Charlie Parker, managing director of discretionary fund management firm Albemarle Street Partners has been “slowly” moving clients away from the giant Fundsmith Equity fund as he fears a change is coming to the market.
The Fundsmith Equity fund has assets of £18.1bn, making it the largest public fund in the UK market.
It has returned 148 per cent over the past five years, compared with 67 per cent for the average fund in the IA Global sector in the same time period.
The performance has deteriorated over recent months however, and the fund is down 5 per cent over the past three months, to make it one of the worst performers of more than 200 funds in its sector.
Morningstar data on inflows into the fund this year showed investor wariness was on the rise. The fund went from net inflows of £263m in June to £63m in August.
Mr Parker said: “A lot of discretionary fund management companies are only offering an off the peg solution for advisers, with a set list of funds, and Fundsmith Equity is one of those.
"It has had very big inflows in recent years, and there is no doubt the fund has performed very well, so no one was going to get fired for buying Fundsmith. But we have started to move the portfolios we look after away from it.”
The deterioration in the performance of the fund more recently has coincided with a shift in market sentiment, away from the growth style of investing, and towards the value style, the latter being a style Mr Smith does not deploy.
According to the most recent factsheet for the fund, Mr Smith responded to the recent bout of market volatility by selling the most economically sensitive stock in his portfolio.
He wrote: “We completed the sale of our stake in 3M during the period. 3M was probably the most cyclical stock we held.“
Growth stocks tend to be less economically sensitive and include food and drink companies and consumer staples.
The factsheet showed 31 per cent of Fundsmith’s assets were in these types of companies at the end of September 2019.
Mr Parker said: “The idea is that a company knows how many chocolate bars it will sell each year into the future, and how much profit that generates.
"The market then prices the value of that profit against bond yields, and when the profit is higher than the long-term bond yield, buys the company that make the chocolate bar.”
Long-term bond yields tend to be low when the outlook for inflation and economic growth is uncertain, or, as has happened since the financial crisis, central banks have been buying bonds to drive the yields lower.
Mr Parker said the recent weak performance of growth stocks and the funds that invest in them was a result of the fact that long-term bond yields have not been falling as a result of central bank policy, while the consumer goods companies have not grown the number of products they sell, meaning the share prices look expensive.
Ben Yearsley, director of consultancy firm Fairview Investing, cautioned: “Investors shouldn't rely on just one style of fund as that growth style is vulnerable if we have a value rebound.”
david.thorpe@ft.com
