FundSmith Equity Fund • No brainer?

By comparison, its benchmark — the MSCI World Index — climbed by almost 300% over the same period. The FTSE 100? Just 30% or so, excluding dividends.

Cash has fared even worse, up by a little over 10%. Granted, historically-low interest rates for most of those 13 years haven’t helped. Still, this is further evidence that sticking money in a bank account (beyond an emergency fund) probably won’t do you any favours in the long run.

Based on this, it’s a tough ask to criticise Smith’s strategy of buying great companies, not over-paying, and then doing nothing.

For balance, let’s try.

It could be argued that Fundsmith was simply in the right space at the right time. Setting up shop not long after the Financial Crisis and enjoying a near-decade-long bull market was never going to hurt.

Indeed, the fact that the fund drastically underperformed its benchmark last year shows that Fundsmith is not immune to setbacks.

This trend has continued in 2023 so far. Alarmingly, a far better return could have been achieved by buying a bog standard S&P 500 tracker that also charges much lower fees. That index is up 17% year-to-date.

Speaking of the US, a second concern is that two-thirds of Fundsmith’s portfolio is invested across the pond. Since that rise in the S&P 500 appears based more on sentiment rather than actual earnings (and Fundsmith holds just 26 stocks), perhaps the risk profile of the fund is higher than it initially appears.

If the US market were to crash, Fundsmith might do better than the S&P 500 tracker but it wouldn’t get away unscathed.

All this is why we continue to believe that a degree of diversification is vital in every portfolio.

If we’re going to nit-pick, Smith also openly acknowledged that he was (very) slow to buy tech titans like Amazon and Apple. Clearly, these would have increased Fundsmith’s returns even more.

Is there a risk of this happening again as the market salivates over themes like artificial intelligence, electric cars and renewable energy?

We are not sure we’d ever go so far as to say any stock or fund is a no-brainer buy. Every potential investment must be judged according to individual tolerance for risk.

That aside, we continue to regard Fundsmith as a core holding within our portfolio. That 13-year return simply can’t be ignored.

True, the past may not be a guide to the future. To jettison evidence that companies exhibiting quality characteristics are able to massively compound wealth over the long term (think decades, not years) however, would be a mistake.

Recent underperformance aside, we still consider FundSmith as a flagship provider of returns.

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