Last night was the latest annual meeting for investors in the Fundsmith Equity Fund. It was another good performance by Terry Smith on the night, and of course a good performance by the Fund itself was reported. It achieved a return of 15.7% last year (year ending December 2015) which was way ahead of any global fund index you care to choose. A lot of stock picking investors did well last year, but how many also have achieved 4.7% in the year to date? Not many I would guess.
Terry Smith has now established a loyal following of enthusiastic investors based on his long term track record with this fund – up 131% since inception five years ago. Terry gives a spirited and amusing performance at these events and there were several hundred people at this one. Here are some brief notes on what was said in response to questions.
Terry mentioned the “On-going Charge” figure was now 1.07%. Costs have come down as a percentage of the fund value as it has grown in size (now £4.6bn), but he mentioned later that he does not plan to reduce his management fee of 1% as the fund grows. One contribution to low costs is the very low turnover of the fund which was 2% last year.
He reiterated his strategy for the fund which is:
– Only invest in good companies.
– Don’t overpay.
– Do nothing.
He said they spend a lot of effort on doing nothing.
How does he pick good companies? He did not go into a lot of detail on this but did mention that he has a focus on good returns on capital, and positive cash flow.
Terry discussed this focus on consumer staples, which some commentators have said has been the reason for the exceptional performance, and implying that might not persist. But he pointed out that these are only 36% of the portfolio, are still not highly valued on a historical perspective and have traditionally been good stock market investments.
He does not intend to change his holdings even if a bear market is anticipated, and he said “market conditions are always uncertain” so it does not affect his investment strategy. Later he said in general they aim to be fully invested – currently 95%.
As anyone who has seen Terry speak will know, he has lots of prejudices. He simply won’t invest in banks (he mentioned the latest news from Barclays), insurance companies, real estate, chemicals, steel companies, heavy construction and engineering and others. But he claimed to own boring, stable businesses.
On the issue of stock selection, he said most people spend their time figuring our whether shares are cheap or expensive, not whether they are good or bad companies which is a mistake. He showed with some data that it matters less what price you pay, or for what you later sell the shares. Over 40 years it’s the return generated internally by the underlying business that matters.
John O’Driscoll discussed the problem of “adjusted” earnings where many large companies are now concealing the real financial figures by presentational gimmicks. Terry agreed it was deplorable (he made his name with a book entitled “Accounting for Growth” which showed all the tricks then employed to make a company look better).
On the question of whether Terry would be retiring soon (he is aged 62), the answer was that he intends to grow the fund “to infinity and beyond” to quote Buzz Lightyear. He has no intention to retire but did mention his possible successor as being Julian Robins, but “not for a very long time”. Comment: the longevity of fund managers is generally high with no obvious decline in performance even into their eighties so I think there are no immediate concerns here.
A question about the growth in size of the fund elicited the fact that there are 75 investors with more than £5m invested, who are mainly institutions of one kind or another. The fund might close to new institutional investors if they get another 25, or to new investors generally.
Terry made a very barbed attack on Hargreaves Lansdown and why they did not recommend his fund (it is not in their top 150 that they promote). He suggested it was a “charging structure” issue and inferred it was just HL maximising their profits, which he pointed out for a simple “distribution” business was astonishingly high at over 50% margins.
To conclude, as he had some questions on it, Terry discussed his views on Brexit. He is in favour of leaving the EU and he did not see an exit would affect the Fundsmith Fund as it is a global fund. He suggested that attendees ask the companies, and suggested most did not feel it would affect them. “If the UK decided to stay, they would be joining the least competitive trading bloc in the world” he said.
Attendees to the meeting received a book entitled “Celebrating five years of investing in decades of success” by Mr Smith which is an anthology of articles he has written in the last five years. It should be available from bookshops and is well worth a read.
In conclusion, any stock picking investors can learn a lot from Terry Smith, or if you don’t have the resources to span the globe then a holding in his fund might be worth considering (this writer has a holding). But you would do better to invest in it directly via the “T” class of shares rather than via your stockbroker or platform operator.
Roger Lawson
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