Fundsmith Equity and Schroder Global Equity are the most consistent IA Global funds of the past decade, beating the MSCI World index – the most common benchmark in the sector – in eight of the past 10 years, and their average peer in all 10.
Of the 223 funds in the sector with a track record long enough to be included in the study, another five beat the MSCI World index in eight of the past 10 years, but weren’t quite as successful compared with the sector average.
Performance of funds vs sector and index
Source: FE Analytics
Fundsmith Equity needs little introduction. Manager Terry Smith sums up his strategy in three simple steps: “Buy good companies, don’t overpay, do nothing.”
He defines good companies as those that produce better-than-average cashflow returns on invested capital. The manager also looks for sustainability in a company’s return, usually through repeat business from the end customer.
“A company that sells many small items each day is better able to earn more consistent returns over the years than a company whose business is cyclical, like a steel manufacturer, or ‘lumpy’, like a property developer,” he said.
Fundsmith experienced a rare period of underperformance versus the MSCI World index last year, as value stocks rallied.
However, Smith pointed out it is company profits, rather than consumers, that are hit first by rising input costs, and his portfolio holdings are well placed to weather this headwind.
“The higher a company’s gross margin – the difference between its sales revenues and cost of goods sold – the better its profitability is protected from inflation,” he said.
The manager noted the high margins on the companies in his portfolio – more than 60%, compared with about 40% for the average company in the MSCI World index – put them on a steady footing, while loss-making growth stocks, which he avoids, would be the ones hit hardest by a re-rating.
“Our fund has prospered during the pandemic,” he said. “The companies it invests in have endured much more – the Great Depression, World War II, the great inflation of 1965 to 1982, the dotcom meltdown and the credit crisis. They will probably survive whatever comes next and so will we if we stick to our principles, and we have every intention of doing so.”
Fundsmith Equity made 483.2% over the decade in question, compared with 279.2% from the MSCI World index and 221.3% from the IA Global sector. This was the fourth-highest figure of the 223 funds with a track record long enough to be included in the study.
Performance of funds vs sector and index over 10yrs 
Source: FE Analytics
Schroder Global Equity is headed up by Alex Tedder, who searches for what he calls the “growth gap”. This arises from differences between underlying company fundamentals and valuations, caused by three persistent market inefficiencies: an over-reaction to short-term newsflow; an over-reliance on a company’s historic growth and the failure to identify catalysts that can change its direction; and a failure to look far enough ahead when appraising companies’ earnings power.
In a recent note to investors, Tedder said rising inflation will be a key factor in performance this year. However, while many analysts have warned the high valuations of tech stocks made them most susceptible to a re-rating in such an environment, he claimed the opposite may be true.
“Perhaps the best examples of positive pricing power are to be found in the technology sector, particularly among the dominant so-called mega-cap platforms,” he explained. “Software companies such as Microsoft or Adobe, which provide essential tools to companies, governments and households, are in a unique position because they can increase their annual subscription charges each year.
“Similarly, a handful of very large internet platforms, notably Google-parent Alphabet, dominate the digital advertising market (which in turn is becoming the dominant channel for advertisers of all sizes). In the first nine months of the year, Google revenues grew 45% compared with a year earlier, helped by strong pricing.”
Tedder said consumer staples and industrials may be among the sectors most vulnerable to inflation, given the sharp rise in base commodities such as grains, sugar, copper and steel. “These industries are generally also highly competitive,” he added.
Schroder Global Equity made 320.8% over the decade in question, the 35th-highest figure in the sector, beating the average fund by almost 100 percentage points.
| Name | Fund size (£m) | OCF (%) |
| Fundsmith Equity | 26100.6 | 1.05 |
| Schroder Global Equity | 1155 | 0.52 |