This week I am looking at Fundsmith Equity fund, the £16.9bn strategy managed by Terry Smith. I have previously mentioned Mr Smith back in October when his firm launched the Smithson investment trust, which focuses on smaller companies than in this strategy.
Mr Smith launched the Equity fund in 2010 after a successful career as an Analyst at a number of firms and as CEO of Tullett Prebon. Over this time has developed a very clear investment strategy of buying high quality companies, not overpaying for them and then “doing nothing”. The idea behind this is that good quality companies will compound attractive returns over time. By not overpaying for shares in such companies, Mr Smith hopes to plug into these attractive returns whilst minimising transaction costs and using capital flows to control position sizes.
The team are very strict in what they consider a high quality company. They will completely ignore a company unless it generates a high cash return on capital employed, has a sustainable business model, has clear competitive advantages and does not require significant leverage to generate these returns. This results in an investable universe which is usually under 100 companies and the fund will generally hold between 20 and 30 at any one time (currently there are 27 investments). The portfolio is very concentrated and they generally find the majority of their ideas from the Consumer Staples, Technology and Healthcare sectors, which currently make up 83% of assets.
This strategy has thus far been hugely successful in outperforming the wider market. Since launch (November 2010) the fund (T class) has returned 335% compared to the MSCI World benchmark return of 161%. However, some investors argue that this strategy has not been tested in difficult markets and that low interest rates have pushed investors towards stocks that fit his strategy.