- The Fundsmith Equity Fund is the UK's largest fund, managing £24.9 billion.
- Fundsmith's best fund, the Fundsmith Equity fund has returned growth of 608.56% since inception in November 2010, outperforming the IA Global Sector Average of 238.63%.
- The Fundsmith Sustainable Equity Fund faces challenges with no 5-year data and recent below-average performance.
- Terry Smith emphasises long-term investments in high-quality companies, avoiding speculative sectors.
Founded by famed fund manager Terry Smith in 2010, Fundsmith has become one of the most recognisable investment brands in the UK. Despite only managing 3 funds, the firm has grown assets under management to over £28 billion, with the flagship Fundsmith Equity fund becoming the largest and most popular fund in the UK, as well as the top funds offered by Fundsmith.
In this article, we look at how Fundsmith funds have performed within their investors. We will provide a detailed performance assessment for all Fundsmith funds and identify how each rank compared to their peers and sector average not only over the past 1, 3 & 5 years but since their inception. The performance analysis will clearly identify whether Fundsmith has delivered value or not for their investors and whether they offer investors competitive investment opportunities.
Fundsmith Fund Performance Summary
Fundsmith currently manages two funds and one investment trust. In this analysis, we assessed each fund's performance by comparing them to all other funds in the same sector over the recent 1, 3, and 5 years. Each fund has then been provided with a star rating based on their comparative performance.
The Fundsmith Equity fund received a 2-star rating due to its underperformance comparative to its sector peers over the past 1 and 5 years. Over the past year the fund returned growth of 14.84%, which was below the sector average and worse than 60% of funds in the Global sector. Over 3 years it failed to outperform 50% of IA Global funds and over 5 years it was in the bottom half of the sector's performers.
The Fundsmith Sustainable Equity fund also earned a 2-star rating. The absence of 5-year performance data further contributed to its overall rating, highlighting its inconsistency and underperformance in comparison to other funds in the same sector.
The Smithson Investment Trust was rated with 1 star, constituting 33.3% of the total. This consistent underperformance led to the lowest possible rating, reflecting its poor performance relative to its peers and other funds available to investors in the same sector.
Fundsmith Fund Performance
The table lists 3 Fundsmith funds along with key performance indicators, sector information, and ratings, giving a comprehensive overview of each fund over the most recent 1 ,3 & 5 year period.
*Fund performance cumulative up to 24th May 2024. Performance inclusive of fund charges only.
Fundsmith Equity Fund
The Fundsmith Equity fund, Terry Smith's flagship fund, was launched on 1st November 2010. The fund quickly grew in popularity and now holds the spot as the largest fund in the UK, with £24.9 billion under its management.
This hugely popular fund has an ongoing Charges Figure (OCF) of 1.04%, making it one of the more expensive funds in the sector which has an average annual charge of 0.84%. The fund's very average performance over the past 5 years may warrant investors to question paying above average fees for the fund. However, beyond 5 years the fund has proven its quality and value. Since the fund launched on 1st November 2010 it has returned huge growth of 618.21%, which is more than 2.5 times better than the sector average of 238.63%.
Fundsmith Equity Performance
The chart below clearly shows that the Fundsmith Equity Fund has significantly outperformed the IA Global Sector Average over a large portion of its history. This impressive long-term performance underscores the effectiveness of Terry Smith’s investment philosophy of focusing on high-quality companies with strong fundamentals.
The chart above shows that the Fundsmith Equity fund consistently outperformed the sector average up until the bear market which took hold towards the end of 2021. Since then the fund has experienced high volatility comparative to the sector, with sharp valuation swings resulting in very average returns for the period.
Fundsmith Sustainable Equity Fund
Terry Smith launched his second global equity fund, the Fundsmith Sustainable Equity fund, on 1st November 2017. As the fund's name suggests, its strategy focuses on sustainable categories, marking a departure from Smith’s earlier stance on ethical funds. This fund's strategy focuses on sustainable categories, closely following the global strategy of the Fundsmith Equity fund but with an ethical investment approach. The primary difference is that it excludes investing in sectors that do not align with sustainability categories.
As of May 2024, the Fundsmith Sustainable Equity fund has a fund size of £678.29 million and is classified within the IA Global sector alongside the Fundsmith Equity fund. Despite its small size compared to the more popular Fundsmith Equity fund, the Sustainable Equity fund has achieved similar returns.
Sectors excluded from the Fundsmith Sustainable Equity fund are:
- No Aerospace and Defence
- No Brewers, Distillers, and Vintners
- No Casinos and Gaming
- No Gas and Electric Utilities
- No Metals and Mining
- No Oil, Gas, and Consumable Fuels
- No Pornography
- No Tobacco
In terms of performance, the Fundsmith Sustainable Equity fund achieved a 1-year growth of 12.83%, ranking 365th out of 511 funds in the IA Global sector, which is below the sector average of 16.4%. Over three years, the fund demonstrated a growth of 22.01%, ranking 233rd out of 455 funds, slightly above the sector average of 20.53%. Over the past 5 years the fund has returned below average growth of 57.93%. However, as the chart above shows since the fund's inception on 1st November 2017 it has returned cumulative growth of 95.48%, comfortably higher than the sector average for the period of 71.12%.
Smithson Investment Trust
When the Smithson Investment Trust launched in October 2018 it broke records by raising £822.5 million in its initial public offering (IPO), the largest amount ever raised by a UK-domiciled investment trust at that time. This unprecedented demand highlighted the appeal of Terry Smith's investment philosophy applied to small and medium-sized companies.
Terry Smith founded Smithson with the belief that small and medium-sized companies often outperform larger ones. This outperformance is attributed to the fact that fewer research analysts cover mid-cap stocks, leading to more discrepancies between price and intrinsic value, which Smithson aims to exploit.
Smithson adheres to Fundsmith's overarching philosophy of investing in companies within industries that historically deliver long-term value. The trust avoids sectors prone to speculative bubbles, such as the Dotcom boom, the mining supercycle, the credit bubble, and the cryptocurrency craze. Smith emphasises that there are no new ways to make money, only well-established principles that stand the test of time.
Five years since its launch, Smithson has continued to uphold its high-conviction approach, maintaining a portfolio of 25 to 40 companies. The fund is managed by Simon Barnard and Will Morgan, with Terry Smith providing strategic oversight and having invested £25 million of his own money at the outset. The trust has faced challenges, notably in 2022 when markets dropped significantly and although it has recovered somewhat since then it has been well behind the performance of both the Fundsmith Equity and Sustainable Equity funds.
Fundsmiths Best Fund
The below chart tracks the performance of all 3 Fundsmith funds. As the most recent fund launched by Terry Smith was the Smithson investment trust in October 2018 the chart tracks the performance since then.
The performance chart above identifies that up until the start of the bear market period towards the end of 2021, the Smithson investment trust had been the best performer of the 3 with growth peaking at 102% at the end of 2021. However, the first 6 months of 2022 were very poor for Smithson with negative returns of -88%. Since then, the Smithson has recovered slightly but failed to match the performance of the Fundsmith Equity and Fundsmith Sustainable Equity funds. The chart also shows that both Fundsmith funds have experienced very similar performance over the period analysed.
Fundsmith’s success is built on a simple investment strategy, which involves taking bold bets on a small number of companies and holding them for the long term, without paying attention to the quirks of a macroeconomy. This is rooted in Mr Smith’s belief that “nobody is capable of consistently predicting macro events” and that it is more worthwhile to identify good companies, a skill he honed over decades working as an analyst. “You might think every fund manager tries to invest in good companies, but I can assure you they don’t,” he says. “At Fundsmith we have spent a lot of time coming up with a definition of what is a good company.”
The Type of Companies Fundsmith Invests In:
- high quality businesses that can sustain a high return on operating capital employed;
- businesses whose advantages are difficult to replicate;
- businesses which do not require significant leverage to generate returns;
- businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;
- businesses that are resilient to change, particularly technological innovation;
- businesses whose valuation is considered by the Company to be attractive.
The Company will not invest in derivatives and will not hedge any currency exposure arising from within the operations of an investee business nor from the holding of an investment denominated in a currency other than sterling.
Fundsmith invests in mature companies with strong balance sheets and established brands, which are capable of reinvesting their profits and compounding value for investors over time, while excluding cyclical sectors, such as mining and financials.
He avoids companies that require leverage to generate profits, which is why he won’t invest in companies which require borrowed money to function or survive – such as banks.
Terry Smith says that his philosophy of investing in good companies is easier said than done, but he believes most other fund managers don’t do this. “Very few investment managers boast about the fact that they invest in low-quality businesses, but most of them do, often because they consider such businesses as ‘cheap’.
They buy these companies because they believe the price to be too low relative to their assets or earnings and then wait for the market to revalue them upwards. This is logical; however, the revaluation will depend on the whim of the market or events which are difficult to predict, such as the business cycle, takeovers, restructuring or management change.
So the revaluation might happen quickly, it might take a long time, or it may never happen at all. None of these are particularly good for an investor.”
Summary
Despite the strong name recognition and the popularity of Terry Smith’s funds, the recent performance has been underwhelming. This was reflected by the Fundsmith Equity Fund which was outperformed by 305 other funds in the IA Global sector over the past year.
However, the Fundsmith Equity Fund, while currently experiencing a period of moderate performance, has a history of long-term outperformance, reflecting its ability to deliver superior risk-adjusted returns over the long term.
What is also important to note, is that over-reliance on any one fund manager or fund can prove harmful to investors. Despite the clear quality of the Fundsmith Equity fund in particular, investors can improve investment outcomes and increase protection by investing in a diverse portfolio that has an unrestricted approach to fund selection and fund management. Under the financial services compensation scheme (FSCS) the UK Government guarantees to protect investors assets up to £85,000 per provider. Investors can maximise this protection by investing in a portfolio that utilises several fund management brands.
Also, research has shown that having a diverse portfolio of high quality funds that specialise in one particular asset class can improve portfolio returns as it utilises regional specialists. No one fund manager is an expert in all asset classes so it makes sense to have a mix of funds from different providers who specialise in a particular asset class.
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