The Annual Shareholder Meeting for holders of the Fundsmith Equity Fund was held last night (20/3/2017). Here’s a brief summary of manager Terry Smith’s presentation and the question/answer session (summarised or paraphrased for brevity). You should be able to watch the whole 2 hour proceedings on the Fundsmith web site soon.
He noted that there was not much happening since last year (Terry prides himself on investment inactivity). The Fund was up 28.2% last year which was similar to the MSCI World Index. It’s the first year they haven’t outperformed the market, but it’s a bullish market at present when the Fund’s holdings are quite defensive.
Terry spelled out his “ODD” investment strategy:
– Only invest in good companies.
– Don’t overpay.
– Do nothing.
He emphasised the good “metrics” of the holdings within the fund: ROCE, Gross Margin, Operating Margin, Cash Conversion, Leverage and Interest Cover, versus the market. For example, free cash flow of the holdings grew 11% when earnings of companies in the index grew zero last year. He discounted allegations that they were too focussed on consumer staples – those holdings have actually been a drag on the fund’s performance in the last few years.
Portfolio turnover was only 0.5% last year (it had actually been negative in previous years because of the way it is calculated).
We then moved to questions/answers (only written questions taken due to the number). I’ll highlight just a few of the more interesting ones:
Question: On actual fees charged to the fund (based on newspaper reports). Answer: the management charge is unchanged. Ongoing charge of 1.16%. The newish office in Mauritius was mentioned and Terry has moved there – he has had a home there since 2014. This is partly to manage the FEET portfolio. Terry emphasised he has not retired, and he does not play golf. Comment: appears to be another workaholic.
Question: Have the portfolio changes had a negative or positive impact? Answer: it’s difficult to do that analysis, but it’s probably made things better. Similar question was on Dominos Pizza – holding sold when it then outperformed. Answer: sold because free cash flow yield fell to 2.7% (was 11.6% when invested). Terry admitted he could not be right all the time.
Question: The Fund doubled in size last year. Will it be closed to new investment? Answer: In summary not at the moment . Could double size of fund without a problem in terms of liquidity in the holdings. For example Microsoft holding is one tenth of 1% of shares. Closing a fund is also not easy.
Question on FEET (Fundsmith’s Far East investment trust): Why has Terry only invested £5m in it (he has hundreds in the main fund)? Answer: the problem is that FEET is illiquid, and he already proportionally has a bigger holding in it. Terry also discussed the large flows into index-tracking funds in Far East securities which now dominate the sector and were distorting the valuations of the large-cap companies they hold. He said the “dream of an active fund manager is to be the last active fund manager in the world”.
Summary: as usual this was an entertaining and educational evening. You can learn a lot about the investment strategies he uses to achieve such great performance, which are probably just as applicable to smaller UK companies as they are the large global companies that make up the Fund’s portfolio on the whole. Anyone who did not achieve 28% return on their own portfolio last year should certainly study Terry Smith’s activities in detail.
There is a longer report on the meeting here.