In a letter to holders of his £13.4bn Fundsmith Equity fund, Smith rebuffed commentators who have spent the past five years warning the shares in his fund are overpriced by posing the question: what would you invest in as an alternative?
Smith said the fund’s stock valuations are not much higher than the market, especially when their relative quality is considered, and he highlighted the fund had outperformed significantly during this five-year period.
“During that time, the fund has risen 175%,” added Smith. “The fact you would have forgone this gain if you had followed their advice will of course be forgotten by them if or when their predictions that our strategy will underperform the ‘value’ strategy of buying cyclicals, financials and assorted junk pays off for a period.”
He added: “Of course, all this may prove is that everything is expensive or at least highly rated, and there are plenty of pundits and fund managers who have indeed suggested that we are in a so-called ‘bubble’ which will end badly with everything falling a long way.
“So far, they have only managed to demonstrate the difficulty in making predictions and implementing actions based upon them. Even if they are eventually proven right, why will a basket of cyclical stocks and financials prove to perform better in these circumstances than a group of companies which are high quality and defensive in terms of supplying everyday consumables and necessities?
“The events of 2007–09 suggest that the opposite is true.”
Three-step strategy
Smith said the alternative to his approach is investing in cyclicals, financials and so-called ‘value’ stocks which involves investing in companies that over time to do not create shareholder value by generating returns on capital above their cost of capital and growing by deploying more capital such as favourable returns.
“We seek to invest in companies which accomplish this,” he added, drawing attention to his three-step investment strategy of “buy good companies; don’t overpay; do nothing”.
The fund returned 22% between 1 January and 31 December last year versus 11.8% for the MSCI World index. Since inception to the end of 2017, the fund returned 261.7% against the MSCI World index’s 135.5%.
According to FE data, the fund has delivered a return of 167.1%, 79% and 23% over five, three and one year respectively, versus the Investment Association’s Global sector’s 80.9%, 45.2% and 14.3%.
Forget the macro
Smith also took a swipe at financial commentators more widely who made a series of incorrect predictions regarding macro events, such as the UK voting for remain in the EU referendum, Donald Trump becoming US president and Narendra Modi becoming India’s prime minister.
“The fact that they have been shown to be comprehensively wrong does not seem to stop them from giving us the dubious benefit of further predictions.”
He added: “Thankfully, I spend little or no time trying to apply predictions about macro events in order to manage our portfolios.”
