A successful first five years for the ‘no nonsense’ Fundsmith Equity Fund

Terry Smith’s Fundsmith Equity fund recently passed its fifth anniversary. Over the last five years it has returned 115.9%, which puts it in third place out of the 203 funds in the Investment Association’s Global Sector. This impressive performance has helped it to attract £4.1bn of assets under management.

Smith is an outspoken critic of much of the investment management industry and set up the fund to offer a no nonsense approach to managing investors’ money. He takes a long-term view and is clear and transparent about the costs with the ongoing charges coming in at around 1%.

Fundsmith Equity has a concentrated portfolio of 28 global shares with the aim of delivering long-term capital growth. The manager only invests in top quality businesses that can sustain a high return on capital employed and whose advantages are difficult for competitors to replicate. The companies also have to be resilient, attractively valued and with a low level of leverage.

The top 10 holdings include the likes of Microsoft, Imperial Tobacco, Dr Pepper Snapple, Sage, Pepsico, Philip Morris and Unilever. Over half of the fund is invested in the US with around a quarter in the UK and the rest in Europe. The companies have an average market value of £57.2bn and have typically been around for many years.

It is a strategy that has worked really well. Over its first five years the fund generated a compound annual total return of 17.2%, which was well in excess of the 9.9% produced by MSCI World and the 7.1% global sector average. The only two funds operating in the same sector with a better five-year return are both specialist healthcare portfolios that involve a higher degree of risk.

Smith remains a controversial figure and has recently gone on record as saying that investors seem to have learnt nothing from the financial crisis. He says that at Fundsmith they continue to use the same strategy that they launched with five years ago:

“Through rigorous analysis and iron discipline, we only buy shares in good companies, try not to over-pay and then do nothing. We have made a good start. However, our investment time horizon is indefinite. We will not waiver from this no-nonsense approach and strive to deliver long-term outperformance.”

The only new purchase in the six months to the end of June was Waters Corporation, which is a leading manufacturer of mass spectrometry, liquid chromatography and thermal imaging equipment. It is well placed to benefit from the increase in food testing as a result of the horse meat scandal and more recent allegations.

During the same period the only outright sale was Choice Hotels, which operates budget and mid-sized hotels in America. The main concern was that it is investing heavily in a new reservation and management system that is outside of its core area of competence. Other disposals since then include Ebay and Domino’s Pizza.

In some ways Smith has been fortunate with the timing, as the fund was launched when share prices were recovering from the financial crisis and has benefited from the long bull market. Some financial advisors think that the large cap ‘bond proxies’ that it invests in could suffer when interest rates eventually start to rise and are worried that these high quality companies with sustainable earnings power are becoming increasingly expensive.

Fundsmith Equity has built up an impressive five year performance record and looks like a decent core option for long-term investors, although there are bound to be periods when these sorts of underlying holdings come under pressure.