Can Fundsmith continue to deliver for investors?

Fundsmith Equity is a mainstay of many UK investors’ portfolios and a popular choice for those seeking global exposure to growth-oriented companies.

With a strong track record under the stalwart Terry Smith, the £22.8bn Fundsmith Equity consistently tops most-bought lists and is a fixture on best-buy lists.

Since its launch in 2010, the fund has returned nearly 500 percent, or 15.5 percent annualized.

Over the same period, the MSCI World Index returned 270.4 percent, while the IA Global fund returned 154.9 percent.

Fundsmith Shares invests in high-quality, established companies, and Smith says he doesn’t “look for tomorrow’s winners, but invests in companies that have already won.”

Instead, Smith chooses a small selection of resilient, global growth companies that offer value for money.

However, Fundsmith Equity has struggled over the past year. In 2022, the fund lost 13.8 percent and underperformed the benchmark, which returned -7.8 percent, as investors turned from growth to value.

Smith had resisted swallowing up fashionable tech companies, but last November, Fundsmith bought Apple as a small holding company, part of a broader pivot to big tech names.

It was a major turnaround for the veteran investor, who previously said he would never own a fashion company, which is “exactly what Apple has become.”

Speaking at Fundsmith’s AGM last month, Smith said, “We’re going back to things that we regularly reject and reassessing whether we’re right or wrong.

“We found that Apple’s revenue from services (such as music, TV and payments) had become 25 percent of revenue and was growing at twice the rate of the iPhone businesses and that it’s an extremely profitable ecosystem with profits like a software company.”

But it couldn’t have come at a more inconvenient time, as tech stocks continued to sell off despite further rate hikes.

In his annual letter to shareholders in January, Smith defended his tech holdings.

While a period of underperformance relative to the index is never welcome, it is inevitable. We have consistently warned that no investment strategy will outperform in every reporting period and in every type of market condition.”

While Smith has more technology holdings, the portfolio is not disproportionately weighted to the sector like many other growth funds.

He also used the annual letter to disagree with those who described the fund as becoming a “tech fund” and that he was going to buy technology.

In fact, consumer staples is Fundsmith’s most important sector, accounting for 32.7 percent of the portfolio, followed by healthcare.

Fundsmith Equity currently has 27 companies in its portfolio.

There has been little turnover in the portfolio over the past year, staying true to Smith’s do-nothing approach – essentially buying high quality companies and holding them for the long haul.

But further rate hikes and the end of the cheap money era could spell further problems for the fund’s performance.

Certainly, last year’s market events prompted Smith to take action on a handful of positions.

In January, Smith, in its annual letter to shareholders, accused Paypal of “intending defeat from the jaws of victory.”

Paypal was the second-largest negative impact on the fund last year, and Smith sold the stake in December after holding the stock for seven years.

“We tried to engage with Paypal because we discovered, seemingly long before management, that their lack of engagement with new customers was a problem, so was cost control, and that their acquisitions were destroying value.”

But Smith seems relatively unphased by the impact of the market on the portfolio. In a recent interview with AJ Bell, he said he was not interested in timing the market.

“Trying to manage money based on forecasting macro events is something that very few, if any, people can do.”

Despite a rough year, Smith sticks to his three-step strategy: buy good companies, don’t overpay, do nothing.