Smith drops just six stocks in three years

Fundsmith’s Terry Smith has said just six stocks have been removed from his £1.5bn Equity fund in the three years since it launched.

Mr Smith launched his fund because he thought the fund industry was “broken” and he criticised the sector on several points, including charges, complexity and the amount fund managers traded.

“The fund industry is still broken,” he said. “Investors still suffer from punitive fee structures, over complexity, overtrading, fund proliferation, closet indexing and over-diversification.”

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The manager said of the 22 companies that made up the portfolio at launch, 16 still remain.

The most recent sale was drug, biotechnology and food industry equipment supplier Waters Corporation last month.

“The company has struggled to deliver revenue growth and we took the view that this was unlikely to improve given that it sells into emerging markets, such as India with its generic pharmaceutical industry, where the affordability of its equipment has been reduced in local currency terms by the weak emerging markets currencies and, especially, the Indian rupee,” Mr Smith said.

“It was also the only stock in our portfolio that did not pay a dividend.”

In September, Mr Smith sold out of Swiss lift manufacturer Schindler Group after it became “too expensive” to hold.

The manager said there had been a “growing fashion” for investing in businesses that sell and supply goods and services that are characterised by small ticket, repeat, predictable everyday events which he chooses for his portfolio.

While he said the appreciation in share prices had helped performance, he cautioned that it could be an issue because the gains were not being driven by company fundamentals.

Mr Smith said two other stocks that had exited the portfolio were subject to takeover offers, which meant the fund could “realise its investment at a premium”.

“Portfolio turnover has thus been maintained at very low levels,” he added.

Since launch to November 2, the fund has delivered a return of 58.6 per cent, which has far outstripped the 39.1 per cent return from its benchmark MSCI World index and the 28.7 per cent average from its peer group within the IMA Global sector, according to FE Analytics.

“In the 36 months since launch, the market has fallen in 10 of those months,” Mr Smith said.

“As the analogy goes, the market rises like an escalator and falls like a lift. It is in these sharp drawdown periods that the fund has delivered its outperformance – unsurprising given the defensive qualities of the portfolio companies and reassuring given the ongoing risks to the economic outlook.”

Elsewhere, Mr Smith said the company had doubled the size of its research team in the three years and that the investible universe of companies researched had grown to 64 in that time.

“At Fundsmith, we do all our stock research in-house at our own expense and pay commission only for execution at 4 basis points (0.04 per cent), thus minimising costs to the fund and helping performance,” he added.