Fundsmith have recently published their results for the year ending December 2013. ShareSoc reviewed this fund in our November 2012 newsletter so it’s interesting to review their progress since then and whether they have managed to keep up their initial superior performance.
Led my well known investor Terry Smith, Fundsmith has a very specific style and these are the promises they make to investors: No performance fees, No initial fees, No redemption fees, No overtrading, No leverage, No shorting, No hedging, No derivatives, No over diversification, No closet indexing, No lack of conviction and No other equity strategies.
The fund focuses on global equities, typically liquid large cap equities with a focus on consumer products companies and avoidance of banks, insurance companies, commodities and other cyclical sectors. There is a strong emphasis on a buy and hold strategy with resulting low stock turnover and low costs. Stock selection is focussed on free cash flow yield, where the yield is above what might be obtained on long term government bonds.
How was the performance in 2013? Total return of the T Class shares was 25.3% which compares with 24.3% for the MSCI World Index in sterling, in other words only slight out-performance. But as Mr Smith points out, in a year when equity markets were in a bullish mode. and the fund could be seen as relatively “defensive” in nature, this might be viewed as a good result.
Top five performers were Dominos Pizza, Microsoft, Stryker, Becton Dickinson and 3M, with the bottom five performers being Swedish Match, Serco, Imperial Tobacco, Schindler and Philip Morris, so three of the five losers are tobacco companies. Mr Smith thinks the concerns about plain packaging and e-cigarettes are overdone but they are limiting their exposure to this sector.
Fundsmith are optimistic about the growth in emerging market economies but say that few emerging market equities meet their requirement for liquidity, as Fundsmith is an open-ended fund. Therefore they are proposing to launch an investment trust in 2014 to be called the Fundsmith Emerging Equities Trust (“FEET”) which will focus on such companies.
The fact that Fundsmith have chosen to launch a fund for this sector is surely interesting when emerging markets have been out of favour for some time and valuations do not look expensive.