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.
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.