Fundsmith

Fundsmith

Industry	Investment
Genre	Fund Management
Founded	November 1, 2010 (2010-11-01) in London, England
Founder	Terry Smith (businessman)
Headquarters	Cavendish Square,, London, England
Number of locations	2
Area served	Global
Key people	Terry Smith CEO and CIO Mark Laurence COO Simon Godwin CFO Julian Robbins Head of Research
Products	Open-ended equity funds and investment trusts
Services	Financial services
AUM	£6bn (April 2016)
Number of employees	16 (2016)
Website	https://www.fundsmith.co.uk

Fundsmith is a London-based investment management company, founded in 2010 by Terry Smith. As of June 2016, Fundsmith manages over £6bn in assets.^[1] Smith has been referred to as "the English Warren Buffett”, after achieving superior investment returns with investment strategies similar to the US investor.^[2]

Fundsmith operates a buy and hold investment strategy^[3] with a portfolio based on a small number of stocks, chosen on the basis of company fundamentals and defensible competitive advantages. Stocks are chosen through in-house analysis of company fundamentals, eschewing other techniques such as momentum investing, market timing or shorting.

Investment strategy

Fundsmith looks for companies generating high returns on capital operating in sectors which are driven by a large number of everyday, repeat events and transactions, such as consumer staples and medical equipment manufacturers. It avoids emerging technology firms, owing to their inherent unpredictability; it also avoids firms in heavily cyclical industries, such as airlines and real estate. Smith does not invest in banks, owing to their reliance on leverage and financial engineering.^[4] He was the No.1 rated bank analyst in London from 1984-89.^[5]

Fundsmith also looks for companies with an established competitive advantage, for example, Automatic Data Processing, the payroll processor whose large installed base of software is said by Smith to give such firms “annuity-like characteristics”. As Smith told The Telegraph newspaper in 2015: "The reality is that we don’t seek to predict who will win, but rather to bet on a company that has already won."^[6]

Fundsmith invests on behalf of individuals, wealth managers, institutions, private banks, prominent families, charities and endowments. All four of the firm’s partners invest their own money in the fund, with Smith having over £60m in it.

Investors in Fundsmith are charged 1% in management fees each year; the fund charges no performance fees, initial fees or redemption fees. The fund also eschews the higher operational costs associated with frequent dealing.^[7]

In 2014 the firm launched the Fundsmith Emerging Equities Trust, employing a similar investment strategy to the Fundsmith Equity fund, but focused on emerging markets.

Funds

Fundsmith operates two main investment vehicles: Fundsmith Equity Fund, which is an open-ended investment company (“OEIC”) and the closed-ended Fundsmith Emerging Equities Trust, which is an investment trust listed on the main market of the London Stock Exchange.

Fundsmith also operates a Luxembourg SICAV, which is a feeder fund which only holds units in the OEIC; and a Delaware L.P. (Fundsmith Equity Fund L.P.) which follows the same strategy but is available to US tax payers who need a Schedule K-1 Form for the Internal Revenue Service.

Fundsmith Equity Fund

Investing on a global basis, the Fund invests in businesses that can sustain a high return on capital employed; whose advantages are difficult to replicate and largely impervious to technological change; and where growth is generated through re-invested cash flows.

Fundsmith states it will hold 20-30 companies in its portfolio at any time; Smith has said that there are no more than 70 stocks in the world that match Fundsmith's investment criteria; their history typically spans several decades and multiple economic cycles.^[8]

Fundsmith invests in companies with large market capitalisations with shares that can be easily traded, to maintain liquidity for investors.

To June 2016, the fund had returned 149% since inception in November 2010, achieving an annualised growth rate of 17.7%; over the same period the fund outperformed growth in the MCSI World Index of Equities (69.3%) and UK bonds (29.3%).^[9]

Fundsmith Emerging Equities Trust

FEET uses the same investment strategy as the Fundsmith Equity Fund, but with one added dimension: the companies invested in by FEET will have the majority of their operations in, or revenue derived from, developing economies.^[10]

FEET was set up as a closed-ended trust due to the illiquid nature of emerging markets. At launch, Smith said FEET’s portfolio will comprise 45-55 investments and about 20% of its investible universe are quoted subsidiaries, associates or franchisees of multinational companies that are also in Fundsmith Equity Fund's investable universe.^[11]

FEET invests in companies that have the majority of their operations in, or revenue derived from, developing economies, and which provide direct exposure to the rise of the consumer classes in those countries. Over half the fund is invested in Asia, mainly India; Smith is broadly sceptical of investing in China.^[12]

Smith has argued that "...one of the most reliable trends we have seen in the past 20 years is the rise of a consumer class in the emerging world. As they go through $7,000 per capita income, they start to want some sauce on their food to make it taste better. They need some convenience, even if it is just instant noodles”.^[13]

From its inception to March 2016, the Trust’s net asset value had fallen 4% and its share price has fallen 2%. Smith expects FEET to eventually outperform the Equity Fund, arguing that the end of the Fed’s quantitative easing and weakness in the Chinese economy are an attractive entry point for long-term investors.^[13]

Operations

Fundsmith is headquartered in the West End of London. The firm employs 16 people and has four owner-partners. Smith serves as CEO and CIO, and makes investment decisions along with Fundsmith’s Head of Research Julian Robins, with whom he first worked 30 years ago.^[10]

Terry Smith

Terence "Terry" Smith, MNZM is a former chief executive of Collins Stewart and Tullett Prebon.^[14] A frequent media commentator on financial issues, Smith has blogged extensively on investment and political topics, and is a columnist for the Financial Times.^[15]

Smith first rose to prominence after the 1992 publication of his book Accounting for Growth, which exposed the misleading accounting practices adopted by bankrupt (but apparently successful) firms in the 90s. Smith was fired by his employer for refusing to withdraw the book; it went on to be one of the UK’s bestselling non-fiction titles, at one stage outselling Stephen Hawking’s A Brief History of Time and topping the non-fiction charts.

References