Fund Focus: alternatives to Terry Smith

Terry Smith unveiled a massive overhaul of the Fundsmith Equity I Acc (B41YBW7) portfolio last week, with turnover breaching the 50% mark in the first half of the year.  

Smith, while yet again keen to blame markets rather than his own investments for performance problems, has at least thrown the kitchen sink at fixing the problem. 

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Such action inevitably divides opinion, as we saw in a post about the overhaul on our social trading network ii Community. While some of Smith’s remaining backers might applaud him taking action, we do see a buy and hold manager straying into unfamiliar territory.  

Some might worry that he’s crystallising portfolio losses by selling losers just as his investment style is most out of favour.  

Others have even compared this to style drift, where a manager changes how they invest to try and arrest underperformance.  

Professional fund pickers tend to see style drift as a reason to sell, given that a fund no longer performs the role you want it to in a portfolio. 

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If you are thinking of finally dropping Fundsmith but still want a fund with a quality growth investment style, there are many alternatives.  

That’s something I examined at Investors’ Chronicle magazine in August last year, and a topic explored by interactive investor in the past.

If I look at the names from these previous pieces of analysis, a full 10 funds crop up. It’s worth a look at some of the top names over recent years. 

From Guinness to iShares 

Fundsmith Equity has returned just 10% over the five years to 10 July, versus 77% for the MSCI World index. The fund has meanwhile lost around 1.8% over one year to that same date, with the index returning roughly 23%. 

The five-year period, which very roughly covers Fundsmith’s woes, has been much more fruitful for a few of our alternatives, even if none of them have beaten the global index. 

But the margin by which many have trailed the market does show that it hasn’t been easy for funds with less of a focus on momentum – something else Smith has sought to pin his problems on. 

Perhaps tellingly it’s a factor exchange-traded fund (ETF) leading the pack.  

The iShares Edge MSCI Wld Qual Fctr ETF $Acc GBP (LSE:IWFQ), which backs a subset of MSCI World constituents with “strong and stable earnings”, has had a solid showing.  

The fund does have decent exposure to the Magnificent Seven stocks, with Apple Inc (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA), Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc Class A (NASDAQ:META) as its top holdings. 

Roughly a third of the fund is in the information technology sector, with 73.1% in the US. 

 Source: FE Analytics. Past performance is not a guide to future performance.

I would sympathise if this feels a little too similar to a bog-standard global tracker fund but the active names in the list are somewhat different.  

Second in the list is Guinness Global Equity Income Y GBP Dist (BVYPP13), which doesn’t actually operate like an income fund.  

The team instead appreciates the compounding effect of reinvesting dividends, and notes that a history of payouts to shareholders can indicate “past value creation by a company while instilling some capital discipline in company management”. 

As Guinness puts it: “A commitment to a dividend leaves no room for vanity projects or frivolous uses of shareholders’ capital.” 

Like many other Guinness funds, this is a concentrated portfolio of roughly equally weighted positions, including Texas Instruments Inc (NASDAQ:TXN), Cisco Systems Inc (NASDAQ:CSCO), Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), ABB Ltd (SIX:ABBN) and AbbVie Inc (NYSE:ABBV). 

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Moving further down the list, JOHCM Global Opportunities I GBP Acc (BJ5JMC0) stands out on a few fronts.  

It has tended to be pretty underweight on the US, with North America recently accounting for just 43% of the fund. 

The team can at times invest fairly defensively – and has sometimes run a pretty big cash position, too. Around a fifth of the portfolio apiece is in financials and industrials by sector. 

Another contender is Brown Advisory Global Leaders B GBP Acc (BD9MKL8). This is very quality-focused and has pretty much the same allocation to North America as the JOHCM fund.  

Its top 10 holdings list is pretty diverse, from Microsoft, Visa Inc Class A (NYSE:V) and Alphabet Inc Class A (NASDAQ:GOOGL) to Experian (LSE:EXPN), London Stock Exchange Group (LSE:LSEG), Roche Holding AG Ordinary Shares new (SIX:ROP) and Safran SA (EURONEXT:SAF). Global equity trust Alliance Witan Ord (LSE:ALW) appointed the Brown Advisory team to run a portion of its portfolio last year. 

It’s hard to ignore how far some of these funds are behind the MSCI World index over a five-year stretch and the other names in our list, Trojan Global Income O Income (BD82KQ4), IFSL Evenlode Global Equity B GBP Acc (BMFX289), Stonehage Flmg GlbBest IdeasEq D GBP Inc (BCLYMF3), IFSL Evenlode Global Income B GBP Inc (BF1QNC4) and GuardCap Global Equity I GBP Acc (BVSS1C1), trail by much more. 

That could be a simple reminder that funds with a quality approach are in the doldrums and arguably await a comeback. But Fundsmith isn’t the only option for those wanting to bet on a recovery.