Fundsmith has continued to hold steady on the cost of investing in its funds, saying its Equity and Sustainable Equity funds continue to offer good value.
In Fundsmith’s second assessment of value report, the firm’s fund board justified the charges on Fundsmith Equity and Fundsmith Sustainable Equity at a time when other fund houses are feeling the pressure to reduce fees.
It argued Fundsmith is charging investors “competitive rates” and that the total cost of investment (TCI) for T Class Accumulation of 1.06% is “below average charge compared to our peer group despite our above average performance”.
Over five years, the £24bn Fundsmith Equity fund has returned 125.1%, compared to the IA Global sector average of 90% and the MSCI World Index’s 97.9%. It has returned 242.2% between 5 November 2010, the fund’s launch, and 30 April.
Although on a one-year basis, it has dropped into the fourth quartile, returning 21.2%, compared to the IA Global average of 30.2%, according to Trustnet.
Fundsmith Equity charges an annual management charge (AMC) of 0.9% for its I class, 1% for the T class and 1.5% for the R class. The report said that this cost “should reflect the quality of the overall service that we provide”.
The report noted that as the business grows and its asset under management increase, the resulting economies of scale mean that it will be able to provide its investors with better value for their investment.
‘Economies have diminished’
However, it acknowledged that the ongoing charges figure (OCF) has remained static since 2017 as “these economies have diminished” despite the fact that its net assets have almost doubled from £13.4bn in December 2017 to £24.4bn at the end of April, according to data from Morningstar.
The Equity fund has an above average OCF of 1.06%, while the Sustainable Equity fund has an OCF of 1.07%, compared to the IA Global median OCF of 0.97%.
A number of fund managers have cut charges recently, including Aberdeen Standard Investments, M&G and Schroders.
But Fundsmith pointed to the TCI, highlighting the fact this is below the industry average. The TCI is 1.07% for the Equity fund and 1.11% for the Sustainable Equity fund, compared to the IA Global median of 1.2% due to its philosophy of not dealing very much, as well as competitive dealing rates.
‘No undue risk and low share class differential’
The report also concluded the fund’s outperformance has been consistently strong without taking undue risk. It pointed to the fund’s Sharpe ratio of 1.22 since inception, compared to 0.63 for the MSCI World Index, and its Sortino ratio of 1.22, while the MSCI World Index Sortino ratio is 0.59.
Elsewhere, the report concluded that its fee differential between share classes is appropriate after looking at the 20 largest active funds in the UK and calculating the average differential between the cheapest share class and the direct retail class. It found the average difference was 26%, compared to Fundsmith’s difference of 11%.
In last year’s value assessment, Fundsmith said it was reviewing whether the R class remained appropriate. For this share class the method of paying the adviser is through Fundsmith rebating 0.5% from the AMC to the adviser.
In the latest assessment, it said the R class is by far the smallest and “reflects a somewhat outdated way of remunerating financial advisers” but there remain certain markets where this is normal market practice so it will continue to retain the class.
