Book Review – Investing for Growth

“Investing for Growth” is a recently published book by Terry Smith, the founder of the Fundsmith fund management company. Anyone who has invested in his Fundsmith Equity Fund, as I first did 7 years ago, will find the book to be simply a refresher on the principles Terry Smith first laid down and has stuck to ever since. That can be summarised as “buy good companies, don’t overpay and do nothing” – the latter meaning don’t over-trade.

The book consists of a mixture of the Fundsmith Equity Fund annual reports over the last ten years, plus articles Terry Smith has written for various publications in that period. It tends to be somewhat repetitive and could have done with some more aggressive editing. It does of course highlight the strong performance of the Equity Fund over the last few years which has attracted many private investors so that it is now one of the largest UK funds. You can see the details of the fund’s performance here: which shows an annualised return since inception of 18.2% per annum, well ahead of its benchmark.

The book is a good reminder of how Terry Smith has achieved this success which is worth any investor understanding. But there are a few articles in the book worthy of particular mention that even investors in his funds may not previously have been familiar with, which I shall pick out.

The chapter entitled “Lessons of the Great Wall Street Crash” makes some interesting comments on the causes of that crash and what he suggests was the failure to deal with it properly – even by FD Roosevelt who normally gets a lot of credit for the eventual revival. It complements well the previous book I read called “Boom and Bust” which also covers that subject.

Another chapter is entitled “Why buy Brics when you can have Mugs?”. This covers the question of whether you should invest in developed market economies (typically North America and Western Europe) when clearly there is rapid growth taking place in some economies, typically called “Emerging Markets”. Terry wrote the article in 2014 when investing in Brazil, Russia, India and China were the popular countries to back. He reported that investing in an emerging market index tracking fund over the previous 5 years would still have underperformed a developed market index.

I recall looking at this issue when I first started investing 20 years ago. Should one back countries where you may know little about them other than their economies are forecast to grow rapidly? As of course China and India have subsequently achieved. But the answer in reality is far from simple. Looking at the latest statistics covering the last five years for a few investment trusts, the only certainty seems to be that investing in the UK “All companies” sector would have been a very poor choice as against a Global fund, or even a North American fund. In fact as US stock markets dominate the overall world value at about 50% of market valuations, that distorts any Global fund figure. With the UK being in a political crisis over Brexit that clearly damaged overseas investors view of UK shares, plus of course the FTSE-100 is full of “mature” companies in sectors with little growth, while the USA has many leading technology companies. As Terry Smith says “If you are willing to invest on the basis of a snappy acronym with no regard for the political and economic characteristics of the countries, perhaps you should have subscribed to the MUGS – Moldova, Uganda, Greece and Suriname. The key is surely to back fund managers who have a proven record in their chosen sectors such as Mr Smith.

Another interesting chapter in the book is headed “Why bother cooking the books if no one reads them?”. Terry Smith first made his name by publishing a book entitled “Accounting for Growth” which showed how the accounts published by companies were frequently manipulated to fool investors, particularly as regards acquisitions. Since then accounting rules have been tightened up but companies, and analysts, have now chosen to promote “adjusted” figures. He highlights restructuring charges, exceptional costs (particularly legal charges) and intangible asset amortisation and impairment charges as being used to distort accounts. He particularly attacks pharmaceutical companies such as AstraZeneca and GlaxoSmithKline and I definitely agree with him this has become a major issue for investors.

Other good chapters are “ESG? SRI? Is your green portfolio really green?” and “The myths of fund management”. He clearly enjoys sacrificing the sacred cows of the fund management industry.

I would recommend this book to any investor. It’s an easy read and not too long at 290 pages.

Roger Lawson (Twitter:  )

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