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Fundsmith Equity has been the UK’s favourite Stocks and Shares ISA fund for years. It consistently tops the sales charts of the big fund platforms. Investors love manager Terry Smith and with good reason. He’s made them lots of money.
Since inception on 1 November 2010, Smith’s flagship fund has delivered a total return of 532.7%. Its benchmark, the MSCI World Index, returned ‘just’ 296.8% in that time. If I’d invested £10,000 in Fundsmith Equity at launch, my money would be worth £63,270 today.
Lately, Smith hasn’t done quite so well. Fundsmith Equity fell 13.8% in 2022 while MSCI World fell only 7.8%. Fundsmith is trailing this year, too. It’s up a solid 9.4% but its benchmark has climbed 11.2%.
A bumpy ride lately
As Smith himself often says, his fund will not perform in every market condition, so we shouldn’t read too much into recent slippage. While last year’s headline performance was poor, the portfolio’s revenues grew strongly and this should boost returns in the longer run. Investors clearly aren’t deterred — the fund is still topping the sales charts and holds a cool £23.8bn.
Yet it’s important that we don’t blindly accept Smith at his own measure (which I imagine is pretty high). It’s very hard to beat the market, year after year. Success can take its toll even on the sharpest minds.
Anybody who is aware of the medieval concept of the wheel of fortune and the circular trajectory of former fund management star Neil Woodford will be on their guard. Smith is now said to be worth £300m, runs his fund from paradise island Mauritius and recently ended up in the tabloids following a legal battle with his ex. There is a danger he could take his eye off the ball.
I’ve just re-read Smith’s July letter to shareholders, and there’s little sign of that. His underlying principles hold firm, even when making a public reverse ferret on a stock, as he did with July 2021 purchase Amazon, buying late then quickly dumping it.
I’ve bought the fund myself
But it’s hard to take issue with a man whose investment philosophy is to invest in a “small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time”. That’s the Motley Fool principle in a nutshell.
Fundsmith has exposure to this year’s US tech recovery, as its top 10 holdings include Microsoft and Meta Platforms. These are volatile times for stock markets, and the US recovery may have run its course for now. With 66.6% of his fund in the US, Fundsmith is exposed to the slowdown.
Other big positions include Novo Nordisk, L’Oréal, and LVMH, so the risks are balanced. The fund is a good way for UK-focused investors to get exposure to big international names like these.
It’s hard to be a winner forever and Smith may struggle to repeat his stellar performance. Despite that, I recently bought the fund to diversify from my UK direct equity holdings. So yes, I suppose it is a screaming buy. Let’s hope Fundsmith will continue to give investors something to shout about.