For those in the fund management business, Terry Smith needs little introduction.
Astute readers may have noticed that his gargantuan Fundsmith Equity offering – £23.3 bn in size – is back in the news again after underperforming the MSCI World index for three years in a row.
In 2023 Fundsmith Equity returned 12.4 per cent, while the benchmark returned 16.8 per cent.
It is now lagging the index over both three-year and five-year periods, two crucial metrics when attracting new investors.
And Morningstar data shows there’s been net outflows in 23 of the past 24 months as interest rate rises across the globe have gnawed a chunk out of his growth investing style. Though bear in mind that owing to the sheer size of the fund, this equates to an AUM decline of just 9 per cent since January 2022.
Before this, Fundsmith Equity had only really existed in an era of historically loose monetary policy. This, coupled with Smith’s refusal to jump on the ‘Magnificent Seven’ bandwagon that has effectively dragged the US stock by the scruff of its neck through 2023, has seen it encounter choppier waters.
With this in mind we checked our proprietary database to see whether allocators have taken flight as a result.
The good news is they’ve largely stayed put.
Fundsmith Equity was held by eight allocators in 2021 and is held by six now, which reflects only a minor dropoff since the leaner years took hold.
One of the two allocators took no chances, cashing out at the very beginning of the rate hike campaign.
Active global equity managers like Smith face a dilemma from the outset: the question of how much to incorporate market mega-caps into portfolios without too much resembling a passive tracker at active costs.
Most must either underweight the tech sector in a bid to differentiate themselves, or else feel obligated to jump on a bandwagon that they don’t really believe in.
As Smith himself pointed out in his recent letter to investors: "The performance of the Nasdaq Composite Index, which was up 43 per cent, was dominated by a few companies, the so-called Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — which accounted for 68 per cent of that index’s gains.
"Nvidia, the designer of chips for use in AI applications, alone accounted for 11 per cent of the 43 per cent gain.
"We do not own all the Magnificent Seven and would probably not be willing to take the risk of doing so, even if all of them fitted our investment criteria."
One could conclude, then, that Smith has returned a stellar 12 per cent for his clients without having to take on much of the concentration risk that the US market is beginning to gather.
That all said, the MSCI World index doesn’t charge a 0.94 per cent OCF.
