Global value strategies and funds with a greater focus on income would likely sit well alongside Fundsmith Equity in a portfolio, several fund pickers have told Trustnet, as concerns over fund size and liquidity have been raised more recently.
As one of the largest and best-performing funds in the Investment Association universe, Fundsmith Equity remains one of the few names that those outside the industry will recognise.
It has been a dominant member of the IA Global sector since launch in November 2010, significantly outperforming its peer group with a total return of 361.30 per cent, as the below chart shows.
Performance of fund vs sector since launch
Source: FE Analytics
However, the fund has seen performance dip in the last few months, making a 0.28 per cent loss in the three months to 18 December, compared with a 1.72 per cent gain for the sector average.
While fund pickers seem loathe to recommend investors sell out of the fund, there are some ways in which investors can mitigate any of the risks of holding Terry Smith’s flagship fund, particularly given the recent rally in the value style.
Below, several fund pickers highlight which funds they would hold alongside Fundsmith Equity.
Jupiter Global Value Equity
There are a number of headwinds that will make it challenging for Smith to repeat his past performance, said Dart Capital associate director of research Alexander George, particularly the threat of premium valuations emerging in the large-cap part of the market.
Therefore, investors continuing to hold the fund should consider holding it alongside strategies “less exposed to the very elevated valuations within the aforementioned ‘growth’ industries”.
“One such fund is Jupiter Global Value Equity, which is also managed by an experienced fund manager [Ben Whitmore] with a good long-term track record, but has far more exposure to companies which are in the recovery stage and are trading on far more attractive valuations as they generally operate in more cyclical sectors,” he said.
“The Jupiter fund will likely struggle should we see a repeat of the defensives-led market of the last three years, but we would expect it to outperform should we see a more risk-on market environment.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch last year the fund has made a total return of 5.12 per cent, and whilst this is an underperformance against the MSCI AC World index (24.45 per cent) and the IA Global sector which made (20.12 per cent).
The fund has an ongoing charges figure (OCF) of 0.94 per cent and a yield of 2.90 per cent.
Investec Global Special Situations
Another fund that would help tackle the growth-style bias of Smith’s fund is the Investec Global Special Situations, according to Charles Stanley's pensions and investment analyst Rob Morgan, which is also a value fund.
Morgan said that having a value oriented, contrarian, global fund placed alongside Fundsmith Equity would provide diversification for the investor.
Morgan said Investec Global Special Situations “targets cheap stocks with the aim that they eventually become more fashionable so they would likely have minimal overlap with Fundsmith where dependable growth and quality are the traits the manager prioritises”.
He added: “Investec Global Special Situations would be one fund that sits right at the other end of the spectrum and provides a high level of diversification.”
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
As the above chart shows, the £223.9m fund has made 76.95 per cent over the past five years, outperformed IA Global sector (70.23 per cent) but underperformed the MSCI AC World index (78.02 per cent). It carries an OCF of 0.86 per cent.
M&G Global Dividend
Investors in Fundsmith Equity should also consider a global income fund “to create well-rounded global equity exposure”, according to Morgan, and one such example is M&G Global Dividend.
Managed by Stuart Rhodes, John Weavers and Alex Araujo the £2.4bn fund aims to: increase income annually, deliver both a higher yield and higher total return than the MSCI All Countries World index over any five-year period.
M&G Global Dividend has made a 67.83 per cent total return over the past five years, underperforming the IA Global sector (70.23 per cent) and the MSCI AC World index (78.02 per cent).
It has an OCF of 0.86 per cent and a yield of 2.15 per cent.
Schroder Global Recovery
Another value fund that could sit alongside Fundsmith Equity in investors’ portfolios is Schroder Global Recovery fund, a ‘deep value’ strategy “that is fishing in a very different pool”, said AJ Bell’s Ryan Hughes.
“The managers are very happy investing in companies that potentially have problems and are totally shunned by others but importantly have turnaround potential,” said Hughes, head of active portfolios at the platform.
“While this style has lagged the market in recent years, I believe they are well positioned to capitalise should value as a style come back into favour.”
He added: “The fund has a correlation of just 0.54 with Fundsmith demonstrating just how different the portfolios are.”
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The £249.9m fund – overseen by Andrew Lyddon, Nick Kirrage and Simon Adler – has made 62.10 per cent returns for investors over the last five years, slightly underperforming against the IA Global index which made 62.29 per cent over the same time frame. The fund has an OCF of 0.96 per cent.
BNY Mellon Global Income
A final fund recommendation from Hughes deals with none of the thematic traits of Smith’s fund, rather providing an alternative from his dogmatic ‘buy & hold’ strategy, which leads to very few changes to the portfolio.
Investors might want to hold a higher turnover approach such as Nick Clay’s BNY Mellon Global Income strategy.
With a focus on companies yielding more than the market, said Hughes, “the strategy is naturally contrarian and has a strong yield discipline that forces the fund to sell stocks when that yield falls back to market levels”.
He explained: “The two approaches are very different and portfolio analysis shows that Fundsmith and BNY actually have no stocks in common in their portfolios, making them a nice complement in a portfolio.”
The £5.6bn fund has an OCF of 0.96 per cent and has outperformed both the FTSE World index (87.08 per cent) and the IA Global Equity Income (59.04 per cent) over the past five years with returns of 90.08 per cent. It has an OCF of 0.96 per cent and a yield of 2.98 per cent.