Fund spotlight: Fundsmith Equity

interactive investor’s analysts share an update and offer a view on one of our Super 60 fund picks.

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Fundsmith Equity was one of the most traded funds on interactive investor’s platform in the third quarter.

Highly regarded manager Terry Smith aims to provide capital growth by investing in a highly concentrated portfolio of between 20 to 30 stocks for the very long term. These are multinational developed-world companies that can sustain high rates of return on operating capital, often in areas where they have competitive advantage, usually gained through brand recognition. In addition, the manager prefers stocks with a market cap greater than £2 billion, which reduces liquidity risk to a large extent.

Smith follows a buy and hold philosophy and that naturally leads to lower portfolio turnover and a much longer holding period for an individual stock. The fund is positioned in such a way to be resilient to changes, such as technological disruption. Furthermore, its quality bias adds more protection on the downside and contributes to the better-than-the-peer-group average risk-return profile of the strategy over the long term.

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What does it invest in?

The fund does not have a formal benchmark and, therefore, the manager’s investable universe is huge. Currently, the fund has 29 holdings, including the technological leader Microsoft (NASDAQ:MSFT), healthcare giant Novo Nordisk (NYSE:NVO) and the French personal care company L’Oreal (EURONEXT:OR).

In terms of regions, although 68% of the fund is invested in the US, while the rest is allocated to the UK and continental Europe, its revenue streams are global and well diversified. Currently, the top three sectors are consumer staples and technology, with a 29% weighting for each, followed by healthcare with a 23% position.

Smith generally avoids investing in economically sensitive and cyclical areas of the market such as energy, materials and financials.

Recently, there have been no significant changes to the portfolio in terms of new stock additions. Among the top contributors for performance in September were Nike (NYSE:NKE), Novo Nordisk (NYSE:NVO) and Stryker (NYSE:SYK), while Facebook (NASDAQ:FB), Waters Corporation (NYSE:WAT) and Intercontinental Hotels (LSE:IHG) were detractors.

Performance

The fund has 90% active share against the MSCI World index, meaning that the manager is willing to take significant bets compared to the benchmark. 

Performance has been exceptional and, over five years, the fund delivered 153% compared to 109% for the Morningstar Global Large Cap category. Over three years, the strategy returned 54% against 42% for the peer group average.

The fund also held up extremely well during the market turbulence in the beginning of the year and showed excellent downside protection features, mostly as a result of portfolio positioning and good stock selection. At its lowest point in March, the fund dropped to -11% compared to -21% for the MSCI World index. Furthermore, year-to-date the fund has delivered a positive total return of 16% versus 7% for the index.

• Click here for more information on this fund, including price, yield and charges

Source: Morningstar

The ii view

Considering the fund specifics, such as high portfolio concentration, quality growth bias, high active share and being benchmark unconstrained, investors need to understand that the strategy will not outperform in all market conditions. That said, should cheaper, low-quality or more cyclical businesses start to outperform the wider market, the fund’s performance may struggle.

We rate the strategy as a core option within our Global Equity category owing to the high-quality nature of its underlying assets and believe that it could be ideally blended with more specialist, smaller companies or value funds in order to achieve greater diversification.