Fundsmith is the fund firm Terry Smith ("Britain's Warren Buffett") founded in 2010, with a discipline of radical simplicity — Buy Good Companies, Don't Overpay, Do Nothing: a concentrated book of 20-30 high-ROCE global consumer, healthcare and tech franchises with near-zero turnover. His annual shareholder letters are famous for wit and common sense; peak AUM topped £25bn.
This article breaks down the Fundsmith Equity Fund's 2019 annual report. The fund earned 25.6%, beating the market. The manager sold 3M and Colgate because he lost faith in their management, and bought Brown-Forman (whiskey) and Clorox (cleaning). He sticks with high-quality, profitable companies like Microsoft and Facebook, and trades very little to keep costs low. For regular investors, it shows the importance of picking a fund that truly buys and holds great businesses, not chasing trends. Worth a read to see how a legendary investor thinks.
In 2019, the Fundsmith Equity Fund T Class returned +25.6%, outperforming the MSCI World benchmark by 2.9 percentage points. During the period, it liquidated its position in 3M (due to loss of confidence in management's capital allocation) and initiated a new position in Brown-Forman. Manager Terry
During the reporting period (January 1 – December 31, 2019), the net return of T Class Acc shares versus the main benchmarks:
| Instrument | Return |
|---|---|
| Fundsmith Equity Fund (T Class Acc) | +25.6% |
| MSCI World Index (£, Net Return) | +22.7% |
| FTSE 100 Index (Total Return) | +17.3% |
| UK Bonds (Bloomberg/Barclays Gov. 5–10yr) | +3.8% |
| Cash (3-month LIBOR) | +0.8% |
Source: Page 7 of the report. Fund returns are after fees, based on midday pricing.
The report does not disclose the complete list of top ten holdings; this item is omitted.
Based on the "Summary of significant changes" section of the report and the manager's commentary, the major transactions during the period are as follows:
| Type | Company | Amount (£) | Notes |
|---|---|---|---|
| New position | Brown-Forman | 396,237,298 | Initial position established |
| New position | Clorox | 120,490,089 | Initial position established |
| Closed position | 3M | 391,740,166 (sold) | Loss of confidence in management's capital allocation |
| Closed position | Colgate-Palmolive | 74,387,143 (sold) | Loss of patience with growth strategy |
| Increased position | McCormick | 440,030,173 | Largest purchase |
| Increased position | Philip Morris International | 203,371,654 | — |
| Increased position | L'Oréal | 110,553,655 | — |
| Reduced position | PayPal | 20,004,934 (sold) | Small reduction |
Note: Total purchases £1,998,529,680, total sales £486,132,243.
| Item | Value |
|---|---|
| Total net assets of the fund (all share classes combined) | £18,831,421,602 |
| Net assets of T Class Acc shares | £3,092,139,869 |
| Ongoing Charges Figure (OCF) for T Class Acc | 1.05% |
| OCF for I Class Acc | 0.95% |
| OCF for R Class Acc | 1.55% |
| Total trading costs as a percentage (voluntary transactions) | 0.005% (0.5 basis points) |
| Total Cost Index (TCI, T Class Acc) | 1.06% |
| Dividend per share for T Class Acc (Accumulation shares) | 2.81p |
Net assets calculated as of market close on December 31, 2019.
Terry Smith (CEO, Fundsmith LLP) presented the following core views in the 2019 annual report:
1. Returns and outperformance: In 2019, T Class Acc shares returned +25.6%, the second-best year since the fund's inception, outperforming the MSCI World Index by 2.9 percentage points and exceeding the FTSE 100 (+17.3%) by 8.3 percentage points.
2. Top five contributors: Microsoft (+2.7%), Estée Lauder (+2.1%), Facebook (+2.0%), PayPal (+1.8%), Philip Morris Intl. (+1.4%); Facebook was the "most controversial buy" but performed well.
3. Reasons for selling: Closed positions in 3M (concerns over capital allocation decisions) and Colgate-Palmolive (no results from waiting for growth strategy); new positions in Brown-Forman (share price weakened due to EU tariffs) and Clorox.
4. Portfolio quality advantages: The portfolio's weighted average ROCE is 29% (S&P 500: 17%, FTSE 100: 17%), gross margin 66%, operating margin 27%, cash conversion rate 97%, and leverage 39%, all significantly better than the indices. The average founding year of portfolio companies is 1925.
5. Valuation and risk: The weighted average free cash flow yield declined from 4.0% at the start of the year to 3.4%; the higher valuation is concerning, but an interest rate hike is not expected in the near term. Portfolio free cash flow grew by 9%.
6. Very low turnover: Voluntary trading costs amount to only 0.005% of average net assets, with total costs (including involuntary transactions) at 1.06%. The report emphasises that cost control is not the whole story.