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 report covers Terry Smith's Fundsmith Equity Fund, which lost 13.6% in 2022, worse than the global stock market (down 7.8%). The main culprit: rising interest rates hit high-priced tech stocks like Meta and PayPal. But Smith sticks to high-quality companies that earn a 32% return on capital (ROCE, a measure of profitability) – far above the typical 18% for large US firms. For ordinary investors, don't panic over one bad year: the fund has returned 478% since 2010 (15.5% annualized). It also has low turnover (7.4%) and low costs. What's worth reading? Smith's critique of companies ignoring long-term shareholders, and his disciplined approach to buying great businesses at fair prices.
In 2022, Fund I Class Acc declined by -13.57%, underperforming its benchmark, the MSCI World Index (-7.8%). The manager significantly rebalanced the portfolio, initiating new positions in Apple and Adobe, while exiting Johnson & Johnson and PayPal. The manager also criticized the management of Unile
| Share Class | 2022 Return | 2021 Return | 2020 Return | Cumulative Return Since Inception (01.11.2010) | Annualized Return Since Inception |
|---|---|---|---|---|---|
| T Class Acc | -13.65% | +20.72% | +18.77% | +478.2% | +15.5% |
| T Class Inc | -13.65% | +20.71% | +18.74% | — | — |
| R Class Acc | -14.08% | +20.12% | +18.17% | — | — |
| R Class Inc | -14.09% | +20.12% | +18.17% | — | — |
| I Class Acc | -13.57% | +20.84% | +18.88% | — | — |
| I Class Inc | -13.57% | +20.82% | +18.85% | — | — |
Comparative Benchmark (2022): MSCI World Index (£ net) fell -7.8%; UK Bonds (5-10 year) fell -15.0%; Cash (£ rate) rose +1.4%.
The report does not provide a complete list of top ten holdings, only disclosing sector and geographic distribution. The portfolio structure as of 31 December 2022 is as follows:
| Sector | Weight (2022) | Weight (2021) |
|---|---|---|
| Consumer Staples | 33.8% | 30% |
| Health Care | 26.0% | 22% |
| Information Technology | 20.7% | 26% |
| Consumer Discretionary | 9.4% | 11% |
| Communication Services | 4.5% | 7% |
| Industrials | 1.7% | 2% |
| Cash & Other Net Assets | 3.9% | 2% |
| Geography (by Listing) | Weight (2022) | Weight (2021) |
|---|---|---|
| United States | 72% | 74% |
| Europe | 23% | 21% |
| United Kingdom | 5% | 5% |
New Positions: Mettler-Toledo International, Adobe, Otis Worldwide, Apple
Liquidated: Johnson & Johnson, Starbucks, Kone, Intuit, PayPal
Significant Additions/Reductions: The report does not disclose specific adjustment magnitudes but notes that new buys/sells involve multiple names, with some positions being relatively small.
Portfolio Turnover: 7.4% (reporting period)
| Item | T Class Acc | R Class Acc | I Class Acc |
|---|---|---|---|
| Ongoing Charges Figure (OCF) | 1.04% | 1.54% | 0.94% |
| Total Cost Indicator (TCI, incl. transaction costs) | 1.05% | — | — |
| Total Fund Assets (AUM) | £3,788,714,772 | £507,931,300 | £13,360,761,660 |
| Dividend (per share) | 1.02p | 0 | 1.60p |
| Voluntary Transaction Costs as % of Avg. Assets | 0.003% | — | — |
1. 2022 Performance Attribution: The fund fell 13.8%, underperforming the MSCI World Index (-7.8%), primarily due to interest rate rises weighing on high-valuation technology stocks. The top five detractors were Meta Platforms (-3.3%), PayPal (-2.5%), Microsoft (-1.8%), IDEXX (-1.7%), and Amazon (-1.5%).
2. Portfolio Quality Remains Superior: The portfolio's weighted average ROCE is 32% (vs S&P 500 18%, FTSE 100 16%), operating margin 28% (vs 18%), cash conversion rate 88% (vs 66%), and interest coverage 20x (vs 10x). The average founding year of portfolio companies is 1922.
3. Valuation Improvement: The portfolio's weighted average free cash flow yield rose from 2.7% at the start of the year to 3.2% at year-end, broadly in line with the S&P 500 median of 3.4%. The manager believes portfolio companies have significantly superior fundamentals compared to the index, with only slightly higher valuations.
4. Low-Cost Operation: Portfolio turnover was 7.4%, and voluntary transaction costs were only 0.003% (0.3 basis points) of average assets. The T Class Acc's Total Cost Indicator (TCI) was 1.05%, just 1 basis point above the OCF.
5. Criticism of Management and Shareholder Engagement: The manager notes that during long-term holdings of Unilever (since 2010) and PayPal (since 2015), company management ignored issues raised by the fund (e.g., Unilever's low return on capital, PayPal's cost control and value-destructive acquisitions), while newly arrived activist investors (Trian, Elliott) quickly gained board seats. The manager believes this reflects unfair treatment of long-term shareholders.