Investors in the Fundsmith Equity fund have seen 61.2% growth over the past three years, compared to the average global equity unit trust which has a total return of 33.7%.
But when Terry Smith first launched his controversial Fundsmith Equity fund in 2010 it was to much derision from the City. He was accused of being a gamekeeper turned poacher - lambasting the industry that had made him a millionaire.
After two decades of working at financial adviser group Collins Stewart, Smith said that the fund industry had become too short-termist - and greedy.
Smith instead promised a fund that would go direct to investors, encouraging them to bypass financial advisers and fund platforms. He said he would cut costs and instead concentrate on picking high-quality shares and holding on to them for the long term, rather than constantly churning a portfolio.
The result was Fundsmith, a low-charging portfolio of high-quality global companies. As he advocated a buy and hold strategy Smith did not reveal his top 10 holdings at launch for fear of copy-cats, although these were later published.
After a slow start, the fund has gone from strength to strength, returning around 8% in the first year, 12% in 2012 and 18.7% so far this year.
Earlier this year Smith did come under some pressure to justify his 1% annual charge. Although this is lower than the industry average, Smith’s preference for exceptionally low turnover means that some argued he could charge even less.
The Fundsmith Equity fund is rated 
Bronze by Morningstar analysts who say it is an ideal choice for investors seeking a lower-risk global equity fund.
Analyst Research, by Ruli Viljoen
In many ways this fund is as characterised by what it won’t own as by what it will. The overriding philosophy is that Smith looks to invest in companies that are compoundable earners, which, in an ideal world, he could own forever.
Ultimately he aims to invest in companies that are already winners and does not seek to identify tomorrow’s winners. The process clearly sets out all the areas of the market in which the fund won’t invest, including companies that require leverage, are cyclical, or have a high degree of obsolescence. Having eliminated these, he screens for companies that achieve an operating return and a spread of more than 3% above their cost of capital as well as those that achieve consistent growth.
It goes without saying that this process leads to a fund with significant biases, and from a performance perspective since launch the fund has been in a sweet spot. Since launch in Nov 2010 to the end of May 2012, the fund is up 12.5% on an annualised basis, compared with the Morningstar Global Large-Cap Blend Equity category, which is down 1.8%.
Interestingly, however, the Tullett Prebon pension fund for the period from Dec 2003 to Dec 2009 produced an annualised return net of fees in excess of 600 basis points ahead of the MSCI World Index and was ahead of the index in each of the calendar years, too.
While early days, we believe Smith’s long-term, distinctive approach and strong focus on delivering consistent, positive risk-adjusted returns make this a strong choice. The fund earns our Bronze rating.
