Fundsmith LLP (‘Fundsmith’), the fund management company set up by Terry Smith in November 2010, announces that The Fundsmith Equity Fund (‘the fund’) celebrates its 5th anniversary with:
- Returns of 18.5% in its 5th year ending 31st October 2015.
- Outperformance of the Investment Association (‘IA’) Global Sector2 by 14.0%.
- Outperformance of the MSCI World Index3 by 13.1%.
The fund, which now has assets under management of £4.1bn, has generated:
- 17.2% compound annual total return since inception to 31st October 2015 against the MSCI World Index’s compound return of 9.9% and the IA Global Sector compound return of 7.1%.
Terry Smith, Founder and Chief Executive of Fundsmith, said:
“When we started the Fundsmith Equity Fund it was with the aim of providing the best fund you could invest in with the highest return adjusted for risk. How have we fared? The fund is the 3rd best performing fund in the Investment Association’s Global Sector over these five years out of 203 funds that reported data for the period. Investors might therefore question whether we have succeeded in our objective of offering the best return available subject to risk, and frankly their judgement is the one which matters most. However, I would just point out that the two funds which rank ahead of us are specialist healthcare funds. They have performed well in a period which has seen a boom in M&A activity in biotech companies in particular. Their concentration on a single sector is a risk we would not be willing to take.
“I remain constantly amazed at the number of people who talk about investment and spend most or all of their time talking about asset allocation, regional allocation, sector weightings, economic forecasts, bonds vs. equities, interest rates, currencies, risk controls and never mention any need to invest in something good. I naively supposed that the experience of the financial crisis might have taught investors a lesson about the inability to generate good returns from bad assets. No amount of structuring using CDOs, CLOs, CDOs squared and all the other alphabet soup of structured finance could turn sub-prime loans into investable assets. When things went wrong even the triple A tranches of those sub-prime loan structures turned out to be triple Z. There’s an old saying about silk purses and sow’s ears which encapsulates this.
“Similarly, it is hard to make a good return over the long term by investing in poor quality businesses, as you are continually faced with the problems of timing and the headwind of their value destruction. If investors have any coherent reason for such investments, they usually are diversification and/or the belief that they can buy them when their fortunes and share prices are depressed and about to improve and sell them close to or preferably just before they turn down.
“Taking the diversification point first, I am also surprised how many investors assume that it is better to be diversified across low-quality investments than to be concentrated in high-quality ones. With regard to market timing, the performance record of the vast majority of active managers would suggest that there are far more who think they can play the investment and business/economic cycle successfully and outperform despite owning stocks in poor quality companies than can actually do so.
“At Fundsmith we have the same strategy that we launched with five years ago. Through rigorous analysis and iron discipline, we only buy shares in good companies, try not to over-pay and then do nothing. We have made a good start, however, our investment time horizon is indefinite. We will not waiver from this no-nonsense approach and strive to deliver long-term outperformance.”