Interactive Investor

Terry Smith talks fund size and running Fundsmith from Mauritius

15th March 2021 11:49

Lee Wild from interactive investor

The Fundsmith founder discusses the size of his eponymous fund – Fundsmith Equity – and concerns among investors that it has become too large. He also talks to interactive investor about the responsibility of running a massive fund and how he does it for most of the year 6,000 miles away from London.

Lee Wild, head of equity strategy at interactive investorHello, today I have with me 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.

Lee Wild: Terry, the fund size is a very topical discussion these days, we’ve talked about it a lot at interactive investor, and Fundsmith Equity now has over £20 billion under management, well over. So, do you think there will be a tipping point at which the fund becomes too unwieldy, a victim of its own success, if you will?

  • 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.

Terry Smith: Well, I mean there must be some point out there when theoretically, and practically that must be true. What I would query is whether or not the current thinking about it, in terms of where we are now is, is grounded in reality or some kind of myopic local view.

Because if you take our fund at the moment, and we owned one percent of each of the stocks in our fund, which hopefully, I’ve only chosen one percent because hopefully, we could agree that’s not terribly a liquid position. We’d have a fund about twice our current size.                             

Which gives you a perspective on one thing right off the back, which is, we’re investing in things that are a hell of a lot bigger than us, right, and I think people get very hooked up on the UK, I’ve never understood why people invest in UK funds, I’ve no idea why they look at the FTSE as a benchmark, it’s beyond my comprehension basically.

And it comes to the same with this, saying it’s the biggest fund in the UK, the UK is three percent of the world economy, it’s not, it might be important to us, but it’s not actually important. And so, gauge our funds against the things that it invests in, I could put our entire fund in some of our largest companies and not have a disclosable earning.

A holding, obviously, I’m not going to do that, but it puts it in perspective for you. Also, if you went to the US market, which after all, is the source of the majority of our investments at the moment, and since inception. We wouldn’t even get in on the top 10.

Being the largest fund in the UK is not all that great, you know, it’s like, in terms of funding, in terms of fund management success it’s like being the largest installer of bicycles in the Irish Republic or something like that. So, what, is my view of that.

Obviously, there must come a point if it kept growing but, you know, another point to make about it is, an awful lot of the growth that people worry about has come from the performance of the fund. If you compound at 18% per annum, fairly obviously, you double in size every three and a half years, so we’ve doubled, doubled and doubled again during this period.

So, that’s where most of the size has come from, that tells you something else about managing the fund, which is, if most of what we’re talking about in fund size has come from a compounding in value, clearly, one of the problems that size might have is if I was seeing massive inflows and I had to deploy them, I’m not.

Lee Wild: Owning such a huge business is a massive responsibility, especially for someone who manages an economist fund. So do big numbers like that phase you at all, do you feel any different in terms of that scale, and perhaps the personal, the emotional pressure that comes with it, over and above when you did, when you started, has there been any change over the years?

Terry SmithNo, none at all actually, and I’m really not phased by it. I mean I think I’m unusual as a fund manager in so far as I managed two operating businesses before I started this, I was the CEO of Collins Stewart, the investment banking business, and then I was CEO of Tullett Prebon, now TP ICAP, one of the world’s biggest intermediary brokerage.

So, I managed, you know, in the case of Tullett, 3,000 employees in 23 countries, as much as I love them very much and enjoyed it, it managed to cause a problem every hour, approximately. So, the operational aspects of running a business don’t phase me, and I would say, I think I’m a better fund manager because I run businesses, you know, it’s not just moving numbers on a spreadsheet, I actually understand some of the dynamics of running a business.

And I think I’m better at running businesses because I’m a fund manager actually as well. I think the two things actually do fit together, but they’re unusual to find together. No, look, the pressure of the size of it doesn’t have any bearing, you know, on me at all, I don’t feel any different today with the number in billions, being almost the same as it was in millions on day one.

And by the way, every single penny in the fund was mine. When I do feel responsibility is the people who invest in us, you know, I don’t want to sound too sort of twee about it all, but there are a lot of people who invest in the fund, whom I know, I mean literally, the guy who sat next to me in school on the first day in Odessa Road Primary School, when we were five years old is an investor in the fund.

And he writes to me every year and tells me how it’s, you know, improved the security of his retirement and his family, and I’ve got a lot of people like that. My best friend in grammar school is also in the fund. And I think I do actually feel a responsibility, it doesn’t phase me, but I do, you know, it’s one of those, someone once said, and I well stand by, before you’re about to do anything very bad in life, have a think about what your mum would think.

It’s the same with this, if I were thinking of doing of something, what would they think of me and what I’m doing, and how would it affect them. But they’re not the scariest investor that I’ve got, the scariest investor is my Jewish dentist. I mean, imagine going in for a filling after I’ve completely got it wrong. He’s the nicest guy, I’m sure I’d be alright, I’m sure he’d give me an anaesthetic.

Lee Wild: You’d hope so yeah.

Terry SmithHope so.

Lee Wild: I mean you spend a large part of the year in Mauritius, does that affect how you run the fund and how you interact with your staff?

Terry SmithWell yeah, obviously it does, I mean but I’ve been in Mauritius for over six years now, so I mean it’s not just suddenly happened. I’m kind of surprised that people historically have thought that it might be a problem, because if you look at Warren Buffett and Omaha Nebraska, or Sir John Templeton, or Nassau, or The Bahamas, there’s quite a line of people who are very successful investors who quite deliberately place themselves away from the noise.

You know, we are an industry where digital communications should have been the norm before, I’ve always been staggered by people who say that they can only run their fund if they’ve got their fund recorded in London, W1, or SW1, they need, you know sat nav to find their way out possibly.

What is it that goes on in W1 and SW1 that they feel that they need to have, I mean they come out with things like I’ve got to be close to the companies, the companies they’re investing in are Shanghai or Cincinnati, they’re not in W1 or SW1. What they actually like is being in the community of people like themselves, I think.

And I think that’s at best a two-edged sword. I think it can lead to an awful lot of group think, I mean the reality is, even if I wasn’t in Mauritius, which as you say, I am, you know, the majority of the time now, and I operate from Mauritius, if I were sitting back in the UK, the worst place for me to manage money is pretty much the office, because I’ve got lots of colleagues and there’s lots of things to talk about, and there are clients to see, and all those kind of things.

The actual business of managing money is mainly about reading things, and thinking, and then talking to my colleagues, and I’ve got just as much ability to read the same document online as my colleagues are reading at the same moment, look at the same model, and speak to them.

Julian, who’s our head of research and my number two and I first worked together 35 years ago, which is a hell of a long time. And he’s in Connecticut and I’m Mauritius and we speak to each other every working day, at least once, we have for the longest while, and I think we will continue to do that for as long as we’re together, basically. And the physical separation doesn’t affect us.

I also think it comes back to a point in answer to one of your earlier questions about the size of the fund, and me saying it’s a bit of a sort of a middle Englander approach to think about it in terms of, oh well it’s the biggest fund in the UK, you know, and?

It’s the same with this, I think it’s very good to live outside the UK and have a look at the rest of the world, you know. In Mauritius I was in work on Friday, but it was a holiday, why, it’s Chinese New Year, there’s a big Sino Mauritian population contingent.

Now, that will have passed most people living in England by, as an event, as will, you know, any number of other festivals, you know, like Diwali later in the year. It’s, you know, there’s a different perspective I think that you get living in a country which is, you know, sort of halfway between Africa and Asia, and it’s good to get that perspective.

  • 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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