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Fundsmith

General discussions about growth strategies which focus primarily on investing for capital growth
Adamski
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Fundsmith

#376764

Postby Adamski » January 13th, 2021, 8:58 pm

Has Fundsmith lost it? % rank relative to category in 2020 was 60% vs Global Large-Cap Growth Equity. Returned 18.4% last year v category 23.7%. Ytd -1.7% v category +2.1%. Looking at the chart, been underperforming significantly recently v category since early Nov. I know 2 months is short term, but can anyone shed any light on what's going on?

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Re: Fundsmith

#376769

Postby Lootman » January 13th, 2021, 9:23 pm

ReallyVeryFoolish wrote:Nothing is going on. I just checked and the last six months it has gained around 9%. Over the last year, it's performance is bang on what it's average return has been each for over a decade.

Yeah, I initiated a position in it in April of last year and it is up abut 25%.

Now the S&P 500 is up about 70% in that time but, even so, I think its return has been decent if not stellar.

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Re: Fundsmith

#376771

Postby doug2500 » January 13th, 2021, 9:25 pm

I don't really think it's reasonable to expect anything to outperform indefinitely. It's done it for nearly 10 years, it deserves a breather for a quarter or two. Or even a couple of years.

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Re: Fundsmith

#376774

Postby Spet0789 » January 13th, 2021, 9:32 pm

Given that the composition of the portfolio hasn’t changed much over the period, the only meaningful question to ask is whether the ability of the portfolio companies to compound capital at attractive returns has diminished.

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Re: Fundsmith

#376781

Postby Dod101 » January 13th, 2021, 9:42 pm

I keep saying, no share or in this case a collection of shares, is going to rise in a straight line. There will be times when it even drops quite a bit over a year or two. The real question is whether the fundamental parameters have changed and if not then let the managers get on with it.

After the stellar run by say Scottish Mortgage the same thing is bound to happen there but I will be totally relaxed if it does. Holders of Fundsmith should do the same unless they really think that a)terry Smith is a one man band and b) that he has lost it.

Dod

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Re: Fundsmith

#377120

Postby Adamski » January 14th, 2021, 3:01 pm

Thanks for your comments all. Makes sense, and decided to hold, but will keep an eye on it as won't pay 0.95% if continues to lose money as has done for 3 months.

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Re: Fundsmith

#377122

Postby Dod101 » January 14th, 2021, 3:04 pm

Adamski wrote:Thanks for your comments all. Makes sense, and decided to hold, but will keep an eye on it as won't pay 0.95% if continues to lose money as has done for 3 months.


I mean do not take my word for it. I am no expert but as you say at that price it ought to be good.

Dod

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Re: Fundsmith

#377244

Postby Aminatidi » January 14th, 2021, 7:19 pm

Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.

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Re: Fundsmith

#377281

Postby tikunetih » January 14th, 2021, 10:03 pm

Aminatidi wrote:Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.


As I remember, perhaps a little unfairly, but whatever, I've the impression you're quite frequently changing your investments, and doing so in a manner based on extrapolating past performance into the future.

FWIW I personally consider the possibility of Fundsmith Equity performing in the coming decade in the manner and as well as it did in the past decade as "beyond remote". Could I be wrong on this? Of course. Will I be wrong. Nope! ;) Bookmark this, and if it turns out I'm wrong about this in 10 years I'll buy you a pint.

Terry Smith has a very sound strategy implemented very skilfully, and I am not criticising his method one bit; but it's tricky for me to imagine market & economic conditions (persistently low/falling rates and Treasury yields, very low inflation, slow economic growth, etc) that could have proved more favourable to that strategy than those conditions occurring over the past 10 years, and I believe the tailwind this delivered to very large cap growth & quality factor strategies has been very substantial...

By all means invest in a strategy that you "believe in"; quality factor is a strategy that can be believed in because IMO it's probably the most persistently exploitable source of excess returns (risk premium) due to in part to the difficulty of capturing it: skilled quantitative & qualitative analysis is required vs. the application of simplistic formulaic methods generally used for screening for other factors, causing those other factors to diminish or even disappear as sources of excess return.

However, recognise that as conditions change - and IMO they likely are changing, and significantly so - understand that the results a given strategy delivers, and importantly how it performs relative to other strategies and factor tilts - can change very markedly from period-to-period, decade-to-decade, hence the bingo charts we'll all be familiar with.

So, do not invest in a strategy because you like the way it performed over the past 5 or 10 years. You need a better reason than that, because it will not behave in the coming period as it did in the past. Indeed, the longer the duration of that prior period of consistent-/out-performance, the greater I suspect is the disappointment likely to arise in a future period for anyone just extrapolating the past.

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Re: Fundsmith

#377288

Postby tikunetih » January 14th, 2021, 10:25 pm

One further thing to add, a more general point: if investing in funds of any type it's important not to treat them as "black boxes" that churn out a specific type, or shape, of result or performance.

Instead, IMO it's important to look inside of funds, see how and of what they're comprised and seek to understand how they delivered that performance and the conditions that enabled it - conditions that change, sometimes significantly so from one market and economic phase to another.

If you "know what you own" you should have less scope for surprises and less reason for future disappointment because you'll know why something is behaving as it is. For example, if I'm correct about Fundsmith Equity and it doesn't perform as impressively in the coming decade as it did in the past, "knowing what you own" means you wouldn't immediately reach for explanations such as "Terry Smith lost his touch" or "that Julian fella who took over doesn't have it" - both of these are possible things that might happen, but I strongly suspect that the key underlying explanation for a less impressive performance over the next decade if that's what occurs will simply be that the environment has changed and unsurprisingly it's not as favourable.

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Re: Fundsmith

#377300

Postby simoan » January 14th, 2021, 11:10 pm

tikunetih wrote:FWIW I personally consider the possibility of Fundsmith Equity performing in the coming decade in the manner and as well as it did in the past decade as "beyond remote". Could I be wrong on this? Of course. Will I be wrong. Nope! ;) Bookmark this, and if it turns out I'm wrong about this in 10 years I'll buy you a pint.

Terry Smith has a very sound strategy implemented very skilfully, and I am not criticising his method one bit; but it's tricky for me to imagine market & economic conditions (persistently low/falling rates and Treasury yields, very low inflation, slow economic growth, etc) that could have proved more favourable to that strategy than those conditions occurring over the past 10 years, and I believe the tailwind this delivered to very large cap growth & quality factor strategies has been very substantial...

By all means invest in a strategy that you "believe in"; quality factor is a strategy that can be believed in because IMO it's probably the most persistently exploitable source of excess returns (risk premium) due to in part to the difficulty of capturing it: skilled quantitative & qualitative analysis is required vs. the application of simplistic formulaic methods generally used for screening for other factors, causing those other factors to diminish or even disappear as sources of excess return.

However, recognise that as conditions change - and IMO they likely are changing, and significantly so - understand that the results a given strategy delivers, and importantly how it performs relative to other strategies and factor tilts - can change very markedly from period-to-period, decade-to-decade, hence the bingo charts we'll all be familiar with.

So, do not invest in a strategy because you like the way it performed over the past 5 or 10 years. You need a better reason than that, because it will not behave in the coming period as it did in the past. Indeed, the longer the duration of that prior period of consistent-/out-performance, the greater I suspect is the disappointment likely to arise in a future period for anyone just extrapolating the past.


That's a rather long winded way of saying "reversion to the mean" is a big factor in investing :-)

All the best, Si

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Re: Fundsmith

#377304

Postby tikunetih » January 14th, 2021, 11:20 pm

simoan wrote:That's a rather long winded way of saying "reversion to the mean" is a big factor in investing :-)


That's certainly a big part of what I was seeking to convey, but pithy sentences never kept anyone's fingers fit.

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Re: Fundsmith

#377305

Postby simoan » January 14th, 2021, 11:51 pm

tikunetih wrote:
simoan wrote:That's a rather long winded way of saying "reversion to the mean" is a big factor in investing :-)


That's certainly a big part of what I was seeking to convey, but pithy sentences never kept anyone's fingers fit.

BTW I agreed with what you wrote. I think we need to consider that most equities, and just about all equities at the quality end of the spectrum, have been repriced to give lower future returns in a world where the risk free rate is 0-1%. It is not only the future performance of Fundsmith that will be affected by this. The good news is that the pricing power of the type of companies held within Fundsmith should be less exposed than most should inflation become a problem.

I genuinely can't make my mind up how best to act going forward, so I am currently sitting on my hands. There are very few good companies on reasonable ratings and some cyclical companies have recovered to their pre-Covid level as if the return to normal levels of profitability is already baked in. My holding in Fundsmith is the least of my worries.

All the best, Si

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Re: Fundsmith

#377337

Postby Aminatidi » January 15th, 2021, 8:17 am

tikunetih wrote:
Aminatidi wrote:Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.


As I remember, perhaps a little unfairly, but whatever, I've the impression you're quite frequently changing your investments, and doing so in a manner based on extrapolating past performance into the future.

FWIW I personally consider the possibility of Fundsmith Equity performing in the coming decade in the manner and as well as it did in the past decade as "beyond remote". Could I be wrong on this? Of course. Will I be wrong. Nope! ;) Bookmark this, and if it turns out I'm wrong about this in 10 years I'll buy you a pint.

Terry Smith has a very sound strategy implemented very skilfully, and I am not criticising his method one bit; but it's tricky for me to imagine market & economic conditions (persistently low/falling rates and Treasury yields, very low inflation, slow economic growth, etc) that could have proved more favourable to that strategy than those conditions occurring over the past 10 years, and I believe the tailwind this delivered to very large cap growth & quality factor strategies has been very substantial...

By all means invest in a strategy that you "believe in"; quality factor is a strategy that can be believed in because IMO it's probably the most persistently exploitable source of excess returns (risk premium) due to in part to the difficulty of capturing it: skilled quantitative & qualitative analysis is required vs. the application of simplistic formulaic methods generally used for screening for other factors, causing those other factors to diminish or even disappear as sources of excess return.

However, recognise that as conditions change - and IMO they likely are changing, and significantly so - understand that the results a given strategy delivers, and importantly how it performs relative to other strategies and factor tilts - can change very markedly from period-to-period, decade-to-decade, hence the bingo charts we'll all be familiar with.

So, do not invest in a strategy because you like the way it performed over the past 5 or 10 years. You need a better reason than that, because it will not behave in the coming period as it did in the past. Indeed, the longer the duration of that prior period of consistent-/out-performance, the greater I suspect is the disappointment likely to arise in a future period for anyone just extrapolating the past.


No I ask a lot but do very little. I made a handful of changes last year and most of those were about moving between wrapped and unwrapped.

I'm probably guilty as a financial simpleton of seeing sense in "buy good companies" and I like the idea of having reasonable holdings in selected companies more than say a tracker where I've actually got 25% in the FFANGS whether I like it or not and then a blend of everything else.

Is that sensible? Probably not :)

I'm not about to rush into anything (like I said I ask a lot but do little) but it's good to get some thoughts on Fundsmith's approach thoughts for the future.

As an aside if I did go down that route it would almost certainly be offset by the other 50% (ish) being in the likes of Capital Gearing and some Ruffer so not as if I'm betting the farm on "quality growth" or whatever you would class it as.

When you look at the correlation they actually appear to complement each other quite well.

I always find the past performance thing interesting. Makes me wonder why people bother doing job interviews :mrgreen:

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Re: Fundsmith

#377360

Postby Adamski » January 15th, 2021, 9:21 am

Well it's 30 degrees and sunny (but a few showers) in Mauritius today, so at least Terry Smith (with £16m salary and £116m to Mauritius based company) is happy :D sleeping to the relaxing sounds of ocean waves in paradise.

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Re: Fundsmith

#377521

Postby smicker » January 15th, 2021, 3:04 pm

Terry Smith has previously said that he would expect the Fund to under perform in times of market exuberance.

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Re: Fundsmith

#377637

Postby ADrunkenMarcus » January 15th, 2021, 9:19 pm

Aminatidi wrote:Interesting thread.

I'm considering Fundsmith for maybe as much as 50% of my portfolio because other than going passive I struggle to think of a simpler route to try and get steady dependable compounding growth without sleepless nights.


I've got about 50% of my SIPP in Smithson, which takes the Fundsmith approach but focused more on medium and smaller companies and in an investment trust structure. It's outperformed Fundsmith since October 2018, FWIW.

Best wishes

Mark.

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Re: Fundsmith

#377832

Postby Backache » January 16th, 2021, 4:18 pm

Agree with several of the posts above.

I have owned Fundsmith units virtually since it started (My investor number with them is in double figures).
I recall one of his very early AGM's when he was asked what return you could expect going forward although uncertain he said 10% annualised was what he thought would be reasonable in fact it has returned 18% or so.

He likes to price companies by their free cash flow yield, in the 2012 annual letter he says the prev year started with his portfolio being bought with a FCF yield of 7% his report at the beginning of this year said the FCF yield was now 3.4% so he was getting half the return for every £ invested now compared with 9 years ago so the shares have been extensively re-rated. The whole market has been re-rated and he may well do better than the market as a whole going forward if you think what he has achieved has been due to skill, however to expect the same returns going forward as the historic returns is not realistic.

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Re: Fundsmith

#377932

Postby tikunetih » January 16th, 2021, 10:13 pm

simoan wrote:I think we need to consider that most equities, and just about all equities at the quality end of the spectrum, have been repriced to give lower future returns in a world where the risk free rate is 0-1%. It is not only the future performance of Fundsmith that will be affected by this. The good news is that the pricing power of the type of companies held within Fundsmith should be less exposed than most should inflation become a problem.

I genuinely can't make my mind up how best to act going forward, so I am currently sitting on my hands. There are very few good companies on reasonable ratings and some cyclical companies have recovered to their pre-Covid level as if the return to normal levels of profitability is already baked in.


Fair points, and I can't add much to that, Si.


Instead, off on a bit of a tangent here that's not entirely OT, honestly...

I think the events of the past year - including and in particular the policy responses triggered - have created an unusually wide dispersion of possible future outcomes for economies, markets and asset prices. I can see valid arguments for a whole range of outcomes, some polar opposites. For me at least, that's not an environment in which to make strong conviction bets.

Absent strong convictions, an approach of having exposure to "everything" - backing all horses - via some take on the theoretical Market Portfolio, seems a reasonable option. You may not shoot out the lights, but nor are you that likely to suffer a catastrophe.

Avoiding catastrophes can prove very effective as it allows compounding to do its magic over long periods of time, the essence of "get rich slowly", particularly if you can keep your costs low. Interestingly, this is how high quality businesses themselves (the "quality factor" stuff favoured by Terry Smith's funds, for example) operate, and explains how some of these businesses have not only survived for so long but thrived and become such profitable machines.


For quite some time I ran mainly trend-following strategies, which was very effective for me but also hard work and very time consuming; having had my fill, for the past decade I've largely followed my own variant of the market portfolio, tilted certain ways to form what I hope can survive - if not always thrive - "all weather" that may blow in from time to time.

An advantage of investing like this is that it avoids much decision making. Investors themselves are often the weakest link in their own investment plans, so limiting their (your/our) involvement can be beneficial. Decision making becomes particularly hard and error prone during periods of market stress - having a portfolio that requires little in the way of decisions from you can therefore be especially useful during those difficult times.

When your role is confined wholly/largely to monitoring not "doing", with the market at a distance and more abstract, your amygdala is less likely to perceive it as a threat triggering autonomic nervous system responses that you later regret. "If you can keep your head when all about you are losing theirs" etc. As mentioned above, avoiding big mistakes is very beneficial, and a lot easier to do over the long term than to keep throwing bullseyes.


As discussed on this thread, it seems highly unlikely that quality factor portfolios such as Fundsmith Equity can deliver investment returns over the coming decade similar to those in the past decade. Stock analysis can be excellent, companies can perform well, but the returns that an investor experiences during their holding period depends on more than that so might be disappointing. For example, returns over a given period are strongly influenced by initial and terminal valuations; the multiple expansion tailwind of this past decade will eventually reverse and become a headwind. The longer your holding period, the less you may be concerned with initial valuations, but unless you're running a perpetual endowment fund then your time horizon will be finite and multiple expansion/contraction will play a material role in the returns you get.

Despite this potential headwind, quality factor portfolios do have a useful attribute: I think they're easier than some other approaches to "believe in". That is, even if you hold such a portfolio during an unfavourable period when returns prove disappointing, I think that the knowledge of "holding quality" can make it easier to look to the longer term beyond any despondent period and avoid abandoning the strategy; investors often tend to bale at the worst time - that's how market bottoms are formed - just as something is about to begin performing again. "Gotta have faith", sang George Michael :D

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Re: Fundsmith

#379195

Postby Mike88 » January 21st, 2021, 8:29 am

I've done my usual - buying funds, in this case topping up Fundsmith, after long periods of good performance. Never mind it was only £5k but worth the risk given the alternative of having cash sloshing around earning 0.25%.


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