If the recent gating of the Woodford Equity Income fund has made you nervous as a private investor, I don’t blame you. Generally, we cough up fund fees so that managers can look after our assets for us while we get on with the rest of our busy lives.
To have an under-performing fund pull down the shutters on us while it restructures for liquidity is not what we sign up for when we invest in funds!
So, you’re watching your back now, yes? And maybe wondering if other fund managers with a reputation for out-performance could crash and burn in a similar manner as Woodford has done. Take Terry Smith and his Fundsmith Equity Fund, for example…
Great returns
Fundsmith reckons it’s focused on delivering superior investment performance at a reasonable cost by doing things differently from its peers. The equity fund was set up in 2010 and has been very successful. The annualised rate of return since inception has been 19.7%, the company’s website claims.
Nine years of earning a total return like that would turn an investment of £10,000 into more than £60,000 – that’s good going, I reckon. And the fund achieved that outcome by applying “stringent” investment criteria.
Fundsmith looks for high-quality businesses with a high return on operating capital employed; economic trading advantages that are “hard to replicate”; little need for financial gearing to generate returns; a high degree of “certainty” of growth from the reinvestment of their cash at high rates of return; resilience to change such as technological innovation; and an attractive valuation.
That list makes me think of legendary investor Warren Buffett’s approach to investing since he’s been managing big money. And quality enterprises with strong economic moats selling for a reasonable price are hard to find. That’s why the Fundsmith Equity Fund only holds between 20 or 30 stocks at a time, but they are big ones. The average market capitalisation of these beasts is about £120bn. Yet Fundsmith has produced market out-performance – who says elephants can’t gallop!
A US bias
The fund looks globally for stocks fulfilling its investment criteria. More than 65% is currently invested in US stocks, just over 17% in UK shares, a little over 15% in Europe and around 2% is in cash. So, there’s a big bias towards the US, and some reckon the US stock market has become overheated lately.
The fund lists its top 10 holdings as Paypal, Microsoft, Philip Morris, Idexx, Facebook, Intuit, Stryker, Estée Lauder, Amadeus and Pepsico. I reckon it’s unlikely that such giants will ever cause Fundsmith the kind of liquidity problems that have led to Woodford getting in so much trouble. However, a decent bear market could hit it hard in the future.
For me, the best solution is to use the Fundsmith criteria to invest in individual shares on my own behalf. The trouble with out-performing fund managers is that they often run out of steam eventually, in my opinion.