Fundsmith

[Humeau]

Some of the criticism of Terry Smith on this thread seems a little harsh.

He has got some investments wrong, yeah but who doesn't?

He has changed his mind about others and bought in after criticising them. I see this as more of a strength in an investor.

His record over 18 years from running the Tullett Prebon pension fund and Fundsmith is +/- 15%, after fees, since 2004 is very, very good. The last five years have been below par by these standards.

After putting a spreadsheet together using FCF growth added to FCF yield and adjusting for currency movements (cash flows for the portfolio are 55% in $) the portfolio is slightly undervalued now and has been for about the last six months. This contrasts with some quite strong over valuations in recent years, during a sustained period of over valuation since 2011/2.

I would suggest that it might have been wise to have added over recent months, but as Terry has suggested as an investor very often 'You are often your own worst enemy'. It looks like over £2bn has been taken out of the fund by investors this year.

FWIW, I don't think his investment style will change and the portfolio has overall metrics on ROIC and margins that suggest that it is full of good companies. I have confidence that this will remain the case and if the overall average growth of FCF of 9.7% is maintained over the next five or six years, this together with a FCF yield of closing in on four percent suggests a doubling in value over that period. I'll be happy enough with that.

[doug2500]

I notice Fundsmith has a holding in Diageo, I've not noticed that before, is it new?

They've sold Intuit too, I'd be interested in why.

Also interesting is they've outperformed bonds this year, as in lost less at least.

[monabri]

I notice Fundsmith has a holding in Diageo, I've not noticed that before, is it new?

They've sold Intuit too, I'd be interested in why.

Also interesting is they've outperformed bonds this year, as in lost less at least.

Diageo has been held a long time...

[KnightOfSpring]

Fundsmith's 2022 letter to shareholders is out https://www.fundsmith.co.uk/analysis/ (scroll down to letter to shareholders and press open).

Very long letter and lots of usual interesting macro comment and some accounting stuff (including share based compensation), which focusses a lot on Intuit (which may explain why it was sold). One thing that strikes me is that there is a fair bit of "rear view mirror" driving here eg if all this free money era was envitably ending, couldn't they have positioned themselves better, even if for a fairly short term move (I appreciate easier for small private investors to be more nimble with their portfolio and also that policy holders want most of their money in stocks rather than cash)? Also whilst the Intuit accounting stuff looks detailed and impressive, drawing on Terry's undoubted forensic accounting skills, was there the opportunity to get out more quickly and avoid the damaging recent performance (NB I haven't checked if they sold most of the holding before the final exit sale)?

[BullDog]

Fundsmith's 2022 letter to shareholders is out https://www.fundsmith.co.uk/analysis/ (scroll down to letter to shareholders and press open).

Very long letter and lots of usual interesting macro comment and some accounting stuff (including share based compensation), which focusses a lot on Intuit (which may explain why it was sold). One thing that strikes me is that there is a fair bit of "rear view mirror" driving here eg if all this free money era was envitably ending, couldn't they have positioned themselves better, even if for a fairly short term move (I appreciate easier for small private investors to be more nimble with their portfolio and also that policy holders want most of their money in stocks rather than cash)? Also whilst the Intuit accounting stuff looks detailed and impressive, drawing on Terry's undoubted forensic accounting skills, was there the opportunity to get out more quickly and avoid the damaging recent performance (NB I haven't checked if they sold most of the holding before the final exit sale)?

Good points, ask Smith to address your questions at the 2023 meeting, assuming there is one planned?

I am uncertain where Smith could reposition his portfolio to. From memory, FS has a global investable universe of fewer than 80 stocks worldwide. And they're usually invested in about 20 odd of them. Where would Smith move the portfoto to? Genuinely curious what you think. Thanks.

[KnightOfSpring]

Yes it would seem that re-positioning would be fraught with difficulties. For starters, even if you were/are right about the end of easy money, then knowing exactly when it is going to happen is tricky. Then you have reputational issues by moving into things that you have previously said were off limits (commodity sector would be an obvious one, but Terry has expressed his dislike of this many times- still he also has disliked the likes of Apple and Amazon and they are now in the portfolio). Policy holders might complain that they would have bought a commodity trust if they had wanted exposure to commodities. I don't know much about trusts myself so don't know how much of a problem moving away from stated strategy etc is. If they needed to stick to their universe of shares, imagine they should have loaded up with consumer staples like Pepisco, Proctor+Gamble, Nestle etc than go bigger into tech shares etc.

Anyway a re-positioning certainly seems a problem. Us as private investors do suffer from a resource disadvantage and lack of access to certain useful sources of information (like meetings with management (although in the letter Terry did say he had uncovered issues without the need to talk to managements)). However we can generally change our portfolios very quickly and have to answer only to ourselves. Of course it could be argued that the need to explain your actions to policyholders could prevent you making poor decisions, trading too much etc.

[Lootman]

even if you were/are right about the end of easy money, then knowing exactly when it is going to happen is tricky.

Yes, a year ago when the Fed Funds rate was zero, not many people predicted that they would now be almost 5%. And if someone could reliably predict future interest rates, they'd be making a fortune trading options on bonds.

The question for me would be how did Smith do versus the market over the last year or so. I would expect his fund to be down a bit given the general market turmoil.

[BullDog]

even if you were/are right about the end of easy money, then knowing exactly when it is going to happen is tricky.

Yes, a year ago when the Fed Funds rate was zero, not many people predicted that they would now be almost 5%. And if someone could reliably predict future interest rates, they'd be making a fortune trading options on bonds.

The question for me would be how did Smith do versus the market over the last year or so. I would expect his fund to be down a bit given the general market turmoil.

And your expectation is correct. First year since launch of significant underperformance of the market. Not too disappointing, over a decade of pretty good returns. Smith is quite candid about it and has never said he can outperform the market every single year.

My further expectation though is that the best of Fundsmith is behind it for now. Likely it will eventually bounce back though. There's some very high quality companies in the portfolio. And they're significantly cheaper now than they were.

[doug2500]

One thing that strikes me is that there is a fair bit of "rear view mirror" driving here eg if all this free money era was envitably ending, couldn't they have positioned themselves better, even if for a fairly short term move

No Timing & No Trading are 2 of their values, listed on every factsheet and the owners manual. I doubt he even thought about it.

[Adamski]

Think the main issue with FS is why the ongoing charge is so high at 0.94% v tracker 0.22%.

It's basically a Vanguard US Equity Index A fund (over 5 years, very closely matches) but with massive fees.

[scotia]

The question for me would be how did Smith do versus the market over the last year or so. I would expect his fund to be down a bit given the general market turmoil.

Fundsmith Total Return = -8.1% over 1 year, and +58.8% over 5 years
Vanguard VWRL World Tracker Total Return = -3.6% over 1 year and 42.5% over 5 years
(I hold both - Numbers from Hargreaves Lansdown)

[Howard]

Think the main issue with FS is why the ongoing charge is so high at 0.94% v tracker 0.22%.

It's basically a Vanguard US Equity Index A fund (over 5 years, very closely matches) but with massive fees.

Are you sure about this? I've held Fundsmith for around 10 years and my holding has gone up over 15% per year in this time. So the initial holding is worth more than 4.5 times the original investment after all fees. I believe the Vanguard fund has gone up slightly less than this - just over 14% per year.

So Terry has done well. Not many funds could claim this performance after fees. Even an underperformance of half a percent per year cumulatively can add up.

To be fair, taking account of survivorship bias, anyone canny enough to have invested substantially in either of these investments has done amazingly well.

regards

Howard

[Adamski]

Are you sure about this? I've held Fundsmith for around 10 years and my holding has gone up over 15% per year in this time.

I'm sure FS has done very well for 10 year holders. My question mark is the last 1/2/3 years, since the pandemic crash. You could argue that's too short a timeframe.

Im sure star stock picker Terry is happy collecting £10s millions per year in his Mauritius paradise retreat. However valid question if has not outperformed in recent years v a tracker.

Think an argument can bring madevthat active managers have no special skill, just some get lucky for a period of time. Such as Cathie Wood and James Anderson picking Tesla early on. Terry Smith having a good run on US and Tech stocks during 2010s bull market.

[Spet0789]

The whole premise of Fundsmith is to invest in companies that can generate cash, invest the capital and compound at high returns over long periods.

If a company can compound capital at 15%, at constant price to book its value doubles every 5 years.

If the valuation of the portfolio halves (whether P/B, P/FCF or whatever) it will take 5 years of the above to claw that back.

So if (big if) Terry Smith can find companies that can do the things in the first para and specifically generate RoC materially higher than the market, an investor holding for 20 years is mathematically certain to outperform the market.

[Howard]

Are you sure about this? I've held Fundsmith for around 10 years and my holding has gone up over 15% per year in this time.

I'm sure FS has done very well for 10 year holders. My question mark is the last 1/2/3 years, since the pandemic crash. You could argue that's too short a timeframe.

Im sure star stock picker Terry is happy collecting £10s millions per year in his Mauritius paradise retreat. However valid question if has not outperformed in recent years v a tracker.

Think an argument can bring madevthat active managers have no special skill, just some get lucky for a period of time. Such as Cathie Wood and James Anderson picking Tesla early on. Terry Smith having a good run on US and Tech stocks during 2010s bull market.

To be fair, Cathie Wood and James Anderson's funds aren't comparable with Fundsmith. They are more of a punt on riskier assets. Comparing a fund which invests in Colgate toothpaste with one that invests heavily in Tesla and early stage tech isn't really valid. I've had fun investing in Scottish Mortgage but considered it much riskier than Fundsmith and so (thankfully) invested much less (although it's still modestly in profit).

regards

Howard

[Backache]

For those interested Smiths thoughts from his AGM are now on video on the website.

https://www.fundsmith.co.uk/tv/

I'd paraphrase by saying we got a few things wrong but are sticking to our knitting. The companies that we invest in are significantly better quality than the average on our metrics but are now sitting at about the same valuation as the S&P500 on our favoured metric having been valued significantly higher.

[BullDog]

For those interested Smiths thoughts from his AGM are now on video on the website.

https://www.fundsmith.co.uk/tv/

I'd paraphrase by saying we got a few things wrong but are sticking to our knitting. The companies that we invest in are significantly better quality than the average on our metrics but are now sitting at about the same valuation as the S&P500 on our favoured metric having been valued significantly higher.

After a poor year or so, I hope things pick up for Smith. I hold only about a 10th of what I used to. Fundsmith was good for me for a decade, but I fear the best days of Fundsmith are now behind it. Happy to be wrong, of course.

[Dod101]

I do not hold Fundsmith and so have obviously missed out on the good years. I could not bring myself to pay the charges. Maybe they are finally coming home to roost. It is a huge handicap he has saddled himself with and the effect accumulates over time.

Dod

[BullDog]

I do not hold Fundsmith and so have obviously missed out on the good years. I could not bring myself to pay the charges. Maybe they are finally coming home to roost. It is a huge handicap he has saddled himself with and the effect accumulates over time.

Dod

Each to his own, of course. Personally, a more than 5x return on investment was worth every penny if the 0.94% management fee in my opinion. In fact I would say it's probably the single best thing I ever did with my money. I'll stop there as it's off topic for this thread.

[Dod101]

I do not hold Fundsmith and so have obviously missed out on the good years. I could not bring myself to pay the charges. Maybe they are finally coming home to roost. It is a huge handicap he has saddled himself with and the effect accumulates over time.

Dod

Each to his own, of course. Personally, a more than 5x return on investment was worth every penny if the 0.94% management fee in my opinion. In fact I would say it's probably the single best thing I ever did with my money. I'll stop there as it's off topic for this thread.

Yes, I know. It is of course me trying to not taking up Fundsmith justify myself. Anyway, this is a Fundsmith thread so I see no reason not to discuss Fundsmith charges. Do you?

But I still see these charges as outrageous especially given the now size of the fund.

Dod