It has been a rocky ride for investors in Fundsmith Equity over the past 18 months. After a difficult start to 2022 in which it was 21.3% down in the first half of the year and lagging the IT Global sector by 5.1 percentage points, things have turned around since.
At the time experts told Trustnet they were unsure whether the £24bn global fund managed by Terry Smith would bounce back immediately, but told investors to keep holding on.
Since then the fund has beaten its sector comfortably, as the below chart shows. The fund has also been among the 25% most performing funds in the IT Global sector over one year, six months, three months and one month.
Performance of fund vs sector since 23 June 2022
Source: FE Analytics
Throughout, Fundsmith Equity has remained popular with retail investors. It was one of the few active funds to stay in vogue last month in a period when investors showed a clear preference for index trackers. Indeed, it was the only active fund in interactive investor’s list of 10 most bought funds in March.
As a result, investor interactive continues to “highly” recommend Fundsmith Equity and Smith.
Dzmitry Lipski, head of funds research at the investment platform, said: “While the fund suffered as interest rates shot up, which knocked the valuations of his highly rated shares, Smith’s stock picking skills are paying off this year.
“He likes companies with high profit margins, meaning that inflationary pressures do not deal too much damage to the bottom line of his portfolio. His focus on unique brands and essential goods and services mean that his companies are performing well in the current challenging economic environment.
Darius McDermott, managing director of Chelsea Financial Services, also “highly” recommended holding Fundsmith Equity in a portfolio. He said it is “vital” to have companies that can weather the current high interest rate, high inflation and low-growth environment.
He added: “It has significantly outperformed the global sector (by 30 percentage points over five years & 165 percentage points over 10 years). Credit must be given to the expertise of the management team. Smith is the lead manager of the fund and is one of the most successful fund managers of his generation. The team clearly has a knack for picking good companies, at appropriate valuations, that have gone on to see strong growth.
“Fundsmith's growth style has also been strongly in favour for the majority of the past decade – as a result the fund has benefitted.”
Performance of fund vs sector over 10 yrs
Source: FE Analytics
However, other experts suggested the time is not right to buy the fund and said they would not add it to a portfolio if not already owned.
Tom Sparke, investment manager at GDIM said: “The Fundsmith Equity fund has an enviable track record of success over many years and Smith has written his name into investment fund history with his longevity and outperformance.
“However, at this point in time I would be reluctant to start a new position in the fund. Today’s equity market is not rewarding quality-growth and it stands at a relatively high historic valuation.”
The price of the fund has increased by almost 310% over 10 years, which compares to 141% for the sector average.
Pricing of fund vs sector over 10 yrs
Source: FE Analytics
Another issue that experts have identified with the fund is its size, which has led to questions of whether Smith can continue to deliver outperformance, although this has been rebuffed by the manager.
Ben Yearsley, director at Fairview Investing, said: “Smith divides opinion, but to be fair to him he has delivered outperformance of the MSCI World whilst having a very different and less tech-heavy top 10.
“His problem is his success, can he continue to deliver with more than £20bn in assets under management? The odds are stacked against it.”
Sparke added that achieving meaningful positions in equities that are not global mega-caps will be difficult, although he does not “foresee” significant underperformance from the fund.
Experts suggested, nonetheless, to hold the fund if investors already have it in their portfolio.
Rob Morgan, chief analyst at Charles Stanley, said: “It’s a perennially popular fund and lots of investors already have exposure.
“Although it is well known and well publicised it is not unique, but it does remain high quality and well managed.”
Experts pointed at the fees of the fund, which has an ongoing charge figure (OCF) of 1.04% as high, buy acknowledged the fund’s performance.
Morgan added: “Given the size of the fund, it is disappointing economies of scale haven’t been passed onto investors more. Nonetheless, all-in costs are about average.”
Smith has argued in the past that the fund remains relatively cheap once transaction costs – which are not included in the OCF – are taken into account and that the total charge is in-line with rivals.