Last night (3/3/2015) Fundsmith held its Annual Meeting for investors in London. It was a full house at the venue – about 300 people I would estimate. Terry Smith the fund manager did most of the talking and he is of course a good speaker. The format was very much like Warren Buffett’s meetings for Berkshire Hathaway shareholders with questions having to be submitted in advance, and some clearly being rhetorical ones asked by the faithful as many investors will have known the answers already. ShareSoc has covered the Fundsmith Equity Fund (an OEIC fund incidentally so it is unusual in having a meeting for investors) and its recent results in our past Newsletters. There is a full report on this meeting here, but here is a brief summary of the key points.
Terry gave a summary of the last annual results. The fund was up 23%. Charges amount to very slightly over 1% and they had negative annual turnover of stock using the industry standard calculation method – this arises because they trade very little but have substantial inflows of cash into the fund from new investors.
He summarised the fund’s strategy which is to 1) only invest in good companies; 2) don’t overpay for them; 3) but otherwise “do nothing”.
The first question was about the running earnings yield on the portfolio companies and was the portfolio becoming over-valued? The answer was that the earnings yield is 4.5% (i.e. implying a p/e of 22.2 which is the inverse). It was 5.1% in the previous year but 4.5% is still cheaper than the market. Are they too expensive Terry asked himself? He does not know. But what else would you put your money into at present?
He then discussed the portfolio winners and losers. He used the phrase “pull up the weeds and water the flowers”, not the other way around. In other words he tends to discard the losers in the portfolio and reinvest the proceeds in other stocks.
He gave four reasons as to why they sell stocks: 1) bids arise; 2) sometimes shares get overvalued; 3) management do mad things; 4) sometimes a company turns out not to be a good company after we have invested.
Will his strategy be affected by a likely change of Government – not at all because it may have little impact on the companies they own (to quote “Great Britain is a small island off the coast of Europe”).
In summary, Terry Smith is making a great success of a focussed and disciplined investment style, and he is a great communicator on how it is done. Let us hope not too many other investment managers copy it, otherwise his “excess” returns might disappear.