Mark Potter

One that got away….

The title references a Western TV series or more specifically a comedy starring the late Mel Smith and Griff Rhys-Jones and I hope my readers are of an age to get the pun!

I thought I would need to write about Fundsmith at some time.  Now seems sensible because the founder, Terry Smith is launching a new closed end fund (Investment Trust) that will invest in UK smaller companies (not very small, just smaller than the mega sized ones his main Equity fund holds).

I have been suggesting that now is a good time to invest in this specific sector (UK Smaller Companies) for a couple of months, so it is nice to know someone so well regarded agrees – Mr Smith is said to be putting GBP25 million into the new fund!

I have never recommended his main ‘Equity’ international OEIC fund, one he once said was the only fund you would ever need (he has since offered other funds, so he obviously reacted to commercial reality).  That looks like my error with hindsight as the fund has done exceptionally well.

I was at a conference before he launched his business where Terry Smith expounded his philosophy bluntly – essentially that all fund managers ripped you off by charging you money and not making better returns than their benchmarks.  Although he had got rich in the fund management business and I believe acquired a reputation as a difficult customer, he was going to come to the public’s salvation and launch an all purpose equity growth fund.  As it happens his timing was good as not long after the launch, the market as a whole started to favour growth stocks over so called ‘value stocks’. 

As you might appreciate, I was not overly impressed by his evangelical style, but hindsight suggests he is a fund management genius.  The annualised return over 5 years from his Fundsmith Equity OEIC is quoted at 21.09% to the end of August by Morningstar.  The 3 year figure is even better at 25.87%.  The total fund size (all share classes) is I believe over GBP18 billion which means that it owns over $600 million in Microsoft shares alone for example, based on the disclosed top 10 holdings at the end of August.  It is a very large fund indeed which maybe explains the launch of the new investment trust.

Have I and anyone I have advised lost out by not buying this fund?  It depends what we owned instead and the fund is not really an all purpose global equity fund, so we can’t compare it with such.  It has a heavy US and a heavy tech exposure.  So do I in part of my portfolio, but secured by buying actual technology funds.  As  a matter of interest a fund I own called the Polar Capital Global Technology fund has better 5 and 3 year annualised returns than Fundsmith and is much less unwieldy at about $3 billion.   But it is more focused and in one sense more risky.

Nonetheless, I admit that if I had not been scared off by the ‘one man show’ nature of Fundsmith and its strong minded founder, I would have been pleased with the money I would have made.  I will count my negative assessment of the risks as mistaken.

Should investors who have not held the fund buy it now?  I would suggest not.  There is quality research by serious academics that suggests all such outperformance attributable to an individual rather than the market, is in effect the result of some variant of luck and will ‘revert to mean’ over time.  That means that although the Fundsmith Equity fund might keep averaging 20% plus returns every year because we are looking into the future and no-one knows, the probability is that it will underperform significantly for a longish period at some future date.

Investing in the new closed end fund if you fully understand why it will be different to an OEIC might well be an interesting option.

I would add that I have nothing to say against Mr Smith personally and having myself understood some years ago the hugely valuable role that the New Zealander Keith Park had in winning the Battle of Britain, I am very pleased that Terry Smith used his ‘clout’ to get more recognition for a Kiwi who most undoubtedly played a major role in defeating the Nazis.