The costs and charges of Fundsmith Equity and its sustainable sister strategy have been deemed appropriate in the first value assessment produced by the fund board, although it is monitoring whether its share class for advised investors remains appropriate.
The boutique fund group said it does not earn excessive margins and continues to deliver gains for its clients.
It noted since inception on 1 November 2010 to 31 December 2019, Fundsmith Equity’s cumulative performance was 364.4% compared with the MSCI World index’s 180.3% while annualised performance was 18.2% for the fund and 11.9% for the MSCI World index.
These returns have been generated within an acceptable level of risk, as shown by the fund’s Sharpe and Sortino ratios, it said.
But it said performance should not be viewed in isolation for a value for money assessment.
Economies of scale have become static
On economies of scale, the firm noted the ongoing charges figure (OCF) for Fundsmith Equity has fallen as it has grown and been able to offer investors economies of scale. It flagged up the I share class which saw its OCF fall from 1.10% in 2011 to 0.95% in 2019.
But it said while economies of scale initially increase as the funds grow in size, this does not continue indefinitely, noting the initial economies have diminished since 2017, with the OCF remaining static.
Overall it concluded that, where possible, the benefits had been passed on but recognised that all costs should be regularly market tested.
> See also: Hargreaves slams questions over Wealth 150 omission
On charges, Fundsmith conceded the AMCs for Fundsmith Equity and Fundsmith Sustainable Equity were higher than the average fund, but when the OCF and total cost of investment (TCI) were considered, that difference reduced significantly.
It said on the basis of TCI, both funds were only marginally above the average level but in the context of performance net of fees, it felt this was justifiable.
Fundsmith reviewing its share class for advised investors
The group said its different share classes were currently appropriate and correctly monitored.
But it is reviewing whether or not its R share class for advised investors remains appropriate. For this share class the method of paying the adviser is through Fundsmith rebating 0.5% from the AMC to the adviser.
“It was noted that the R class structure is no longer appropriate for most UK investors and is seen as an inferior method of investment. It was agreed that we should continue to review the justification for offering this share class.”
It added: “The R class remains in place for the time being. It is a very small portion of Fundsmith Equity fund and we shall continue to consider whether it is appropriate.”
It has two other share classes – I for investors of over £5m which has an AMC of 0.9% and T for those under £5m which is 1%.
Fundsmith said it is not uncommon to charge smaller investors a higher fee due to the element of the costs the fund group bears being the same regardless of the size of the investment. These costs as a proportion of the amount invested are clearly higher when the investment is relatively small, it said.
“The extra AMC for the T class is charged for good reasons, both in terms of extra cost and extra benefits. The level of that charge and the cut-off point are relatively subjective and are worthy of discussion.”
‘We will not run any portfolio for less than 0.9%’
The firm also reiterated its stance on pricing for running other funds and segregated accounts. “Our approach is clear and has been since inception: we will not run any fund or portfolio for less than 0.9% per annum management fee,” it said.
It added: “The willingness of professional investor clients for whom we manage segregated accounts to invest at this management charge provides evidence to support the conclusion that our investment proposition represents good value.”
