Business Insider - Investing legend Terry Smith's $30 billion equity fund returned 440% to investors over a decade

lunes, 28 de diciembre de 2020 By Business Insider

Here's his 4-part strategy for success and 10 pieces of investing wisdom to take into 2021

A decade since launching a new equity fund, investing legend Terry Smith has amassed £23 billion assets under management and returned 440% to investors over that timeframe.
Smith provides Insider with exclusive insight into his 4-step strategy for success.
"Study the subject before you invest," said Smith in an email interview. "You probably need to study for several years and see at least one full business and market cycle before you can be competent to invest."
Insider also breaks down the top pieces of investing wisdom from Smith's book, Investing for Growth, which collates his essays and letters to investors over the 10 year period.

In 2010, Terry Smith launched a new equity fund with only £39 million ($52 million) assets under management, £25 million ($33 million) of which was from his own personal account, as he started a new investment firm, Fundsmith.

By the end of the decade, the Fundsmith Equity fund had amassed £23 billion ($30 billion) assets under management and returned 440% to investors over that timeframe.

To put that into perspective, if an investor placed £10,000 into the Fundsmith Equity fund at launch, they would have just short of £54,000 this year.

The fund's performance over the last decade means Smith is viewed as an investing legend. He is often compared to legendary US investor Warren Buffett, and sometimes even referred to as Britain's answer to the Berkshire Hathaway boss himself.

"How does it feel to be a legend? Pleasing, obviously, but I never take anything for granted," said Smith in an email interview with Insider.

But Smith's trajectory to investment legend started long before the launch of Fundsmith. He started his career at Barclays in 1974 then became a top-rated banking analyst in London at UBS Phillips & Drew before releasing his best-selling book, Accounting for Growth, which covered the accounting techniques firms use to hide, or enhance, their performance.

The book was informed by Smith's time as analyst, but resulted in his dismissal from UBS for refusing to withdraw it. The dismissal didn't impact Smith's career too much, he later became chief executive of Tullet Prebon, one of the world's biggest money brokers.

But it has been Fundsmith that has really catapulted Smith into the limelight. The combination of the fund's impressive performance with Smith's blatant transparency on his investing strategy and his honesty on the markets garnered a huge following.

Smith collated those thoughts from his essays, articles and shareholder letters into a book called Investing for Growth to celebrate Fundsmith's 10-year anniversary.

The book provides investors with deeper insights into Smith's investing strategy, successes, failures over the 10-year period.

In fact, it was reading investors' insights, similar to the book he released in October, is what has shaped and informed Smith's investing strategy and philosophy over the years.

"I have been inspired by many investment practitioners and authors," said Smith, in an interview over email. "I started reading the now legendary Berkshire Hathaway annual chairman's letter in the 1980s. I have read literally hundreds of books and studied the investment process of many investors, ranging across almost every style of investment when I was an analyst and head of research. I knew many of the most famous investors, because I provided research to them. To be a success, I think you need to synthesize a lot of sources."

Throughout the book, Smith reiterates his 3-step core investment strategy that Fundsmith leverages, which is to invest in good companies, don't overpay and do nothing.

But in an email interview with Insider, Smith gives more some insight into the four factors he believes has driven his and the firm's success:

"We developed and refined our investment strategy over decades before we started Fundsmith," Smith said. "We didn't start the business, raise a fund and then think 'how shall we run the fund, and what shall we invest in?' We already knew."
"We launched a strategy which we knew worked in the sense of delivering superior risk adjusted returns, and we knew we could deliver it," Smith said. "We didn't think 'Ah, there's a lot of demand for BRIC, FAANG, ESG (insert current fad) funds, so let's launch one'."
"We work hard," Smith said. "I think success is less about having great ideas and far more about good execution, and we work very hard every day at unglamorous tasks like analysing results, attending conferences, reading trade publications, and updating models."
"And last but by no means least, I have help from some fine colleagues without whom this would not be possible. It's invidious to single out one, but I am going to. Julian Robins, our head of research and I, first worked together 34 years ago and he's the greatest combination of integrity and ability that I have ever encountered."

For young investors looking to get ahead in the world of investing, Smith re-emphasizes working hard.

"Study the subject before you invest," Smith said. "You probably need to study for several years and see at least one full business and market cycle before you can be competent to invest."

Insider breaks down the top 10 pieces of wisdom from Smith's new book to take into 2021 and outlines Smith's book recommendations for Insider readers.

10 pieces of investing wisdom

All the following quotes are from Investing for Growth.

1. If you don't understand a company, don't invest

One of the key components of Smith's investing mantra is to invest in good companies. How can an investor invest in good companies, if they don't understand them? Smith continually emphasizes throughout the book how crucial it is to understand the companies being considered for investment.

"I'm often asked why I won't invest in bank shares given that I was once a top-rated banking analyst in the City. The answer is that having an understanding of banks would make anyone more wary of investing in them. One of my basic tenets is never to invest in a business which requires leverage of borrowing to make adequate returns on investing."

In the book, Smith lays out the 13 ways he thinks about company valuations.