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Fundsmith Equity
Fundsmith Equity invests in high-quality, well-established companies around the world. "We do not seek to find tomorrow's winners – rather, to invest in companies that have already won," says manager Terry Smith. He likes resilient businesses that have high returns on equity and whose advantages are difficult to replicate. Terry believes in a back-to-basics approach, and valuation discipline is an important part of the process. The fund has a bias towards larger companies.
Our opinion
Terry Smith’s clear, straightforward process of finding easy-to-understand businesses without overpaying for them has proved a hugely successful and resilient approach, with outstanding long-term performance.Company description
Fundsmith was established in 2010 by Terry Smith. He set out to be different from his peers, aiming to operate in line with the investor, businessman and philanthropist Sir John Templeton’s adage that “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
The business is owned and controlled by its partners, who have worked closely together over many years, and is headquartered in London. All the partners have significant co-investment in their own funds, delivering a clear alignment of interest. Ancillary activities are outsourced to external providers, allowing the Fundsmith team to focus on investment analysis, portfolio management and customer care. Investors in the funds include wealth managers, private banks, prominent families, charities, endowments, and individuals.
Fund manager
Terry Smith has become one of the country’s most prominent investors since his fund’s launch in 2010. He graduated in History from University College Cardiff in 1974 and went on to work at Barclays Bank. He then obtained an MBA at The Management College, Henley and became a stockbroker with W Greenwell & Co, later joining Barclays de Zoete Wedd, working as a bank analyst. He subsequently worked at UBS Phillips & Drew and then Collins Stewart, which acquired Tullett Liberty and Prebon Group. Collins Stewart and Tullett Prebon were demerged in 2006 with Terry remaining CEO of Tullett Prebon. In 2010 he founded Fundsmith where he is CEO and CIO.
Terry SmithFund manager
Investment process
Fundsmith Equity’s investment process has three simple steps: seek to only invest in good companies; try not to overpay for the shares; and then do nothing.
The manager considers a good company to be one which delivers high, sustainable cash flow returns on capital invested. Its valuations will grow year on year, its advantages will be difficult to replicate and it will be resilient to change - particularly technological innovation.
It’s also the belief of the manager that quality companies need a source of growth in order to invest their retained earnings, giving compound returns. Examples of growth sources are the rise of the consumer in the developing world, ageing populations, premiumisation of consumption (buying better and more expensive products) in the developed world and e-commerce and digitalisation of work, payments, communications, and entertainment.
Valuation is a secondary consideration but one that is important to the process.
The ideal holding period is forever. The manager will only voluntarily exit a position if the investment case fundamentally weakens, the valuation becomes too expensive, or a superior investment opportunity is identified. There will also be some involuntary turnover, for example in the event of a takeover. This policy means lower dealing costs which, in turn, reduces charges for investors.
Fundsmith Equity is highly concentrated, with between 20 to 30 stocks, each with a weighting of between 1%-6%. The sectors which tend to dominate the portfolio are consumer goods, medical equipment, devices and drugs, and technology. While this is a global fund, the largest country of listing is the US, because that is where the manager finds most of the companies he considers to be the best in their sectors. That said, many of these companies will have significant revenues outside the US and in the developing world.
ESG
ESG - Limited
Terry has a simple and easy-to-follow philosophy of buying what he regards as good companies and holding them for the long term, ideally forever. As such, ESG consideration goes as far as determining what non-financial risks a business is exposed to and whether these would limit it from making sustained high returns. Therefore, only those with excessive ESG risks that would impair the future financial returns of the business, would not make it into the investable universe.
Risk
Market risk of the portfolio, and any liquidity risk, is monitored regularly and procedures are in place to ensure that action is taken if appropriate. The fund can hold a maximum of 10% in any one stock and no more than 40% of the portfolio can be in positions greater than 5%.
The manager will never invest in a company that requires borrowing to make an adequate return, rather he will invest in those with repeatable, relatively predictable returns, seeking to minimise volatility. Portfolio companies will have some leverage, but it will not be essential to their success.
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