Asset Manager Overview
Fundsmith LLP was founded at the end of 2010 by Terry Smith. The firm is responsible for over £34bn of assets under management (as at 31 December 2024) across a small sample of strategies, all subscribing to one underlying philosophy. The business is owned and controlled by its partners, and is headquartered in the UK with offices in the USA and Mauritius.
Fund Manager/Team Overview
At Fundsmith, Mr Smith is both CEO and CIO, and as lead manager of this fund is predominantly supported by head of research, Julian Robins. Mr Smith has a lengthy career within financial services and prior to setting up Fundsmith held a range of senior roles within leading stockbroking houses, including Collins Stewart. Mr Robins has over 30 years' industry experience and has worked with Mr Smith since 1999. In addition, they are supported by a small team of analysts and investment managers.
Investment Philosophy & Process Overview
The basic premise of this fund is to invest in high quality companies that are viewed to be attractively valued, as measured by the free cash flow yield, with reliable growth prospects and holding them for the long term. In order to achieve this Mr Smith and Mr Robins have developed a robust investment process that focuses their research on companies that have some kind of intangible asset including (but not limited to) brand names, patents, licenses and excellent distribution networks. Initial filters greatly reduce the vast investment universe of over 60,000 listed global companies to under 100. These filters apply strict criteria seeking to highlight companies with enduring profitability, attractive free cash flow yields and low levels of operational and financial leverage. Consequently, the fund avoids companies in the more cyclically sensitive areas of the market such as banks, airlines and commodity related stocks. Conversely, there is a bias towards healthcare and consumer goods companies, franchisors and firms with an established and loyal customer base.
By focusing on a relatively small number of very high quality, well established companies with strong balance sheets, the manager holds the belief that these firms will generate superior returns over the long term. Quite often these companies can demand a valuation premium versus the broader market, a fact that Mr Smith remains aware of. Though the team look at all of the industry's most commonly used valuation metrics, such as price to earnings (P/E), the favoured measure is free cash flow yield. This is used because their belief is that the financial health of a company should be considered by the amount of cash produced after replacement capital expenditure, and not earnings, for example, which can be manipulated.
The resulting portfolio of 20-30 positions is constructed without reference to the MSCI World index. Given the types of companies sought, it can show sizeable deviations at both the geographic and sector levels. Indeed the only formal limits are the UCITS rules (i.e. a maximum of 10% can be held in a single stock and investments of more than 5% may not exceed 40% of the whole portfolio - this is commonly known as the 5/10/40 rule). Although many of the underlying firms have exposure to emerging markets, the fund tends not to invest in companies that are listed on emerging market exchanges, it also avoids stocks below $2bn in size.
In keeping with the approach, portfolio activity is incredibly low. That is not to say the manager is complacent, positions will be exited if the investment case has fundamentally weakened, if valuations are deemed too expensive, a superior opportunity has been identified or a takeover has occurred.
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