Fund buyers back Terry Smith despite sentiment shift

Fund buyers back Terry Smith despite sentiment shift

A shift in market sentiment away from the growth style of investment favoured by Terry Smith was no reason to abandon the manager, according to a range of fund buyers.

Mr Smith’s Fundsmith Equity fund has been among the very best sellers in the Investment Association (IA) universe over the past three years, and at £16.3bn vehicle will soon become the largest fund open to UK advisers, displacing M&G Optimal Income from top spot when the latter is split into two in the coming weeks.

The fund is also the top performer from 160 funds in the IA Global sector over the past three and five years.

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Market conditions since the financial crisis have strongly favoured the growth style of investing used by Mr Smith which typically works best when interest rates are low and growth is relatively scarce.

Mr Smith typically invests in well established companies with predictable earnings growth. This style does well when bond yields are low because the predictable income stream is similar to that of a bond, but should be more attractive than a bond.

As interest rates rise and bond yields are pushed up, this style of investing typically falls from favour with investors and is replaced by value investing, which focuses more on the valuation of individual shares, rather than the growth potential.

This should mean funds such as that run by Mr Smith fall from favour.

Tom Sparke, investment director at GDIM in Cambridge, said he tended not to buy funds with a strong focus on one style, such as Mr Smith’s fund, because it means a period of underperformance was likely when the style falls from favour.

Rising interest rates and bond yields in the US appear to be the market conditions when a fund such as Fundsmith would begin to underperform.

But while professional investor sentiment towards Fundsmith has been cooling, retail investors have continued to buy. The Interactive Investor platform reported Fundsmith was the most bought on its platform in October.

John Goodall, head of private client research at WH Ireland said he continued to have Fundsmith on his recommended list.

He said Mr Smith had a track record of performing in different market conditions and that the large businesses with predictable earnings of the companies held in the Fundsmith portfolio were quite defensive in nature and so could do well in a period of economic turbulence.

Mr Smith also recently launched the Smithson investment trust, which deploys the same investment style, but with smaller companies.

Peter Walls, who runs the Unicorn Mastertrust, which invests in investment trusts, confirmed he recently invested in the Smithson launch. He said the management team was "very impressive".

Over the past three months, when the market turbulence was at its most acute, Fundsmith lost 3.3 per cent, compared with 6 per cent for the average fund in the sector. This was enough to leave the fund among the best performing 25 per cent of mandates in the sector during that time period.