Interactive Investor

Revealed: Terry Smith’s succession plan for Fundsmith

15th March 2021 16:51

Kyle Caldwell from interactive investor

The Fundsmith founder spells out plans for the rest of his career and who will replace him when he finally hangs up his boots. Also find out his best investment, and why he is quoting former footballer Vinnie Jones.

Lee Wild, head of equity strategy at interactive investor: Hello, today I have with me my colleague Kyle Caldwell, collectives editor at interactive investor, and someone who needs no introduction, Terry Smith, founder, chief executive and chief investment officer at Fundsmith, which includes the UK's largest investment fund, Fundsmith Equity.

Hello Terry, delighted that you could join us today.

Terry Smith:  Morning.

  • This interview is part of a longer conversation with the UK’s most popular fund manager. To watch the other interviews, visit our YouTube channel.

Lee Wild: Looking at your career, I mean it’s been pretty spectacular, first at Barclays Bank, then eventually at Collins Stewart, Tullett Prebon, and before setting up Fundsmith in 2010, how would you sum up the first 10 years of Fundsmith?

Terry Smith: I would quote Vinnie Jones, at the end of the movie Lock, Stock and Two Smoking Barrels, where you may recall he deposits a holdall with the two antique shotguns to an auction catalogue, which shows that the two antique shotguns that they’re about to throw off Hammersmith Bridge or somewhere, are incredibly valuable, he leaves that with the guys at the pub.

And as he leaves, he says, it’s been emotional. That’s, I mean I actually like setting up and building businesses, I think it’s a great thrill, and it is emotional. I mean I work with a group of people, now some 43/44 strong, but at its core is a smaller group of people who I’ve worked with for many years. Julian 35, Greville over 20, Mark about 25 years, something like that.

But there’s quite a few people, and one of our non-executives I’ve worked with since 1979, which is interesting, you know, so we go back a long way. And it’s, you know, the sort of the thrills, excitement, risks and so on, it’s emotional.

Kyle Caldwell:  And over 10 years on from launch, what would say has been your best moments and also your worst moments?

Terry Smith: I think the best moment was standing in the square, at Cavendish Square where our office is, in the morning when we opened having our photograph taken as a group. It’s one of those things that you look back on and you think, wow, where did those 10 years go, what were we all thinking when we were standing there, and so on. So that’s I think the best moment, that moment when finally, the starting pistol was fired.

The worst moment is realising I should have done this about 10 years earlier really. We’d have been having this discussion in 2011 rather than 2021.

Kyle Caldwell: And following on from that, what would you say has been your best investment over that 10-year period?

Terry Smith: The best investment is Microsoft (NASDAQ:MSFT). We started buying Microsoft at $25-$26 dollars a share, we’ve made 10 times our money. We did it when literally the Lex column of the Financial Times said nobody should own the shares at this price, they were right, but not in the way they meant it of course.

And I remember we got flack at our annual meeting, we got flack in terms of incoming emails from our investors, we got flack on blogs from people who all said you shouldn’t own Microsoft, you know, if you continue to own Microsoft there will be serious questions about your fund.

And so, and as you said, the commonest reason why people said that the commonest reason, they put forward is it’s not Apple (NASDAQ:AAPL). Yeah, we kind of figured that out all on our own. And, of course, you know, it’s turned out to be a great investment.

I think if you’re going to buy things that are big and make that kind of enormous return, the likelihood is, I mean, you know Julian, who, as I say, worked with me for 35 years and we know each other inside out basically, quite often analyses these things and then says just before we pull the trigger on buying them, he says, I think this is going to work because of this, this and this, but I’ll guarantee you one thing, it will be an uncomfortable company to own.

And quite often that is one of the keys to this. Now, some people will, of course, change that into an investment philosophy on its own they think that the only way to make money is to own things that are uncomfortable. I’m not suggesting that, right.

Some people say you can only make money in things which are small, obscure, difficult to understand, no, I’m not saying that, right. I’m not heading down that path. Quite often they’re big, well known and not that difficult to understand. I mean if we can understand them, I’ll represent they can’t be that difficult.

But I think that people do often gravitate towards this idea that it’s got to be something, you know, small obscure, under researched, difficult to own. No, sometimes you’ve just got to have a different view to other people.

Kyle Caldwell: Right, well this is a burning question for a lot of investors, I think, Terry. Warren Buffett’s in his 90s, he’s still going strong, and people want to know, have you set a retirement date and thought about succession planning, or will you still be running the fund in another 10 or 20 years’ time, and what is it that will finally make you hang up your boots?

Terry Smith: Will I be running it in 10 to 20 years’ time? How could I tell? I mean the old joke is, do you know what makes God laugh, people making plans. I wish it were my decision, but I don’t think it is my decision. I have no desire to retire or any plans to retire at the moment. I actually mostly enjoy what I do, I enjoy the process and the discovery involved in it.

I work mostly with a bunch of people whom I enjoy working with, so I quite like some of the clients. I’ve even found the odd client who quite likes me, which is remarkable. And so, with all that together why would I give up? And this is actually the way I run my money, I mean this is not something that is just good for the clients, you know, this is something if I wasn’t running Fundsmith, I’m assuming Fundsmith didn’t exist at that point, I’d probably be sitting down and doing this for myself anyway.

And so, look, I’ve no plans to retire, it’s such a gradual course, or succession planning, the day I’m not here Julian will take over and behind Julian we have another couple of people, I think, coming through the ranks of people. I think you can even see a generation of people beyond that, I think, beginning to emerge within the firm, who are very able.

And, if they want to, might well be able to take all this on in due course, including the ownership of the firm, or part ownership of the firm, I think that naturally must go with it for them. We have plans to transition all that. I don’t think investors should worry about it for a variety of reasons.

I mean the simplest thing to say is this, unless you think my death will affect the underlying investments, who cares? I mean I sincerely hope that the day I’m not here anymore that Microsoft is vaporised as a result, I mean, I think it would be a fitting tribute.

You know, I’ve got a feeling it won’t happen though. And therefore, the day after when you get the note saying that I’m no longer doing this, the fund will still be worth the same the following day, or roughly that, depending on the market movement.

And if you want your money back, you’ll be able to have it that day. So, what’s the big worry? I seriously think people, first of all, shouldn’t worry about the immediate transition because of that, this is not Warren Buffett of Berkshire Hathaway, a closed-ended vehicle, where if it comes up that Warren’s unfortunately passed on, while we’re doing this interview, I presume the share price is going to open up down 20% I presume. I don’t know, I mean I’m not trying to predict share prices.

But you would think it might have a bit of a wobble, but that’s not what’s going to happen. The unit price follows the underlying share prices, [and] they’ll be unaffected. The other thing is, I’d give Julian a shot if I were you, I think he might actually be better at this.

The good news is I won’t be here to find out, but everyone whom I care about, my family and friends who I want to take care of, and the various causes that I want to take care of through what I’m doing, will all be reliant on the skill of him and his colleagues the day after, and frankly, I’m very relaxed about that.

  • This interview is part of a longer conversation with the UK’s most popular fund manager. To watch the other interviews, visit our YouTube channel.

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