I recently bought the country’s most popular investment fund Fundsmith Equity, but now I’m wondering whether that was wise.
Since launching in November 2010, manager Terry Smith has built a stellar reputation by investing in a big, mainstream global companies rather than a portfolio of whizzy upstarts. It’s quite a trick to beat the market while investing in the same companies as everyone else.
Since inception up to 31 July 2023, Fundsmith Equity delivered a total return of 532.7%, comfortably exceeding the 296.8% return on the MSCI World Index. Yet as my table shows, recent performance has been patchy.
| 2018 | 2019 | 2020 | 2021 | 2022 | Year to 31 July 2023 | July 2023 | |
| Fundsmith Equity | 2.2% | 25.6% | 18.3% | 22.1% | -13.8% | 9.4% | 0.9% |
| MSCI World Index | -3.0% | 22.7% | 12.3% | 22.9% | -7.8% | 11.2% | 2.1% |
| Vanguard S&P 500 | -4.76% | 31.01% | 18.04% | 28.36% | -18.35% | 20.44% | 3.19% |
While past performance is no guarantee of future returns, it does throw up some interesting patterns.
For the last five-and-a-half years, Fundsmith Equity has moved broadly up and down with the MSCI World, as funds tend to do. Even the very best manager is unlikely to, say, make a 20% gain in a year when markets crash 20% (unless they’re doing fancy stuff with derivatives).
In 2018, 2019 and 2020, Smith beat the market. Yet he’s underperformed during recent stock market volatility. No manager can win in all conditions, and I wouldn’t sell his fund on that count alone. However, I’d like him to start beating the index again, otherwise what’s the point?
The S&P 500 beat him
Comparing Fundsmith Equity to the Vanguard S&P 500 UCITS ETF isn’t entirely fair. Smith only has 66% exposure to the US, with diversification across France, Denmark, the UK and Spain. Yet over five years, Smith has been easily beaten, rising ‘only’ 51% on a cumulative basis compared to 74.97% for the US index.
He’s delivered smoother returns though, avoiding 2022’s sharp drop while missing out on this year’s equally sharp recovery. As a tracker, Vanguard will have automatic exposure to this year’s runaway stock Nvidia, whereas Fundsmith doesn’t. The ETF also holds the rest of this year’s tech stock ‘magnificent seven’, Apple, Amazon, Google-owner Alphabet, Meta, Microsoft and Tesla.
Fundsmith’s top 10 holdings do include Microsoft and Meta, but Smith bailed out of Amazon in 2021, which has rocketed 55% so far this year.
These things happen. Also, I can’t be the only one who suspects the AI-fuelled tech bonanza may have peaked. This time next year Terry Smith could be feeling pleased with himself, as his portfolio of high-quality global businesses ploughs on.
Let’s see how things go
Fundsmith charges 1% a year, which was something to shout about at launch but isn’t noticeably cheap today. By contrast, Vanguard charges just 0.07%, so Smith has to work harder purely to match its return, let alone beat it.
What Fundsmith Equity does do is give me exposure to European stocks such as Novo Nordisk, LVMH and L’Oréal, that I don’t have elsewhere. So it and the Vanguard tracker do complement each other, up to a point. There’s scope for both in my portfolio, so I’m not selling. But my next purchase will be the tracker. Smith will struggle to beat that in the longer run, especially after deducting his charges.
