Terry Smith has issued his latest report to investors on the performance of the Fundsmith Equity Fund. It contains some of his usual acerbic comments on the financial world which I cover below.
Total Return on the fund last year was 25.6% and that beat the MSCI World Index benchmark which was only up 22.7%. As Fundsmith is one of my bigger holdings, that helped to contribute to my own portfolio performance although my overall gain was better. But that compares with the previous year when Fundsmith was well ahead of my portfolio which has more small cap stocks in it. Undoubtedly investors in Fundsmith will be happy with this continued good performance and the fund has continued to attract new investors so is now the largest UK retail equity fund. Many people have concerns that the fund is now so large that returns may drop away but Terry Smith continues to confound them.
The top five contributors to outperformance were Microsoft, Estee Lauder, Facebook, Paypal and Philip Morris with the detractors being 3M, Colgate Palmolive, Clorox, Brown-Forman and Reckitt Benckiser. Terry continues his management style which he defines as buying good companies, not overpaying and then doing nothing. He also likes to invest in companies with a good Return on Capital Employed (ROCE), good margins and good cash conversion. These are good lessons for all stock market investors.
He derides “value investing”, i.e. buying apparently cheap stocks and the alleged rotation from growth into value. He says “most of the stocks which have valuations which attract value investors have them for good reason – they are not good businesses”. He argues that returns from stock market investment come from the growth in company earnings and the compounding of reinvested retained capital, not from buying cheap companies.
He clearly does not intend to change his investment style and makes some critical comments on the Woodford debacle which he assigns to a change in investment strategy with Woodford moving into illiquid small cap stocks in an open-ended fund.
Fundsmith are holding the Annual Shareholders Meeting on the 25th February for those who wish to question Terry on his management, or on why he is not reducing the fund management charges given the growing size of the fund, although they are not expensive in comparison with some actively managed funds.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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