Multi-managerDec 17 2014

Managers sound warning over Smith’s flagship fund

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Outspoken fund manager Terry Smith’s flagship fund has been criticised by a team of multi-managers, who argue its key theme is “long in the tooth”.

The £2.9bn Fundsmith Equity fund is a concentrated portfolio of some of the largest multinational companies in the world, heavily skewed towards consumer sectors.

The fund has performed strongly since launch in 2010, but multi-managers from Hawksmoor Investment Management said they were nervous about the valuations of its holdings.

The managers, Richard Scott, Daniel Lockyer and Ben Conway, said they had begun to trim the holding in their Hawksmoor Cautious Model Portfolio in October, adding instead to the more defensive Henderson UK Absolute Return fund.

“The growing belief that the world economy will continue to experience a combination of low but positive growth with low inflation has been good for bonds, but great for the share prices of high-quality multinational firms,” Mr Conway said.

Since launch, the Fundsmith fund has delivered a return of 98.6 per cent compared with the MSCI World index’s return of 58.5 per cent, according to the fund’s latest fact sheet.

However, the earnings growth in the underlying shares has not matched the share price rises.

Mr Conway described the stocks held by Mr Smith as “forever companies” – those which are likely to be around for many more decades, have strong cash flow, high margins and high barriers to entry.

He said these businesses were now trading on significant valuation premiums to the stockmarket, making the Hawksmoor managers “nervous”.

Exceptional performance from the Fundsmith fund through the sell-off and recovery in October and November has given the managers further cause for concern on the sustainability of the theme.

Mr Conway said: “Fundsmith is doing tremendously well, but we are starting to be a little bit nervous about this theme because it is long in the tooth.”

He said the charts of any fund associated with the “forever companies” theme showed they had all performed “extremely well”, especially in recent months.

The theme first began to significantly outperform in 2011 through the eurozone crisis.

This was because investors tended to flock to such companies in times of uncertainty with the view they provided stability and often a rising dividend.

The Fundsmith fund continued to outperform rising markets through 2012 and 2013 and had significantly beaten global equity indices in 2014 as volatility returned to the markets.

However, the managers are not yet ready to abandon the theme altogether.

Fundsmith declined to comment.