Terry Smith explains..........

[westmoreland]

It occurs to me that what we may be witnessing here is a bubble phenomenon. Smith has been lucky enough to have a good "track record", and spins a good yarn. He attracts more investors. He buys more of the same stocks, pushing the prices up. His "track record" looks even better. He attracts more investors... Eventually, the bubble comes to an end when the prices of the stocks he is buying become so ridiculous that people start selling the stock faster than he can buy it, and then the whole process goes into reverse.

How far would you like to go back? It is only the last seven years that the public have been fortunate enough to be able to invest with Smith. The guy has been doing the exact same thing all the way back for several decades, including when he ran the Tullet Prebon pension fund. Fundsmith has directly evolved from this decades long experience. The suggestions that the guy is in some way "lucky" is quite laughable frankly speaking, and so is the suggestion that he has any influence of the share price of companies he invests in. OK, the more you try, the luckier you seem to get. However, I'm really not here to defend the bloke but I do feel the need to debunk any thinking that the guy is merely "lucky". It simply doesn't hold water I'm afraid.

smith did a presentation where the tullet prebon pension fund compounded by over 14% annually, including through the recession. fund smith has compounded at 18.2% which is broadly in line with that given the business cycle the fund was started in.

after some scepticism, i have done some research on the fund, and i've decided to add it to my portfolio. i noted that the top holdings in the fund are technology and healthcare businesses, not consumer staples.

the focus is on how much cash a business has at the end of the year, either to reinvest or pay dividends. that is what investing boils down to ultimately and i'm surprised how many people try and complicate it.

[hiriskpaul]

It occurs to me that what we may be witnessing here is a bubble phenomenon. Smith has been lucky enough to have a good "track record", and spins a good yarn. He attracts more investors. He buys more of the same stocks, pushing the prices up. His "track record" looks even better. He attracts more investors... Eventually, the bubble comes to an end when the prices of the stocks he is buying become so ridiculous that people start selling the stock faster than he can buy it, and then the whole process goes into reverse.

How far would you like to go back? It is only the last seven years that the public have been fortunate enough to be able to invest with Smith. The guy has been doing the exact same thing all the way back for several decades, including when he ran the Tullet Prebon pension fund. Fundsmith has directly evolved from this decades long experience. The suggestions that the guy is in some way "lucky" is quite laughable frankly speaking, and so is the suggestion that he has any influence of the share price of companies he invests in. OK, the more you try, the luckier you seem to get. However, I'm really not here to defend the bloke but I do feel the need to debunk any thinking that the guy is merely "lucky". It simply doesn't hold water I'm afraid.

When fund managers get good results, that is down to skill. When they have bad years it is due to bad luck and/or the market being irrational.

[hiriskpaul]

Line up 16,000 monkeys throwing darts at a list of stocks. After a year shoot the half that picked the inferior performing portfolios and run the remaining 8,000 portfolios for another year. Then repeat, closing out the inferior 4,000 portfolios, leaving the top 4,000 to run. After 7 years you will be down to 125 great performing portfolios and it will quite laughable frankly speaking that the monkeys that chose these portfolios were lucky.

[Aminatidi]

It is always essential to keep our feet on the ground and Geoff makes some good points. But do we really think that Fundsmith has the buying power to influence prices like that? He is investing in some pretty big companies, world renown at that.

My main concern is his charges which are very high. In fact if he were running an IT he would be highly criticised especially given the size of the fund he is running. Given say a direct comparison with the likes of Scottish Mortgage they are ridiculous. SM has an ongoing management fee of 0.44%, about half of Fundsmith and I am not sure that the 0.9% for its cheapest charge is equivalent to an ITs ongoing management charges.

I have always said that it is the net result that counts and I guess that is so but it makes Fundsmith's charges look like very easy money once the fund is established anyway.

Dod

The KID for SMT shows their ongoing costs as 0.84%.

[SalvorHardin]

Line up 16,000 monkeys throwing darts at a list of stocks. After a year shoot the half that picked the inferior performing portfolios and run the remaining 8,000 portfolios for another year. Then repeat, closing out the inferior 4,000 portfolios, leaving the top 4,000 to run. After 7 years you will be down to 125 great performing portfolios and it will quite laughable frankly speaking that the monkeys that chose these portfolios were lucky.

If 30 of those 125 monkeys came from the same zoo then surely it is worth having a look at that zoo?

A similar example was used by Warren Buffett in his 1984 article, "The Superinvestors of Graham and Doddsville", where he looked at the outperformance of investors whose investment philosophies were firmly rooted in Benjamin Graham and David Dodd's methods (Buffett used coin flipping Americans for his random investors).

https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors

https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

If markets were truly efficient and it was impossible to outperform except by chance then I would still be in work rather than retired.

[hiriskpaul]

Line up 16,000 monkeys throwing darts at a list of stocks. After a year shoot the half that picked the inferior performing portfolios and run the remaining 8,000 portfolios for another year. Then repeat, closing out the inferior 4,000 portfolios, leaving the top 4,000 to run. After 7 years you will be down to 125 great performing portfolios and it will quite laughable frankly speaking that the monkeys that chose these portfolios were lucky.

If 30 of those 125 monkeys came from the same zoo then surely it is worth having a look at that zoo?

Worth having a look yes, but it needs to be done with a sceptical eye. If all the monkeys were, through some way they were brought up, conditioned to throw their darts towards no.16 and stocks clustered around 16 happened to result in good portfolios, then maybe it would not be surprising to see excellent stock pickers from the same zoo.

A similar example was used by Warren Buffett in his 1984 article, "The Superinvestors of Graham and Doddsville", where he looked at the outperformance of investors whose investment philosophies were firmly rooted in Benjamin Graham and David Dodd's methods (Buffett used coin flipping Americans for his random investors).

https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors

https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

I have no doubt that looking for value through detailed security analysis worked really well, helped by the fact that not too many people were doing it. It still can produce outstanding results, but practitioners need to be lucky to spot something before everyone else catches up. Here is what Ben Graham said about security analysis in an interview later on in his life:

In general, no. I am no longer an advocate of elaborate techniques of security analysis in
order to find superior value opportunities. This was a rewarding activity, say, 40 years
ago, when our textbook "Graham and Dodd" was first published; but the situation has
changed a great deal since then. In the old days any well-trained security analyst could do
a good professional job of selecting undervalued issues through detailed studies; but in
the light of the enormous amount of research now being carried on, I doubt whether in
most cases such extensive efforts will generate sufficiently superior selections to justify
their cost. To that very limited extent I'm on the side of the "efficient market" school of
thought now generally accepted by the professors.

http://www.grahamanddoddsville.net/word ... 201976.pdf

If markets were truly efficient and it was impossible to outperform except by chance then I would still be in work rather than retired.

That doesn't follow at all. There would be many amongst those monkeys who could have retired very early.

Going off topic now, but there was an interesting interview of Facebook co-founder Chris Hughes this morning on Start the Week. Rare amongst the billionaire class in that he attributes a great deal of his success to luck. https://en.wikipedia.org/wiki/Chris_Hughes

[Lootman]

Line up 16,000 monkeys throwing darts at a list of stocks. After a year shoot the half that picked the inferior performing portfolios and run the remaining 8,000 portfolios for another year. Then repeat, closing out the inferior 4,000 portfolios, leaving the top 4,000 to run. After 7 years you will be down to 125 great performing portfolios and it will quite laughable frankly speaking that the monkeys that chose these portfolios were lucky.

And then there was Bill Miller whose fund beat the S&P 500 for 15 successive years, and then failed spectacularly when the sub-prime crisis hit.

Fund management is the exception to the rule that making more effort will make you more money. Often it is the exact opposite.

[GeoffF100]

And then there was Bill Miller whose fund beat the S&P 500 for 15 successive years, and then failed spectacularly when the sub-prime crisis hit.

It is not surprising that someone beat the S&P 500 for 15 consecutive years, considering the number who have tried. Fund management groups get rid of the unlucky managers and replace them with new ones. New managers are continually entering the race.

[Dod101]

The KID for SMT shows their ongoing costs as 0.84%.

If that is the case it is obviously wrong considering that the SMT management fee is only 0.30% reducing o 0.25% for portfolio assets over $4 billion. In the latest factsheet for Scottish Mortgage the ongoing charges are shown as 0.44% which I would believe.

For Fundsmith the ongoing charges are quoted as 1.54% to 0.95% depending on the class of share held because their management fees vary from 1.5% to 0.9%. As I said ridiculously high and they would be blown out of the water if he were running an IT with these charges. As it is many OEIC investors seem to see things differently and it is undeniable that he has very good results. I have not tried to compare his with SMT and I suspect SMT is at least more volatile.

Dod

[OZYU]

So Fred, SMT, which I have held for donkeys, has blown Fundsmith out of the water over 5 years, well my holding of IPU has matched it, and my holding of HCM has trounced the lot by miles(plotting Fundsmith with HCM makes Fundsmith look pedestrian).

Does not prove a thing.

I am certain that holders of Fundsmith over the past few years, which include my Good Lady, are perfectly content, and I strongly believe that, even if it has a few soft years(quite possible in these dangerous markets), they will be just as relaxed in 10 years time. I am just as certain that I will lose my bottle and finally trim HCM before they trim theirs.

Ozyu

[Dod101]

HCM to those (including me) who had no idea is apparently Hutchison China Meditech. Not much wiser actually.
IPU = Invesco Perpetual Smaller Cos.

Anyway Fred that is very interesting. I wonder what Fundsmith would have looked like if his charges had been more reasonable? Year after year of an extra .6% or so must take its toll. Now beginning to wonder about Terry Smith. He talks a lot of sense but then so does Nick Train in much the same area and he costs a lot less.

I am very happy with Scottish Mortgage. They operate without the fanfare and have a deep thinking and some might say idiosyncratic James Anderson in charge.

Dod

[Itsallaguess]

I too, have investments that have trounced Smith. I can't be bothered doing the sums, but yes, 0.6% per cent compound makes a difference.

If comparisons are being made on general market up-side periods, such as those seen in recent years, is anyone also able to say how they've compared over more volatile market-periods?

Smith spent some time on this subject during the recently linked video, and seemed to suggest a level of comparable-safety compared to other investments, when comparing drops during market turbulence, and I wondered if this was also evident in people's own investments, in a similar way to the comparisons made above?

Cheers,

Itsallaguess

[Alaric]

However, one thing that has surprised me is that my holdings in Chelverton Growth fund, you would (or I would anyway) expect to be rather volatile, small companies etc... Recently, since the start of the year, it's hardly moved. I was very surprised when I looked a short while ago with a view to topping up at a bargain price.

It's a closed end fund with assets (small companies) difficult to value frequently. In the absence of much trading in secondary markets, what is there to move the price? That's were regulator emphasis on risk = volatility gets it wrong, that fund would be one where risk = "difficult to value assets" so there's a danger of an unexpected write down.

[Alaric]

But as far as I know, the fund is valued everyday.

I don't know the fund in question but wouldn't it mostly hold unquoted stocks? So valuation isn't a simply looking up a price. ITs usually work on the basis of publishing a monthly asset value. That influences but doesn't determine the daily price, which is what buyers will pay and what sellers will sell at. Hence why you get discounts and premiums.

[Dod101]

In summary after considering everything in this threadmy conclusions are that Terry Smith is a very persuasive presenter and actually talks a good deal of sense with very commendable results, better than middle of the road but not outstanding despite his accolades. I would think that in a serious down turn he might well come out better than some. However his very high charges put me off because they are simply outrageous bearing in mind the size of his fund. I would still mind them but would be prepared to pay if his record was truly outstanding, and he is not, despite what he sometimes says abut other managers, putting the interests of his investors first, otherwise he would be doing what Baillie Gifford has done and be reducing his charges.

On balance I will stick with Scottish Mortgage and Nick Train via Finsbury Growth and Income. Good luck to those with him though. They are so far doing fine.

Dod

[Aminatidi]

Finsbury is 0.7 whilst Fundsmith I class is 0.95%

Genuine question, is that 0.25% such a big deal?

I've no dog in the fight as I hold some Fundsmith and some Lindsell Train but I wiped 0.2% off my management costs just by switching to a fixed price platform.

I do take the point, but I'm interested why it should be that big of a deal providing the returns are there to justify holding the fund v doing something else?

[MaraMan]

I am a paid up member of the Dod fan club but I don't understand the latest point, but maybe that's me just not understanding charges.

I class Fundsmith charges are 0.97% and FGT charges are according to their fact sheet 0.80% on-going charge and 0.20% portfolio transaction charge. I must be missing something here with all this talk of outrageous FS charges.

Anyway I also have no dog in this fight, I have what I regard as substantial sums in FS, FGT and SMT, and I think they are all great.

MM

PS - I think TS record is outstanding. He said recently in an interview that if he wasnt a fund manager then he would have been a boxer, which I think you can tell from his manner, but I rate him only on his results which as I say are outstanding when compared to his peer group.

[Dod101]

Good heavens I did not know I had a fan club but thanks anyway. No the difference is not such a big deal I agree. I am writing from my own standpoint only. That is the trouble with these forums; you cannot cover all the angles in a short post.

I have a big slug in Scottish Mortgage and a smaller one in Finsbury and since I am not putting any significant new money into my investments, (living off my dividends as I do) it would need a bit of rejigging for me to find the funds for Fundsmith. No point in just buying a small holding of him; it is either about 3 or 4% of my total or not at all and although I would do it if Fundsmith was particularly attractive, my ramblings over the last couple of days or so do not point up a very strong case for disturbing what I currently hold, especially as it would not be producing an income. The high charges tip the balance against it for now.

I think the other point is almost a moral one. Terry Smith, crusader in so many ways, should surely be trying to hold his head up as one of the 'good guys' when it comes to charges. It has done Baillie Gifford no harm to be able to show that they are in the vanguard of low charges. GIven the size of the Fundsmith fund he can certainly afford to. There has to come a point where the charges are not just high but outrageous.

Dod

[WorldCupWilly]

Really interesting thread. I too am a big fan of Terry and Fundsmith and have over half of my SIPP, ISA and other funds invested with him. Besides his straightforward approach and plain speaking, he has through his turning round the Tullet Prebon pension scheme and then backing himself with Fundsmith, got a much longer and better track record than he's given credit for by many commentators. One thing that caught my attention was how they determined which were "good" and "bad" sectors which really comes down to those that produce the best excess returns over the cost of capital.

They (Fundsmith) point to the work of Aswath Damodaran who teaches corporate finance and valuation. His website has a wealth of great data and analysis that is all downloadable to Excel. He also writes a blog/youtube channel and has a (free) App called uValue which is pretty good. Thought I'd share this with you as you'll find that Terry Smith seems to take a similar view on valuation and stock selection. Here's his website:

http://people.stern.nyu.edu/adamodar/New_Home_Page/home.htm

All that said, I'm also a fan of Nick Train and the Lindsell Train Global Equity fund, which in my opinion also has the advantage of Michael Lindsell's Japanese stock picking expertise where some of the best value and performance can be found.

[Quint]

Really interesting thread. I too am a big fan of Terry and Fundsmith and have over half of my SIPP, ISA and other funds invested with him. Besides his straightforward approach and plain speaking, he has through his turning round the Tullet Prebon pension scheme and then backing himself with Fundsmith, got a much longer and better track record than he's given credit for by many commentators. One thing that caught my attention was how they determined which were "good" and "bad" sectors which really comes down to those that produce the best excess returns over the cost of capital.

They (Fundsmith) point to the work of Aswath Damodaran who teaches corporate finance and valuation. His website has a wealth of great data and analysis that is all downloadable to Excel. He also writes a blog/youtube channel and has a (free) App called uValue which is pretty good. Thought I'd share this with you as you'll find that Terry Smith seems to take a similar view on valuation and stock selection. Here's his website:

http://people.stern.nyu.edu/adamodar/New_Home_Page/home.htm

All that said, I'm also a fan of Nick Train and the Lindsell Train Global Equity fund, which in my opinion also has the advantage of Michael Lindsell's Japanese stock picking expertise where some of the best value and performance can be found.

Good post. I have equal big lumps in Fundsmith and Lindsell Train Global Equity and during the period i have been invested in both i have seen similar performance. I held Lindsell Train for a while before i discovered Fundsmith, as my platform of choice is HL and after watching the Fundsmith AGM i know know why