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Fundsmith Equity is one of the most popular investment funds in the UK. However, recently, the performance has not been amazing.
I have Fundsmith in my own portfolio and I always see it as a core position. Is it still a good choice given its recent performance? Let’s have a look.
Investment approach
Fundsmith is a global equity fund meaning it can invest in companies listed around the world. Concentrated products (containing about 20-30 stocks), investing only in high-quality businesses that meet strict investment criteria.
Specifically, portfolio manager Terry Smith invests in businesses that:
- It has advantages that are difficult to imitate
- It has solid growth prospects
- Very profitable
- It has a strong balance sheet
- That is resistant to technological interference
- It has an attractive valuation
Once he identifies a company that meets these criteria, Smith typically invests for the long term.
“Buy a good company, don’t overpay, and do nothing,” is the approach in a nutshell.
I’m still very happy with this approach as we enter 2023. History shows that over the long term, high-quality businesses tend to generate strong returns for investors.
That said, this approach won’t work all the time.
Ownership
I am also comfortable with stocks in my portfolio. As of early 2023, the top 10 fund holdings are:
| Microsoft |
| Novo Nordisk |
| Philip Morris |
| L’Oreal |
| IDEXX |
| Estee Lauder |
| LVMH |
| Stryker |
| Automatic Data Processing |
| McCormick |
One thing I like here is the fact that there are some strong themes including cloud computing, diabetes care, rising global wealth, and animal care.
Performance
As for performance, it has been a bit disappointing recently.
The table below shows that Fundsmith has underperformed the benchmark in the last two years.
| 2022 | 2021 | 2020 | 2019 | 2018 | |
| Refund (%) | -13.8 | 22.1 | 18.3 | 25.6 | 2.2 |
| MSCI World Index (%) | -7.8 | 22.9 | 12.3 | 22.7 | -3.0 |
| Excess | Not | Not | yes already | yes already | yes already |
And in 2022, the performance is insufficient.
So what’s wrong? And should performance be a concern?
Well, last year’s poor results could be due to several factors. These include:
- Fundsmith style. Terry Smith often invests in stocks that have relatively high valuations. In 2022, many stocks are not doing well because interest rates are rising.
- Stock options. Fundsmith made some howlers last year. PayPal (which was sold in December), for example, fell about 60%.
- There is no exposure to energy stocks. This led to underperformance of the benchmark as energy stocks outperformed.
Personally, I am not worried about the hardships of 2022. As I said before, there is no investment approach that works.
And last year’s return should be put into perspective. Since the start of Fundsmith in 2010, it has returned 15.5% per year, which is a very good result.
Having said that, for the fees I paid (0.94% per year over Hargreaves Lansdowne) I want to see it start to outperform again in the not-too-distant future.
Risk for 2023
Whether performance will improve in 2023 remains to be seen.
If the value stock stays in fashion this year, Fundsmith could disappoint again. Currently, many stocks in the portfolio have relatively high valuations.
Also, if energy becomes the top sector again, the fund may underperform again.
I caught it
I will stay with Fundsmith in 2023. I support to improve at several stages.
2022 shows that this investment fund is not a silver bullet. It can lose its value. So, I will allocate capital to other funds and also buy many individual stocks in 2023 for diversification.
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