This is one of the strongest options for investors seeking exposure to high-quality global equities. Terry Smith co-founded Fundsmith LLP and launched this strategy in 2010 on the back of the success he achieved as investment advisor to the Tullett Prebon pension fund. His experience in the industry dates back to 1974 and has included time in research and in senior management positions at FTSE companies.
He is an original thinker and has often demonstrated his willingness to bet against the crowd by taking a longer-term view. The investment philosophy is to buy and hold, ideally forever, high-quality businesses that will continually compound in value. High-quality companies are defined as having little need for leverage and an ability to sustainably grow an above-average cash return on operating capital employed. When considering these criteria, and a minimum $2 billion market cap to keep the strategy scalable, the investable universe is significantly reduced to a shortlist of around 70 names for deep-dive analysis. Smith is supported here by Julian Robins and Daniel Washburn. Robins is a co-founder of Fundsmith and has worked with Smith for over two decades. Washburn's experience is limited to Fundsmith, which he joined in 2011.
Further resource was added in 2017 with the hiring of two analyst/fund managers who focus on global mid-caps. We consider the analytical resources appropriate based on the clearly defined and prescriptive approach that limits the opportunity set and extremely long-term investment horizon (portfolio turnover is <5% a year). This is a very high-conviction and longterm approach. There are elements of sector concentration (large parts of the market are excluded) and elevated valuation risk in the portfolio, and returns may look at odds with the broad MSCI World Index over the short term.
As evidenced by a consistent adherence to the process on valuation, we believe Smith has a good handle on the risks, however, and over the long term will serve investors well. He has developed a very strong track record on this strategy. While returns have benefited from style tailwinds since launch, we believe Smith has added significant value above and beyond the strategy's style bias. His input on the Tullett Prebon pension fund also highlights his ability to add value over a market cycle. Our conviction remains high in this strategy's ability to outperform in the long term. It retains a Morningstar Analyst Rating of Gold.
