Private investors have poured money into Fundsmith Equity since launch in November 2010. So how have they done?
Fundsmith founder and manager Terry Smith has built a formidable reputation, but 2022 was unusually troublesome for him. His £23.5bn flagship fund fell 13.8% compared with a fall of just 7.8% on his benchmark index, MSCI World. Smith held up his hands in January’s letter to shareholders but defended himself by saying that “whilst a period of underperformance against the index is never welcome it is nonetheless inevitable”.
One year is neither here nor there. What matters is how well his stock picks have performed over the long term, and here Smith is on solid ground.
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Smith has a strong track record
Fundsmith Equity was launched in November 2010 and by 31 March it had delivered a staggering total return of 518%, with dividends reinvested. That would have turned a £10,000 investment at inception into £61,800.
Smith has thrashed MSCI World, which grew a healthy 273.9% over the same period, turning £10,000 into £37,390. That’s £24,410 less.
Impressively, Smith didn’t beat the market by taking outsized bets on wonder stocks like Tesla. His top 10 holdings include solid names such as Microsoft, Novo Nordisk, L’Oréal, luxury goods maker LVMH, cigarette maker Philip Morris, Estée Lauder and Visa.
These are not forgotten, overlooked names that only Smith has had the wit and wisdom to root out. Everybody’s heard of them!
He didn’t completely escape the US tech stock crash, as he held Meta Platforms, PayPal Holdings and Amazon. There’s always a risk that other stock picks could suffer in future too. But his level-headed picks have so far helped him avoid the trap that Scottish Mortgage Investment Trust fell into. It went too big on Tesla and other US tech tearaways and had a torrid 2022.
The man who liquidated himself
Measured over 12 months, Fundsmith Equity is up 2.6%, while Scottish Mortgage is down 32.6%. Fundsmith Equity is also making a better fist of the recent recovery, rising 8.4% in the last six months while Scottish Mortgage keeps crashing, down 13.9%.
Smith isn’t perfect. Back in 2010, Fundsmith Equity’s simple annual 1% charge with no upfront fees looked competitive, less so today. Smith himself banked a massive £190m last year, under a complex partnership package that includes a share of the profits, but will deduct some costs too. He’s sunning himself in Mauritius, but at least his loyal investors are enjoying their time in the sun.
There’s no guarantee Smith’s dominance will continue. Everybody loved Neil Woodford, until success went to his head. But unlike Woodford, Smith seems to be sticking to what he knows best. Last year, he had the humility to wind up Fundsmith Emerging Equities Trust after admitting his team lacked the “particular edge that would allow us to deliver superior risk-adjusted returns”. It shows he doesn’t always have the Midas touch. But I admired him for that.
At The Motley Fool, we prefer to build our own portfolios, rather than paying somebody else to pick stocks on our behalf. But if I chose to pay anyone, Terry Smith would be high on my list.
