hollands said it is a concentrated portfolio of highly cash-generative companies from around the world that are typically operating with ‘capital-lite’ business models, while the approach leads to a ‘bias to more stable sectors such as consumer goods and health care and away from more volatile industries like mining and banks’.
Khalaf added: ‘The team seek out companies with strong finances that offer predictable earnings growth and the ability to pay a growing dividend. This is a concentrated portfolio of 30 to 40 stocks which the managers want to hold for the long term.’
What about investment trusts?
If we consider investment trusts similar to Fundsmith, there are more available in terms of approach
Khalaf recommends the £14.5billion Scottish Mortgage Investment Trust which has delivered higher returns than Fundsmith Equity and has an ongoing charge of just 0.36 per cent.
It has returned 793.1 per cent since November 2010 turning £1,000 into £8,931, while another favourite, Lindsell Train Investment Trust has returned 546.8 per cent and turned £1,000 into £6,468.
Scottish Mortgage managers James Anderson and Tom Slater and Lindsell Train’s Nick Train have a similar investment approach to Fundsmith, namely buying strong companies with reliable growth prospects and holding them for the long term.
Anderson and Train can boast a longer track record than Terry Smith and lower charges though all three managers have delivered exceptional performance in the last decade and are worthy of consideration by investors.
|Fund/trust||Total return since
|Lindsell Train IT||332.1%||13.2%||0.65%|
|Source: AJ Bell/FE fundinfo 16/03/2011 to 20/10/2020|
Khalaf added: ‘However comparing returns from open-ended funds and investment trusts – or closed-ended funds – is not straightforward.
‘Investment trusts benefit from gearing, or borrowing, which exacerbates returns in rising markets. Open-ended funds usually only price once a day whereas investment trusts price throughout the day and can trade at a discount or premium, which increases their volatility numbers.
‘Moreover almost half of the Lindsell Train investment trust is now invested in the unlisted Lindsell Train fund management group, which makes it a bit of an oddity as an investment proposition.
‘The open-ended Lindsell Train Global Equity fund is a better comparator with Fundsmith Equity and a better fit for most retail investors but that doesn’t quite have a ten year performance record as yet.’
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