Review on Fundsmith Equity Fund

Firstly, this is not a recommendation to purchase this fund, neither it is a sponsored article. You are always welcome to speak to me if you wish to purchase this fund, I won’t reject you. I attended Tokio Marine’s product new launch event on 17/1/2020. As I am very new to the industry, AXA and Tokio Marine’s product new launch events are kind of eye opening to me. AXA seems to me that they are more extravagant in terms of providing buffet food, incentive trips and advisor’s benefits. Whereas Tokio Marine is more down to earth and prudent. It is company’s culture. On a personal note, I feel that their publicity videos engaging those mediacorp artistes are kind of lame and funny. Coming back to the review of Fundsmith Equity Fund, this is one of the best funds for value investors.

Who is Fundsmith?

It is an independently own fund house by key staff. The key staff are Terry Smith (Chief Investment Officer) and Julian Robins (Director of Research) have worked together for more than 20 years and been through many market cycles. The fund was founded in 2010, about $34 billion in AUM, is the largest retail fund in UK.

Investment Strategy

1. Only invest in good companies
Good companies are able to deliver high returns on operating capital employed in cash. Growth driven from reinvestment of their cash flows at high rates of return. The companies do not have significant leverage to generate returns. They are resilient to change, particular to technological innovation. They operate in sectors with intangibles advantages such as brands, distribution, installed base and franchisors. They make money from a large number of everyday, small-ticket, repeat, predictable transactions. They have moats to protect returns from competition.

2. Don’t overpay
Compare free cash flow yields now and what they will be in four to five years time and select the best combination of current value and future growth.

They compare the portfolio stocks with:
– each other
– investible universe
– the market
– bonds

3. Do Nothing
The fund’s sell discipline
The ideal holding period is forever. Voluntary exit a position if:
– Investment case fundamentally weakens
– Valuation becomes too expensive
– Superior investment opportunity identified
Some portfolio turnover will be involuntary, for example in the event of takeover. They will never sell in response to general market sell-off if company fundamentals remain strong.
The fund will not time the market, trade frequently, short anything, panic when market falls or fall for the latest investment fad, invest in some sectors at all.

Stock selection and Portfolio construction

Notice that I did not discuss about fund’s past performance? Past performance will not be a guarantee for future performance. The fund has shortlisted an investible universe of 73 stocks, updated models on entire investible universe, create a portfolio of 20-30 stocks which went through a value-based selection process. The ideal holding period is indefinite.

Conclusion

This fund is fundamental driven and has its own investment mandate. The only risk is the fund is as good as Terry Smith is still around in this business. There is the key man risk. Valuation of shares are generally high and the ability to uncover undervalued companies are challenging.

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