Until last Thursday, Terry Smith, manager of the £16.7 billion Fundsmith Equity investment fund, was in total lockdown.
He was not even allowed to go out to shop for food or visit a pharmacy. Confined to barracks with a punch bag, boxing gloves, skipping rope, desktop computer and a library of books for company.
This is because Smith, 67 next month, directs his successful investment business Fundsmith from Mauritius, an island located in the middle of the Indian Ocean and more renowned for tourists kite-surfing, fishing and swimming with wild dolphins than its reputation for investment acumen.
Fighting talk: Terry Smith is keeping fit while holed up on the paradise island of Mauritius
And Mauritius is currently dealing with an outbreak of coronavirus – brought in by tourists – in a far more draconian way than here in the UK. Until a few days ago, there was a full curfew with police roadblocks everywhere.
‘Yesterday was the turn of those with a surname starting with ‘S’ to go out and shop,’ Smith said in a phone call from his residence two miles from Mauritius’s once welcoming sun-kissed sands.
‘Only one bag allowed, no groups, and permitted out only if wearing a mask and gloves. It’s all strictly controlled. Just access for the time being to food and the pharmacy.’
Yet the controls haven’t inhibited him whatsoever in running his well-honed Fundsmith investment empire that spans London, Connecticut in the United States and the idyllic island he has lived on for the past six years – fuelled by eyebrow-raising annual remuneration in excess of £16.2 million, spectacular success that means he is now dubbed the British Warren Buffett.
It is a business that manages three investment funds – smaller companies vehicle Smithson, Fundsmith Emerging Equities Trust and the flagship (and hugely successful) Fundsmith Equity.
Between them, they have assets under management of £18 billion. Indeed, among the fund management fraternity, Fundsmith is currently in a minority in reaching out to as many investors as possible and comforting them while stock markets reel from the financial consequences of coronavirus (asset managers don’t do investor hand-holding very well).
In a letter written by Smith and sent last week to Fundsmith Equity investors, wealth managers and posted on the company’s website, he sought to reassure them that it was very much business as usual – and that the strategy of ‘only investing in good businesses’ would see the fund through ‘these trying times’.
My number one priority is to reassure investors that everything is operating normally.
‘My number one priority is to reassure investors that everything is operating normally,’ he explained further during our call.
‘So, if they want to make contact by email or telephone, they know we are here for them.
‘Similarly, if they need information we can provide it – and if they want to buy or sell, they can do so. That’s all key and critically important, in some ways more so than the fund’s performance.’
Like all investment funds, Fundsmith Equity has been challenged by stock markets of the past month. But its performance has held up remarkably well.
Since the start of the year, the global fund is down 7.9 per cent (to the end of March), far less than equivalent falls in the MSCI World Index (a barometer of stock market performance across the globe) and the FTSE100 Index of 15.7 per cent and 23.8 per cent respectively. T
o put these numbers into some form of longer-term context, the fund has generated for investors in from the start annual returns of 16.7 per cent.
Put another way, an investment of £10,000 at the fund’s launch in November 2010 would now be worth just short of £43,000.
Smith’s modus operandi is to invest the fund’s money in no more than 30 companies, selected from around the world. All meticulously and forensically researched before they are embraced within the fund.
The businesses are all ‘high quality’, have strong cash flows, little borrowings, are usually leaders in their field, and are robust enough to withstand technological innovation.
The top ten holdings include a host of familiar names – Microsoft, PepsiCo, PayPal and Facebook.
Smith prefers to hold companies for the long term although in last week’s newsletter to investors, he did confirm he had used the current market maelstrom to take stakes in two new companies ‘hit hard’ by ‘China exposure and a classic glitch’.
This takes his holdings up to 30, the maximum permitted.
No amount of arm twisting, or Brummie charm, would persuade him to reveal the identity of these two new holdings – ‘I’m not giving you any clue, I’ll let you and our investors know when we have finished building our position,’ he quipped, before letting out a raucous laugh (one of many during the interview).
But he did admit he had his eye on another company that he would ‘really’ like to hold. ‘It’s currently in the firing line from an economic perspective,’ he said, ‘but I’m certain it’s absolutely a good business and I want to buy it if it has another lurch down in price.’
he virus has hit economic and financial systems still on medication from 2008, whose immune systems remain weakened. Economies and markets didn’t have any protection when the virus came their way. So I fear the effects will be profound.
If he did this, he would be forced to sell one of his long-term holdings, thereby keeping within the maximum 30 stock limit.
He would be happy to do this, he said, swapping a quality lowly valued company for one he holds that is higher valued. Indeed, he said he might swap out of a couple.
‘Some things I hold are doing well in this environment. There is no certainty I’ll make any changes, but maybe on a relative value basis it could be time to rotate out of these and into good businesses currently not valued as highly by the market,’ he said.
Although he thinks no one – however big an investment expert they proclaim to be – knows where stock markets are going to go from here, his view when pressed is that they have further to fall.
His belief is that stock markets have been too dependent for too long on government deficits and extremely low interest rates.
He explained: ‘Coronavirus has hit those with underlying health issues the hardest. Looking across to financial issues, it’s the same.
‘The virus has hit economic and financial systems still on medication from 2008, whose immune systems remain weakened. Economies and markets didn’t have any protection when the virus came their way. So I fear the effects will be profound.’
He added: ‘This event did not begin as a financial crisis – like 2008 did. It’s a real-world crisis and no amount of helicopter money or fiscal stimulus – $2trillion in the United States, £350billion in the UK – is going to solve it.
‘Indeed, when governments have come up with yet more stimulus packages, markets have typically responded by falling further.
‘I’m just not sure we’ve reached the bottom for equities. The good news is we don’t manage money based on my, or anyone else’s, guesses about this.’
His view is that until a vaccine is found, markets will slip and slide. ‘It could happen tomorrow,’ he said, ‘and everything would almost certainly change direction. Anything that suggests a solution is in sight will probably change the direction of markets.
‘Indeed, one of the possible solutions lies with tobacco companies – and plant-based vaccines. Wouldn’t it be a rich irony if they came up with a vaccine?’
For the record, tobacco giant Philip Morris, one of the companies leading the charge, is a top ten holding. Yet, he believes equity prices will go lower. ‘Fundsmith Equity is pretty defensive, so I’m not worried,’ he added.
Only two of the fund’s 30 stocks – airlines reservation business Amadeus and Inter-Continental Hotels – have so far borne the full brunt of the market’s retreat.
He is confident they will survive although he says in his note to investors that if ‘our equity in both is vaporised we will lose about five per cent of our current portfolio.
‘Whilst I would not be pleased with that, if that’s the worst thing that happens I would suggest we can live with it.’
WHAT ABOUT HIS OTHER TRUSTS?
Although Terry Smith does not manage Fundsmith’s two other investment funds – Smithson and Emerging Equities – he oversees them like a hawk, speaking to the respective managers (Simon Barnard and Michael O’Brien) daily.
Both funds, set up as stock market-listed investment trusts, have withstood the current market imbroglio remarkably well, especially Smithson. The fund is set up in similar fashion to Fundsmith Equity, investing in between 25 and 40 companies selected from across the globe.
But they are smaller businesses than those held in Smith’s fund. Last month, shares in Smithson increased by 1.4 per cent, meaning investors with the fund since launch in October 2018 are sitting on gains of 16 per cent. ‘It’s done well,’ said Smith.
‘There’s only one really hard-hit stock in the 30-strong portfolio and that has been US air bookings company Sabre that has suffered from the drastic curtailment in air travel. It’s the equivalent of Fundsmith Equity’s holding in Spanishbased Amadeus. I am confident both companies will survive.’
Although shares in Fundsmith Emerging Equities – an emerging markets trust – fell nearly nine per cent in March, they performed better than their benchmark.
But the fund has had a torrid time since launch in June 2014 with its share price falling six per cent. The only blackspot in Fundsmith’s armoury
What Smith will not be doing is changing the way he goes about investing. He has no truck with ‘value’ investors – fund managers who buy lowly rated companies in the hope that at some stage their true value will come through, maybe as a result of management or structural change.
‘I have never been a believer in the philosophy that so-called valued investments would perform well or protect your investment in an economic and market downturn,’ he said, ‘and so it has proven so far.’
Mark Barnett’s travails at investment house Invesco – like his mentor Neil Woodford, a value investor – seem to prove Smith’s point.
Unlike Fundsmith Equity, Barnett’s Income and High Income funds have been in near meltdown.
Smith is currently keeping his body in butcher’s dog shape by working out indoors daily – pummelling a punch bag into tatters – although he can’t wait for the day he can again run down to the beach and plunge headfirst into the Indian Ocean.
He is also reading voraciously, tearing through Sebastian Mallaby’s hedge fund history More Money Than God. A final bit of advice for Wealth readers? ‘Don’t make the mistake of selling into a falling market. Try and push emotion to one side.’
Easy said, hard to do, but sound advice from someone in investment management who knows what he is doing – and unlike many has the track record to prove it.
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