Does any fund manager deserve to earn at least £16.2m a year?
It is a question I asked myself a few days ago when I trawled through the latest accounts for Fundsmith, a company set up in 2010 by Terry Smith to run the Fundsmith Equity Fund and a couple of other investment vehicles – investment trusts Smithson and Fundsmith Emerging Equities.
In the year to the end of March 2019, Fundsmith generated pre-tax profits of £26.4m.Now aged 66 and with a lifetime of working in the City behind him, Mr Smith has turned Fundsmith into a great success story.
In the year to the end of March 2019, Fundsmith generated pre-tax profits of £26.4m.
Some £16,169,324 of these profits went the way of Mr Smith, with the rest shared between the seven other members of the partnership that is Fundsmith. Big, bloated numbers that no doubt will offend some readers and feed accusations of yet more fat cattery.
But let us take a step back and look at what Mr Smith has achieved over the past decade.
Mr Smith set up Fundsmith from scratch. He had no idea whether it would succeed or not, although he had a pretty good idea that he could bring his intimate knowledge of the City to good use in the investment world.
He put up all the initial capital to get Fundsmith off the ground and at the start he was the only investor in the Fundsmith Equity Fund.
Indeed, for the first couple of years, he was not paid a penny for his efforts.
Yet he was not deterred. He ploughed on, fuelled in big part by self-belief in an investment process that he had developed way before he decided to set up Fundsmith.
A process that, in his own words, is as follows: “Buy good companies, try not to overpay for them, then sit on your hands and do nothing but hold them.”
It all sounds rather simplistic, but it is not. It involves meticulous and painstaking research and, like a film director, a lot of his analysis and ideas end up on the cutting room floor.
Today, the Fundsmith Equity Fund is one of the country’s most successful investment funds.
Someone who invested £10,000 at the fund’s inception would have waved in 2020 sitting on an investment worth more than £46,000.
Of course, there have been periods of underperformance and losses along the way.
In December 2018, it recorded monthly losses of 6.9 per cent, but the fund’s overall trajectory has been relentlessly upwards.
The fund is invested in just 28 companies, most of them familiar names – the likes of Microsoft, Estee Lauder, PayPal, Philip Morris, Facebook and Intuit. Some two-thirds of the portfolio is invested in companies listed in the US and just 17 per cent in the UK.
I caught up with Mr Smith in the wake of Fundsmith’s accounts being published.
When I asked him to respond to accusations of fat cattery, he did not go into defence mode as I expected. Far from it. He was almost zen-like.
He said: “My view is that if people – my investors – are happy with the returns I have made for them, then they should just focus on that and remain happy.
“If they’re not happy with what they are getting from me, then they shouldn’t be invested in our funds.”
Certainly, some of the wealth specialists I spoke to after speaking to Mr Smith seemed to have no problem with his remuneration.
Dzmitry Lipski, investment analyst at Interactive Investor, said: “He’s worth every penny. He’s a great investor. Yes, it’s a large amount – £16.2m – but relative to what?
“He has delivered, and remember you have professional footballers kicking a ball around a pitch earning millions of pounds a year.”
Brian Dennehy, managing director of FundExpert, agreed: “If Terry Smith happens to make a stack of money because he has made me or my clients a stack of money, then I am happy.”
He added: “But when Neil Woodford makes a war chest of money from failure, that leaves a bad taste in my mouth.”
Mr Dennehy was referring to the fact that on the same day as Fundsmith’s accounts were published, it was revealed that Mr Woodford and his business partner Craig Newman had paid themselves £13.8m in dividends also in the year to the end of March 2019.
Although Mr Woodford’s flagship Equity Income fund had, at that stage, yet to hit crisis point, concerns were already being raised in regulatory circles about the illiquid nature of many Equity Income’s holdings.
In writing up my interview for The Mail on Sunday, I expected a torrent of online abuse. But it came in dribs and drabs rather than in floods.
Indeed, most were supportive of Mr Smith.
One reader said: “He is a brilliant money manager and only gets this amount of money because he has had 10 years of continued success and investors have flocked to his fund.
“I’m one of them. I sincerely hope he earns more next year because he will have been successful again and so will my part in his investment.”
Absolutely, I think we should herald the investment likes of Mr Smith.
He is one of the few investment managers out there who waves a flag for the investor benefits of active fund management.
Jeff Prestridge is personal finance editor of the Mail on Sunday
