Fundsmith

[Adamski]

Has Fundsmith lost it? % rank relative to category in 2020 was 60% vs Global Large-Cap Growth Equity. Returned 18.4% last year v category 23.7%. Ytd -1.7% v category +2.1%. Looking at the chart, been underperforming significantly recently v category since early Nov. I know 2 months is short term, but can anyone shed any light on what's going on?

[ReallyVeryFoolish]

Nothing is going on. I just checked and the last six months it has gained around 9%. Over the last year, it's performance is bang on what it's average return has been each for over a decade.

RVF.

[Lootman]

Nothing is going on. I just checked and the last six months it has gained around 9%. Over the last year, it's performance is bang on what it's average return has been each for over a decade.

Yeah, I initiated a position in it in April of last year and it is up abut 25%.

Now the S&P 500 is up about 70% in that time but, even so, I think its return has been decent if not stellar.

[doug2500]

I don't really think it's reasonable to expect anything to outperform indefinitely. It's done it for nearly 10 years, it deserves a breather for a quarter or two. Or even a couple of years.

[ReallyVeryFoolish]

Nothing is going on. I just checked and the last six months it has gained around 9%. Over the last year, it's performance is bang on what it's average return has been each for over a decade.

Yeah, I initiated a position in it in April of last year and it is up abut 25%.

Now the S&P 500 is up about 70% in that time but, even so, I think its return has been decent if not stellar.

And that's just about what the fund is all about, I reckon. For over a decade now, it's been solid, reliable. Made a lot of people much wealthier than they otherwise would have been. And all without keeping anyone awake at night. It's been quite defensive last year pretty much as Smith promised it would be too. It's not broken as far as I can see.

RVF

[Spet0789]

Given that the composition of the portfolio hasn’t changed much over the period, the only meaningful question to ask is whether the ability of the portfolio companies to compound capital at attractive returns has diminished.

[Dod101]

I keep saying, no share or in this case a collection of shares, is going to rise in a straight line. There will be times when it even drops quite a bit over a year or two. The real question is whether the fundamental parameters have changed and if not then let the managers get on with it.

After the stellar run by say Scottish Mortgage the same thing is bound to happen there but I will be totally relaxed if it does. Holders of Fundsmith should do the same unless they really think that a)terry Smith is a one man band and b) that he has lost it.

Dod

[Adamski]

Thanks for your comments all. Makes sense, and decided to hold, but will keep an eye on it as won't pay 0.95% if continues to lose money as has done for 3 months.

[Dod101]

Thanks for your comments all. Makes sense, and decided to hold, but will keep an eye on it as won't pay 0.95% if continues to lose money as has done for 3 months.

I mean do not take my word for it. I am no expert but as you say at that price it ought to be good.

Dod

[Aminatidi]

Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.

[tikunetih]

Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.

As I remember, perhaps a little unfairly, but whatever, I've the impression you're quite frequently changing your investments, and doing so in a manner based on extrapolating past performance into the future.

FWIW I personally consider the possibility of Fundsmith Equity performing in the coming decade in the manner and as well as it did in the past decade as "beyond remote". Could I be wrong on this? Of course. Will I be wrong. Nope! Bookmark this, and if it turns out I'm wrong about this in 10 years I'll buy you a pint.

Terry Smith has a very sound strategy implemented very skilfully, and I am not criticising his method one bit; but it's tricky for me to imagine market & economic conditions (persistently low/falling rates and Treasury yields, very low inflation, slow economic growth, etc) that could have proved more favourable to that strategy than those conditions occurring over the past 10 years, and I believe the tailwind this delivered to very large cap growth & quality factor strategies has been very substantial...

By all means invest in a strategy that you "believe in"; quality factor is a strategy that can be believed in because IMO it's probably the most persistently exploitable source of excess returns (risk premium) due to in part to the difficulty of capturing it: skilled quantitative & qualitative analysis is required vs. the application of simplistic formulaic methods generally used for screening for other factors, causing those other factors to diminish or even disappear as sources of excess return.

However, recognise that as conditions change - and IMO they likely are changing, and significantly so - understand that the results a given strategy delivers, and importantly how it performs relative to other strategies and factor tilts - can change very markedly from period-to-period, decade-to-decade, hence the bingo charts we'll all be familiar with.

So, do not invest in a strategy because you like the way it performed over the past 5 or 10 years. You need a better reason than that, because it will not behave in the coming period as it did in the past. Indeed, the longer the duration of that prior period of consistent-/out-performance, the greater I suspect is the disappointment likely to arise in a future period for anyone just extrapolating the past.

[tikunetih]

One further thing to add, a more general point: if investing in funds of any type it's important not to treat them as "black boxes" that churn out a specific type, or shape, of result or performance.

Instead, IMO it's important to look inside of funds, see how and of what they're comprised and seek to understand how they delivered that performance and the conditions that enabled it - conditions that change, sometimes significantly so from one market and economic phase to another.

If you "know what you own" you should have less scope for surprises and less reason for future disappointment because you'll know why something is behaving as it is. For example, if I'm correct about Fundsmith Equity and it doesn't perform as impressively in the coming decade as it did in the past, "knowing what you own" means you wouldn't immediately reach for explanations such as "Terry Smith lost his touch" or "that Julian fella who took over doesn't have it" - both of these are possible things that might happen, but I strongly suspect that the key underlying explanation for a less impressive performance over the next decade if that's what occurs will simply be that the environment has changed and unsurprisingly it's not as favourable.

[simoan]

FWIW I personally consider the possibility of Fundsmith Equity performing in the coming decade in the manner and as well as it did in the past decade as "beyond remote". Could I be wrong on this? Of course. Will I be wrong. Nope! Bookmark this, and if it turns out I'm wrong about this in 10 years I'll buy you a pint.

Terry Smith has a very sound strategy implemented very skilfully, and I am not criticising his method one bit; but it's tricky for me to imagine market & economic conditions (persistently low/falling rates and Treasury yields, very low inflation, slow economic growth, etc) that could have proved more favourable to that strategy than those conditions occurring over the past 10 years, and I believe the tailwind this delivered to very large cap growth & quality factor strategies has been very substantial...

By all means invest in a strategy that you "believe in"; quality factor is a strategy that can be believed in because IMO it's probably the most persistently exploitable source of excess returns (risk premium) due to in part to the difficulty of capturing it: skilled quantitative & qualitative analysis is required vs. the application of simplistic formulaic methods generally used for screening for other factors, causing those other factors to diminish or even disappear as sources of excess return.

However, recognise that as conditions change - and IMO they likely are changing, and significantly so - understand that the results a given strategy delivers, and importantly how it performs relative to other strategies and factor tilts - can change very markedly from period-to-period, decade-to-decade, hence the bingo charts we'll all be familiar with.

So, do not invest in a strategy because you like the way it performed over the past 5 or 10 years. You need a better reason than that, because it will not behave in the coming period as it did in the past. Indeed, the longer the duration of that prior period of consistent-/out-performance, the greater I suspect is the disappointment likely to arise in a future period for anyone just extrapolating the past.

That's a rather long winded way of saying "reversion to the mean" is a big factor in investing

All the best, Si

[tikunetih]

That's a rather long winded way of saying "reversion to the mean" is a big factor in investing

That's certainly a big part of what I was seeking to convey, but pithy sentences never kept anyone's fingers fit.

[simoan]

That's a rather long winded way of saying "reversion to the mean" is a big factor in investing

That's certainly a big part of what I was seeking to convey, but pithy sentences never kept anyone's fingers fit.

BTW I agreed with what you wrote. I think we need to consider that most equities, and just about all equities at the quality end of the spectrum, have been repriced to give lower future returns in a world where the risk free rate is 0-1%. It is not only the future performance of Fundsmith that will be affected by this. The good news is that the pricing power of the type of companies held within Fundsmith should be less exposed than most should inflation become a problem.

I genuinely can't make my mind up how best to act going forward, so I am currently sitting on my hands. There are very few good companies on reasonable ratings and some cyclical companies have recovered to their pre-Covid level as if the return to normal levels of profitability is already baked in. My holding in Fundsmith is the least of my worries.

All the best, Si

[Aminatidi]

Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.

As I remember, perhaps a little unfairly, but whatever, I've the impression you're quite frequently changing your investments, and doing so in a manner based on extrapolating past performance into the future.

FWIW I personally consider the possibility of Fundsmith Equity performing in the coming decade in the manner and as well as it did in the past decade as "beyond remote". Could I be wrong on this? Of course. Will I be wrong. Nope! Bookmark this, and if it turns out I'm wrong about this in 10 years I'll buy you a pint.

Terry Smith has a very sound strategy implemented very skilfully, and I am not criticising his method one bit; but it's tricky for me to imagine market & economic conditions (persistently low/falling rates and Treasury yields, very low inflation, slow economic growth, etc) that could have proved more favourable to that strategy than those conditions occurring over the past 10 years, and I believe the tailwind this delivered to very large cap growth & quality factor strategies has been very substantial...

By all means invest in a strategy that you "believe in"; quality factor is a strategy that can be believed in because IMO it's probably the most persistently exploitable source of excess returns (risk premium) due to in part to the difficulty of capturing it: skilled quantitative & qualitative analysis is required vs. the application of simplistic formulaic methods generally used for screening for other factors, causing those other factors to diminish or even disappear as sources of excess return.

However, recognise that as conditions change - and IMO they likely are changing, and significantly so - understand that the results a given strategy delivers, and importantly how it performs relative to other strategies and factor tilts - can change very markedly from period-to-period, decade-to-decade, hence the bingo charts we'll all be familiar with.

So, do not invest in a strategy because you like the way it performed over the past 5 or 10 years. You need a better reason than that, because it will not behave in the coming period as it did in the past. Indeed, the longer the duration of that prior period of consistent-/out-performance, the greater I suspect is the disappointment likely to arise in a future period for anyone just extrapolating the past.

No I ask a lot but do very little. I made a handful of changes last year and most of those were about moving between wrapped and unwrapped.

I'm probably guilty as a financial simpleton of seeing sense in "buy good companies" and I like the idea of having reasonable holdings in selected companies more than say a tracker where I've actually got 25% in the FFANGS whether I like it or not and then a blend of everything else.

Is that sensible? Probably not

I'm not about to rush into anything (like I said I ask a lot but do little) but it's good to get some thoughts on Fundsmith's approach thoughts for the future.

As an aside if I did go down that route it would almost certainly be offset by the other 50% (ish) being in the likes of Capital Gearing and some Ruffer so not as if I'm betting the farm on "quality growth" or whatever you would class it as.

When you look at the correlation they actually appear to complement each other quite well.

I always find the past performance thing interesting. Makes me wonder why people bother doing job interviews

[Adamski]

Well it's 30 degrees and sunny (but a few showers) in Mauritius today, so at least Terry Smith (with £16m salary and £116m to Mauritius based company) is happy sleeping to the relaxing sounds of ocean waves in paradise.

[smicker]

Terry Smith has previously said that he would expect the Fund to under perform in times of market exuberance.

[ADrunkenMarcus]

Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.

I've got about 50% of my SIPP in Smithson, which takes the Fundsmith approach but focused more on medium and smaller companies and in an investment trust structure. It's outperformed Fundsmith since October 2018, FWIW.

Best wishes

Mark.

[Backache]

Agree with several of the posts above.

I have owned Fundsmith units virtually since it started (My investor number with them is in double figures).
I recall one of his very early AGM's when he was asked what return you could expect going forward although uncertain he said 10% annualised was what he thought would be reasonable in fact it has returned 18% or so.

He likes to price companies by their free cash flow yield, in the 2012 annual letter he says the prev year started with his portfolio being bought with a FCF yield of 7% his report at the beginning of this year said the FCF yield was now 3.4% so he was getting half the return for every £ invested now compared with 9 years ago so the shares have been extensively re-rated. The whole market has been re-rated and he may well do better than the market as a whole going forward if you think what he has achieved has been due to skill, however to expect the same returns going forward as the historic returns is not realistic.