A two basis point (bps) drop in charges for Fundsmith Equity has been hailed as good value, despite it still being pricier than the average global equity fund.
Fundsmith’s third assessment of value (AoV) report revealed the ongoing charges figure (OCF) for Terry Smith’s (pictured) flagship vehicle dipped across the board thanks to the firm negotiating lower costs for some administrative services.
Charges for the T clean share class for direct investors was lowered to 1.04% during the 12 months to 31 December 2021, while the I class, for those with investments above £5m, saw the OCF nudge down to 0.94%.
For shareholders in the R class, which was phased out after the Retail Distribution Review, charges fell to 1.54%.
Annual management charges remained unchanged at 0.9% for the I class, 1% for the T class and 1.5% for the R class.
| OCF 2021 | OCF 2020 | AMC | |
| I Class | 0.94% | 0.96% | 0.90% |
| T Class | 1.04% | 1.06% | 1.00% |
| R Class | 1.54% | 1.56% | 1.50% |
Source: Fundsmith
Economies of scale
In the AoV report, Fundsmith said it was able to pass on economies of scale by negotiating reductions in fund administration and depositary costs, which are on a tiered basis. It closed out the year with £28.9bn in assets.
This also led to a 0.5bps reduction in transaction fees charged by the outsourced dealing-services provider to 3bps for 2022.
However, in last year’s report it acknowledged Fundsmith Equity’s OCF had remained static since 2017 as “these economies have diminished” even though net assets had nearly doubled from £13.4bn in December 2017 to £24.4bn at the end of April 2021.
Despite lowering its charges, Fundsmith Equity is still more expensive than peers in the IA Global sector, which have a median OCF of 0.93%. Its sister strategy, Fundsmith Sustainable Equity, has an OCF of 1.07% for the T class.
Fundsmith pointed out the fund’s total cost of investment (TCI), which includes the OCF and transaction costs, is below the industry average. For the T share class, Fundsmith Equity’s TCI is 1.08%, while the median global equity fund’s is 1.15%.
“Unlike some other firms in the industry we do not seek to profit from these costs by charging a set ad valorem fee to the fund whilst driving down the underlying charges,” it noted in the report.
“Regardless of whether charges are pre-agreed to fall as assets under management rise, or a flat fee such as custody charges, Fundsmith seeks to negotiate periodically lower rates for these overall services, reflecting the scale of its activities.”
Performance woes
The AoV report also highlighted Fundsmith Equity’s consistently strong returns without taking undue risk. It has produced excess returns versus the MSCI World between 40%-70% over all five-year rolling periods since inception.
But performance has recently started to come under pressure, as investors shun the type of growth names beloved by Smith for cheaper cyclical names.
His fund narrowly underperformed the MSCI World in 2021, returning 22.1% versus the index’s 22.9%, though it still did better than the IA Global average (17.7%).
But year-to-date, it has significantly lagged both metrics, falling 17.1% versus the MSCI World’s -6.7% and IA Global’s -11.8% returns.
Assets in the fund stood at £23.4bn as at 13 May, according to Trustnet.
See also: Fundsmith to undergo FCA-mandated review
