The ancient Greeks saw Neil Woodford coming. They tried to warn us though the myth of Icarus, a boy who flew too close to the sun, a dire tale of complacency and hubris. The wax in Woodford’s wings has melted too.
Investment Gods
There is something satisfying in seeing an ancient myth played out for a modern audience, unless you hold units in Woodford Equity Income (as I do) or shares in Woodford Patient Capital (as I don’t). Stories become myth because they speak an underlying psychological truth. So what makes you think fund management’s golden boy Terry Smith can keep flying so high?
Today everything is feathers and frolics, but can it last?
It is astonishingly difficult for any fund manager to consistently beat the market, again and again. Research repeatedly shows that over five years, eight out of 10 managers underperform. Yet Smith has delivered an average annual return of 17.4% since launching his flagship Fundsmith Equity in November 2010. Even in this bull market, that’s an impressive feat.
Mr Smith goes to Washington
As I have warned before, Fundsmith Equity is 65% invested in the US, which has enjoyed a barnstorming few years. However, many wrongly think of it as a global fund, which is understandable given that it appears in the Investment Association Global sector.
However, Smith hasn’t merely piggy-backed on those FAANG beasts. Only Facebook appears in his top 10, a controversial choice he publicly defended in January. He does hold tech stocks, but not of the whizzy, toppy variety. His two biggest portfolio plays are PayPal and Microsoft, with airline booking system Amadeus at number four and financial software company Intuit at number six.
Long-term man
In so many respects, Smith thinks like we do at the Fool. His mantra is: “Buy good companies. Don’t overpay. Do nothing.” He invests for the long term in solid businesses such as PepsiCo and Reckitt Benckiser. He doesn’t trade, short, hedge or time the market, and has no upfront fees, just an ongoing annual charge of 1.05%.
Famously, Smith runs a tight portfolio of around 30 stocks, so this isn’t a low-risk quasi-tracker. He has the courage of his own convictions although as Woodford showed, that can be dangerous if your convictions are wrong.
Sceptics have been warning that Smith’s feathers will come unstuck for years. So far, they haven’t and his £17.5bn fund is now the UK’s biggest. 2018 was his weakest year with a return of just 2.2%, although as Smith noted, 92% of all investment funds made a loss last year.
Open to doubt
As an open-ended fund, Smith will have to sell stock to meet any redemptions if performance slips, but since he doesn’t mess around with unquoted companies or illiquid holdings, he should avoid Woodford’s calamity.
I’d consider buying Fundsmith Equity, but I don’t need more US exposure. Only buy if you do, but remember, the US market is nearing the end of a decade-long bull run. When that comes to an end, Smith will not escape the fallout, although I doubt he’ll do a Woodford.
I don’t know if the Greeks saw Terry Smith coming, but he has certainly seen them, claiming “I don’t do hubris”. Or is there something a bit hubristic in that? We’ll see.
