The benefit of this experience is clear when you look at the recent performance and popularity of the £3.7bn Fundsmith Equity Fund he runs. “I have a very simple philosophy that has evolved over my career,” he says. “From being an analyst to a broker and other roles, I have developed systems and learnt what works and what doesn’t.“Our philosophy is the most important thing and there are three key parts. First, only buy good companies,”he says. “I have a stringent definition of what a good company is and not many qualify.
At the moment there are only 68 companies worldwide in our investment universe. I do not buy with the intention of selling later, the intention is to hold these companies and let them compound in value.”The second element is to never overpay. Smith continues: “You can, of course, overpay for something if your intention is to sell it to somebody who will pay more, but we arenot proposing to do that.”
The third of Smith’s trinity? Then do nothing. “Our turnover is extremely low. From time to time you have to take action, when companies demerge or do spin-offs, for example,and sometimes valuations can go to extremes, which mean we needto make a switch. But in most cases once we have bought in, that’s it.”Smith has only sold three positions during the past year, two of which were companies that had been created from ones he already owns. “ADP,the payroll-processing company spun out a software business whichwe sold and Reckitt Benckiser spun out of a pharmaceutical business.”The one straight sell-off was tobacco products company Swedish Match, due to potentially disruptive developments in that industry.
An advantage Smith has over many ofhis peers is his time spent running a public company, the interdealer broker Tullett Prebon.“I like to think it is unusual in the investment industry to be a fund manager who was formerly a chief executive of a public company,” Smith says.“Something Warren Buffett has said, which I agree with, is that he thinks he is a better fund manager becausehe runs businesses and betterat running businesses because he isa fund manager.“You gain an insight into capital allocation,product developments and the need to grow if you have actually run a business. That is very hard to gauge from the outside looking in.“It brings to life what the person onthe other side of the table is looking for. It means we have better meetings with company management than we otherwise would.”
Smith is also quick to credit others for the development of his investment process.“I started learning from what Buffett said in the late ’70s,” Smith says.“I’ve had most of the well-known investors around the world as clients at one stage or another, and I have learnt from all of them.”He cites examples including Tom Shrager at Tweedy Browne in New York and another American investor, David Winters of Wintergreen.
