Terry Smith has been called the British Warren Buffett and with annualised returns of 18.4% in his flagship Fundsmith Equity Fund, since its launch in 2010, it’s hard to disagree. This compares favourably to the MSCI World Index which managed 12.8% over the same period.
Now revered as an investment guru, the path to legendary status was not always smooth. Smith began his City of London career in 1974 where he developed the interest in stock analysis that made his name. He earned his reputation as a maverick when he issued a sell note on Barclays, the company he was working for at the time. Later he was famously fired from UBS in 1992 when he published “Accounting for Growth”, an insightful analysis that exposed some of the legal but misleading accounting practices used by many listed companies at the time. Some of those companies happened to be clients of UBS. This led to Smith joining stockbroking firm Collins Stewart where he became Chief Executive before heading up broker Tullett Prebon. There he turned the company pension fund around from a deficit to a surplus using the same formula that he employs today with such success in Fundsmith.
Smith launched Fundsmith with £25m of his own capital and still has a “significant portion” of his personal wealth in the fund. Over the last 9 years Fundsmith has grown significantly and now manages £17bn in the flagship fund.
Terry Smith is full of snappy antidotes like “Every three days the population of the world travels in an Otis elevator”, Otis is owned by United Technologies and is an example of the type of company Smith likes to hold. As an investor the profit comes not from installing the lifts but the ongoing incremental income from spare parts and servicing. “Buy and hold” is what Smith’s investment philosophy essentially boils down to. He eschews chopping and changing and prides himself on the low annual turnover within the fund. In some years he has only sold 1 holding and considers that a mark of success. Smith is also an investor with conviction, he currently holds 27 companies within the fund, a far lower number than the average fund manager.
The fund’s approach is to look for high quality companies, buy them at a reasonable price and hold them, ideally forever. “High quality” is defined as having little need for leverage, an above-average cash return on operating capital employed and an ability to sustainably grow at this rate of return. In practice, this limits the investable universe to companies with a minimum US $2bn market cap to keep the strategy scalable, so approximately 65 names. Smith shuns any stocks that require leverage to make profits such as banks and property companies. His view of the perfect investment is a company that is generating lots of cash and is still able to find profitable avenues to invest it.
A passionate student of history, Smith likes to point to the average date that companies within the portfolio were founded, which is currently 1927. He believes that businesses that are resilient to change, where their advantages are difficult to replicate and where there is a high degree of certainty of growth will continue to thrive.
The fund is not constrained by region or by sector but given its size, it naturally leans towards US companies with 65% currently invested in the US and 30% in technology. Most of the holdings are household names including Paypal, Microsoft, Novo Nordisk, Unilever and Pepsico.
We believe Fundsmith will continue to outperform the wider market and is our preferred global equity growth fund as part of a diversified portfolio. Cantor Fitzgerald clients can access the Euro denominated Institutional share class (TER 1.05%).
Performance % Total Return (net of fees)
|Jan 2019||2018||2017||Annualised to 31/01/19|
|EU Bonds (3)||2.2%||2.4%||-0.3%||8.4%|
(1) T class € accumulation shares, net of fees, source: Bloomberg
(2) MSCI World Index (€ Net), source: www.msci.com
(3) Bloomberg/Barclays Bond Indices Euro Govt 10 yr, source: Bloomberg
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Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.