RankiaPro - Fundsmith Equity Fund Analysis

Fundsmith Equity is a concentrated global equity fund . Launched in 2011, it has achieved recognition from its investors (good fund size) and globally recognized financial information platforms. All this thanks to its unique approach and the manager's philosophy.

In this article we analyze this investment strategy.

Fundsmith Equity Fund Features

The main characteristics of this investment fund are:

• Investment Philosophy : Focuses on buying and holding high-quality companies that continually increase in value. In this way, the goal is to buy good companies, not pay too much and maintain long-term investments.
• Investment Strategy : Avoid short-term trading and focus on carefully choosing your concentrated stock portfolio. An important point of the Fundsmith Equity strategy is that, in addition to being concentrated, it does not use derivatives or hedge. This is closely linked to the manager's vision. Fundsmith states that it focuses on delivering performance at a reasonable cost and was created to differentiate itself from other management companies by doing things differently. All in line with Sir John Templeton's axiom: " If you want to perform better than the crowd, you must do things differently from the crowd ."
• Benchmark: This strategy tracks the MSCI World Index.
• Investment Team: Terry Smith is a renowned English fund manager and businessman. He has extensive and varied experience in the financial world, in addition to having received several industry awards and recognitions. He is the author of the 1992 book " Accounting for Growth " (bestseller). In it he criticized the accounting techniques used by some listed companies that always reported growth.
• Assets : As of May 31, 2024, the strategy had almost €8.8 billion in assets under management.
• Manager: Fundsmith is a London-based wealth management company, founded in 2010 by Terry Smith. It has only two strategies that follow the same investment philosophy and process, but with different sets of opportunities: global developed large caps and global developed mid caps. In addition to its well-defined philosophy, Fundsmith is also distinguished by its statement of not paying much attention to benchmark indices/parameters or tracking error.

Evolution of the Fundsmith Equity fund

Source: Fundsmith Equity Fund Fact Sheet as of 05/31/2024. Note: 1 T class € accumulation shares, net of fees priced at midday UK time, Equities: MSCI World Index (€ Net) 3 EU Bonds: Euro Govt 10+ yr Bond Index, 4 Cash: € Interest Rate.

Given its history, the Fundsmith Equity fund allows us to observe its long-term results, as the manager suggests. Looking at the annualized results to date and since launch, you can see that the fund has been able to outperform its benchmark index with a small group of companies in the portfolio .

Over other shorter time horizons, or in specific years, the fund may suffer a little compared to the MSCI World Index, but this is something the investment team points out. Since this product is actively managed and with a long-term view of quality companies, it may not maintain any of the components of the benchmark index or have significant (even total) differences from it.

Therefore, short-term profitability may not be favorable in periods when the market prefers lower quality companies, so to speak. The Fundsmith Equity team believes that limiting the opportunity set and maintaining a long-term investment horizon is the right path .

As for the risk metrics, the manager does not show them in the fund's monthly sheet. Using an external data source, we have examined the 5-year data against the benchmark.

The first thing that jumps out is the alpha, which corresponds to what was previously observed in the performance results. In recent years, the investment team has failed to outperform the benchmark over two important time horizons for an institutional assessment, 3 and 5 years . In relation to the market Beta , this is less than 1 in both the 3 and 5 years, and there is consistency here. The team consistently takes less risk than the market despite having a more concentrated and often aggressive selection in sectors or regions.

However, considering other metrics such as the Information Ratio, it can be seen that this has not necessarily brought benefits.

Conclusions

Advantages :

• Manager with long-term commitment and low risk of PM change.
• Low portfolio turnover, which reduces transaction costs and allows you to focus on long-term growth.

Disadvantages :

• It is a concentrated investment fund with high conviction, which is not necessarily negative, but the investor must understand the manager's philosophy well to commit to it for the long term.

 

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