Fundsmith Equity Fund a good idea?
|Investment | Unit Trusts
Asked by Charlemagne911, submitted
26 January 2011.
Do you have any opinion about this new Fundsmith organisation? They seem to be very upfront about their aims and the fact that Terry has put so much of his own money into it shows commitment.
I am 63 and looking for investment that will provide income rather than long-term commitments. However do you think they may be worth a punt for up to 5-7 years on perhaps 5% of available capital that would not cause disaster if the worst happened?
Answered by Justin on 26 January 2011
I've mixed views on Fundsmith.
Terry Smith has a successful record of making money and it's always good to see fund managers putting a decent chunk of their personal wealth into their fund - it certainly helps to focus their mind. Plus I like Fundsmith's straightforward and transparent approach.
However, I don't feel Fundsmith is quite as revolutionary as they'd like you to believe.
Although they've made a fanfare over their 1% annual management charge, Fundsmith's margins are probably similar to most other fund managers because they're not paying trail commission (typically 0.5%) to advisers. Use a discount broker that rebates trail commission in full (see our list here) and most actively managed stockmarket funds will cost around the same as the Fundsmith Equity Fund.
In fact the Fundsmith Equity Fund total expense ratio (TER) is a little high at 1.25% (equivalent to 1.75% were trail commission being paid), probably because the relatively small current fund size means running costs are disproportionately high - the TER should fall as the fund grows.
What's most important is the fund itself and whether it's likely to perform well.
It's a focussed fund, holding 20-30 stocks, that invests long-term globally in high quality businesses. When selecting investments greater emphasis is given to analysing stats than meeting company management. The other investment selection criteria sound similar to many funds of this ilk, that is companies in markets with barriers to entry, growth potential, avoiding excessive debt, attractive valuations etc - the usual sensible stuff.
Terry Smith is managing the fund, assisted by Julian Robins, a US-based analyst. While Smith has a successful track record in the City, he doesn't have a track record of running a retail investment fund, so investing does require something of a leap of faith in his reputation and abilities.
Overall the fund seems pretty sensible and I'd give it a greater chance of success than failure. But whether you'd want to opt for this fund over a more proven fund manager elsewhere is a personal choice.
Given you're looking for income without a long term commitment then you might want to consider equity income funds instead. The Fundsmith Equity Fund currently has a 2.5% dividend yield but is orientated towards growth, not income. Plus its buy and hold investment strategy (which could do well overall - it works for Warren Buffett) means it should probably be viewed as a longer term portfolio holding as you'd expect this style of fund to sometimes struggle during periods when its stocks are out of style/favour with markets.
If you found this answer helpful, please add your vote by clicking here
Readers' Comments (2) - To post a comment please register or login
Comment by briggs2095 at 4:05pm on 03 Mar 2013:
Your comments about Fundsmith are now over two years old. Posted 3/3/13
Comment by justin at 10:32am on 18 Mar 2013:
Yes, sadly it's not practical for me to update previous answers.