Fundsmith Equity is one of the most popular investment funds in the UK, and it’s not hard to see why. Between its launch in late 2010 and the end of 2021, the fund – which is managed by Terry Smith – delivered a return of about 570%, roughly twice that of the MSCI World index.
I’ve been invested in Fundsmith for a number of years now and I’ve always viewed the fund as a core holding in my portfolio. Currently, it’s one of my largest fund positions. But is Fundsmith still one of the best funds for me (a long-term, growth-oriented investor) to invest in going forward? Let’s take a look. Here’s my view for 2022.
What type of fund is Fundsmith?
Let’s start with a basic review of what Fundsmith Equity is and what it invests in. It is a global equity fund, meaning it invests in companies all over the world and not just those listed in the UK. As a concentrated fund (it holds just 20-30 stocks), it only invests in companies that meet its strict investment criteria.
Specifically, Fundsmith seeks to invest in high-quality companies that:
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Can sustain a high return on operating capital (they are consistently very profitable).
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Have advantages that are difficult to replicate.
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Are financially strong.
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Have a good chance of generating growth.
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Are resilient to change and technological innovation.
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Have attractive valuations.
It then aims to invest for the long term.
Overall, I really like this approach to investing. Since the fund’s inception, this approach has managed to generate strong returns, outperforming its benchmark comfortably while, at the same time, minimising downside during periods of volatility.
Having said that, there are likely to be periods where this style of investing underperforms the market. I’ll discuss this later in the performance and risks section of this review.
Which companies are in Fundsmith?
Looking under the bonnet (its the latest factsheet), we can see that as of 31 December 2021, the top 10 holdings in the fund were:
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Big Tech giant Microsoft
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Pet diagnostics firm Idexx
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Diabetes specialist Novo Nordisk
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Beauty group L’Oréal
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Beauty group Estée Lauder
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Payments firm PayPal
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Big Tech company Meta Platforms (Facebook)
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Accounting software specialist Intuit
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Tobacco giant Philip Morris
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Medical technology company Stryker
My own research tells me that other stocks in the portfolio include Nike, Visa, PepsiCo, Starbucks, Unilever, Diageo, and Amazon.
Is this a good mix of companies? I think it is. There are a couple of companies I’m not the biggest fan of for ethical reasons, such as Philip Morris (cigarettes) and Meta Platforms (referred to as the ‘new cigarettes’). However, in general, I do like Fundsmith’s portfolio holdings. I’m very comfortable owning these kinds of companies in my portfolio in 2022.
Performance
In terms of performance, this has been excellent over the long run. As we can see from the table below, the fund returned more than 20% in four out of the last six years. That’s an impressive achievement.
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Source: Fundsmith
It’s worth noting however that last year, the fund did underperform its benchmark slightly. For 2021, the return was 22.1% versus 22.9% for the MSCI World. This did was largely down to the fact that 2021 was very much a recovery year and Fundsmith’s companies – which tend to be highly resilient – didn’t have much to recover from.
It’s also worth pointing out that on Hargreaves Lansdown there are a number of global equity funds that have delivered superior returns over a five-year timeframe. Baillie Gifford Global Stewardship and Rathbone Global Opportunities are two examples. However, Fundsmith’s returns tend to be more consistent than some of these other top performing funds. For example, some rivals actually generated negative returns last year.
Overall, I’m very happy with the performance here.
Risks in 2022
In terms of the risks as we start 2022, I see a few. One is that Fundsmith tends to avoid highly cyclical areas of the market, such as oil companies and banks. Most of the fund is invested in three main sectors – consumer staples, technology, and healthcare. Looking at the current economic environment, I think there’s a decent chance cyclical stocks could lead the market in 2022. So I have to be prepared for some underperformance from Fundsmith in the short term.
Another risk is the concentrated nature of the fund. Given that it only holds around 20-30 stocks, stock-specific risk is quite high, relative to more diversified funds. To give an example here, PayPal has been around 7-8% of the fund in the recent past. However, this stock has fallen more than 30% over the last six months. This will have impacted fund performance significantly.
Some investors also believe the fund’s size (£29bn at 31 December) is a risk. They worry that this could limit investment opportunities. Personally, I’m not too concerned about this risk, given the fact that companies like Microsoft and Amazon are worth several trillion dollars.
Is Fundsmith worth the fee?
Finally, let’s take a look at fees. Personally, I pay an annual fee of 0.96% to invest in Fundsmith through Hargreaves Lansdown. I also pay Hargreaves Lansdown’s fund charges (0.45% per year).
These fees are relatively high. They’re significantly higher than the fees I’d be paying if I was invested in cheap index tracker funds.
However, I think the excellent long-term performance here justifies the higher fee.
Is Fundsmith a good investment for 2022?
Putting this all together, I’m convinced Fundsmith remains a great choice for my investment portfolio in 2022. The long-term track record is excellent and I’m very comfortable with the fund’s holdings.
There is a chance the fund could underperform the market in 2022 if cyclical stocks have a great run. However, I’m comfortable with any short-term underperformance. As a long-term investor, I’m more concerned about what this fund does over the next five-to-10 years. And I’m confident it can continue to generate strong returns for me.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Amazon, Diageo, Hargreaves Lansdown, Idexx Laboratories, Microsoft, PayPal Holdings, Unilever, and Visa and has a position in Fundsmith. The Motley Fool UK has recommended Amazon, Diageo, Hargreaves Lansdown, Idexx Laboratories, Microsoft, Nike, PayPal Holdings, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
