Interactive Investor

Three big fund alternatives to Fundsmith

19th July 2022 10:54

Sam Benstead from interactive investor

Investors looking to freshen up their global equity allocation could consider these funds. 

Terry Smith's flagship strategy Fundsmith Equity is facing pressures on two fronts. Not only is his investment style out of favour as interest rates rise, but he has been hammered by stock-specific issues at Meta (NASDAQ:META) (formerly Facebook) and PayPal (NASDAQ:PYPL).

While still recommended on interactive investor’s Super 60 list, Fundsmith Equity's performance has trailed peers recently. The fund is down 9% over the past year compared with a 7% drop for the typical global stocks manager.

However, over five and 10 years it has comfortably outperformed, returning 69% and 348%, versus 45% and 168% for the average manager.

But strong performance does not mean that investors should not be on the lookout for alternatives.

These are three funds investing globally in high-quality shares that caught our analysts’ eye, but are not members of the Super 60 list. In common with Fundsmith Equity, the trio of potential alternatives adopt a concentrated approach in holding a small number of shares. Fundsmith Equity currently has 28 holdings.

The trio are no minnows – two have assets of more than a billion, and the other is just shy. However, the funds may not be on the radar of some DIY investors, as they are not household names.

GuardCap Global Equity

The top performing of the Fundsmith substitutes, GuardCap Global Equity has returned 73% over five years, while also only losing around 4% over the past 12 months. It was launched in 2014.

This £1.6 billion fund has beaten Fundsmith Equity when markets were rising and falling over those time periods, showing that it has not simply performed better by taking more risk.

Four managers on the fund means there is a stable team with no key manager risk if someone were to exit. The fund has Booking Holdings, CME Group and United Health Group among its 10 top positions. None are held by Terry Smith. Overall, there are 26 holdings.  

GuardCap Global Equity is ranked in the first quartile of global funds over five and three years, and the second quartile over six months and one year.

Tracy Zhao, senior fund analyst at interactive investor, said: “The core of its approach is to look beyond the normal investment horizon as the market frequently undervalues the longer-term future earnings and cash flow of companies that are growing sustainably.

“The investment strategy emphasises long-term thinking, long-term forecasting and long holding periods (usually five to 10 years) to exploit this.”

Stonehage Fleming Global Best Ideas

Beating Fundsmith just over five years, and proving more defensive as interest rates have risen, Stonehage Fleming Global Best Ideas is arguably a true competitor to Terry Smith.

This £2.4 billion fund also focuses on “sustainable growth”, looking for characteristics such as strong management, free cash flow, and the ability to grow dividends every year.

Like Fundsmith, it buys predominantly large-cap businesses, with a buy and hold approach, but also has a sell discipline when valuations go up too much. Top stocks include Alphabet, Microsoft, Visa, Adobe, LVMH, and Essilorluxottica. It owns 27 stocks.

Recent activity from manager Gerrit Smit, who has been in charge of the fund since launch in 2013, includes buying L’Oreal. The cosmetics company had previously been too expensive for inclusion, but shares have fallen 19% this year.

Smit said: “The investment team considers four pillars for each and every investment. These include: strong sustainable organic growth, high-quality management, high profitability and efficiency, and strong free cash flow generation.

“L’Oreal fulfils all these criteria, with our projection of 5-6% organic growth over the next five years, an outstanding management team that is highly diverse and long term in its strategic thinking, consistent spending in R&D, and a 27-year track record in paying stable or growing dividends.”

Zhao says: “This process avoids short-term investments and high turnover levels. Instead, it identifies large-cap businesses with a significant opportunity for long-term future growth.”

Trojan Global Income

The best performer of the Fundsmith rivals over six months due to its defensive characteristics, Trojan Global Income has actually made money this year, returning 1%, as investors turned to consumer staple stocks, which have reliable dividends and profits. It is the smallest alternative to Terry Smith, with £800 million invested.

Over five years it lags, with a 49% return compared with its top rivals at around 70%, but it still beats the average global stocks fund. It is one of the top global “equity income” funds over five years, according to data firm FE Analytics.

Its style of investing could be in favour for a while given the outlook for inflation and how sticky its firms' customers are. Top stocks include: Unilever, British American Tobacco, Pepsico and ADP. It has 33 holdings.

The fund is managed by James Harries, who joined Troy in 2016 to launch the fund. He had previously worked at Newton Investment Management, where he established and managed the Newton Global Income fund.

Zhao said: “The performance difference between Trojan and Fundsmith can largely be attributed to sector allocation, where Trojan has invested in defensive stocks. This is in line with its investment philosophy of capital preservation, meaning it will perform better when markets are under pressure. On the flip side, this approach would be a drag compared to Fundsmith in a rising market.

“Both Trojan and Fundsmith are very highly concentrated, and invest in quality large-cap companies.”

Fund Total return (%): 1m 3m 6m 1yr 3yr 5yr 10yr
GuardCap Global Equity 3.14 -4.76 -5.18 -3.94 23.48 72.97  
Stonehage Fleming Global Best Ideas Equity 4.13 -3.63 -8.16 -9.81 22.97 66.24  
Fundsmith Equity 4.7 -4.84 -9.22 -11.56 17.93 64.58 346.1
Trojan Global Income 2.81 -2.56 1.04 5.75 20.17 47.4  
Sector average 1.14 -6.11 -9.25 -7.38 19.73 42.57 171.19

Source: FE FundInfo, data to 17 July 2022. Past performance is not a guide to future performance.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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