Last Updated on December 18, 2023 by Tree of Wealth

The information presented in this article was pertinent when it was originally published. However, as circumstances are constantly evolving, it is advisable to exercise prudence when relying on any of the content in this article. As a disclaimer, please note that the information provided is not intended to be construed as investment or financial advice. Keep in mind that past performance is not a guarantee of future returns. The risk profile of Fundsmith Equity may not be appropriate for your specific investment goals, so it’s always recommended to seek professional financial advice before making any investment decisions. It’s important to acknowledge that investing in such products comes with a risk of losing all invested funds. There are many investment options available in the market, so take the time to carefully consider your options and seek expert guidance to make informed decisions.

Fundsmith Fund – Why Its Good & How To Invest In It

British investment magnate, Terry Smith, hailed as the UK’s equivalent to Warren Buffett, is the mastermind behind Fundsmith, a premier investment company headquartered in London that he birthed in 2010. As of today, Fundsmith is entrusted with an awe-inspiring £23.4 billion in assets.

Fundsmith’s performance is nothing short of stellar, consistently superseding the index with a significant buffer. The company exhibits an impressive compound annual growth rate (CAGR) of 15.6% as of June 2023, a testament to its success.

Echoing the spirit of Sir John Templeton’s mantra, Fundsmith was built to stand out from the pack, with the goal of yielding results that distinguish it from the rest. The philosophy, as quoted from the Fundsmith website, can be summarized as, “To exceed the crowd, one has to diverge from the crowd.”

So, you might ask, what sets Fundsmith Equity Fund apart, enabling it to persistently outpace the index year after year? Let’s peel back the layers to discover the key elements fueling its extraordinary success:

Instead of hunting for businesses with a low price-to-earnings (PE) ratio, Fundsmith Equity Fund’s strategy revolves around the identification and investment in top-tier businesses. Their portfolio boasts companies with higher PE ratios such as Microsoft, LVMH, L’Oreal, and Novo Nordisk.

Drawing upon Terry Smith’s insightful perspective, “It’s illogical to equate Fords with Ferraris; the latter’s higher price doesn’t provide any insight into the deal you’re securing.” In essence, Smith maintains that the PE ratio does not offer any meaningful insight into a business’s true worth.

Interestingly, even though Fundsmith’s portfolio comprises stocks with a higher PE ratio, the risk they carry, as illustrated by their Sharpe Ratio (1.09 for Fundsmith as compared to FTSE World Equity’s 0.53 as of April 2023), is lower than the sector’s average.

The Sharpe Ratio is a significant indicator of risk and reward. A higher Sharpe Ratio implies that an investment has yielded superior returns for the risk taken, showcasing the investment’s commendable performance and its fair reward for the risk undertaken. Conversely, a lower Sharpe Ratio indicates that an investment may not have delivered adequate returns for its risk level, suggesting that the risk assumed may be disproportionate to the returns achieved.

Fundsmith Available Platforms:

Best Investment- Linked Policy Detailed In-Depth Comparison Singapore 2023

Fundsmith has achieved an impressive near 16% per annum return since November 2010 and continues to register consecutive months of gains, according to their latest report in June 2023. The company recently acquired a small holding in Proctor & Gamble, and while there were some detractors in the past month, Fundsmith remains confident in its long-term investment outlook.

Over an 11-year period, Fundsmith Equity has outperformed all mutual funds available for purchase through investment platforms, including those from banks, except for technology-focused funds. Additionally, it has outperformed the widely recognized Standard & Poor’s 500 index, which tracks the performance of 500 leading publicly traded companies in the U.S. and is considered a reliable benchmark for large-cap U.S. equities.

Disclaimer: This is by no means an investment advice. Do your due diligence when it comes to investing. As the Fundsmith Fund is an equity fund, it’s risk exposure may not be suitable for everyone. You should also know that that while investments may have a high return, past returns does not equate to future performances and there is a chance principles may be lost, as with all investment instruments. Should you be interested, do seek professional Financial Avisors whom can give you advice.

Fundsmith performed astonishingly well even during the COVID-19 peak years, and this has led many to be curious about how they are doing so well, as well as how Singaporean investors might be able to get a bit of this action.

As such, this article will cover exactly what Fundsmith is and what their beliefs are, why it is good, what they’re investing in, and how you can invest in them as well.

So, what’s the Fundsmith Equity Fund?

Fundsmith, founded by Terry Smith, is a fund management company that is located in the U.K.; Smith, who is regarded as the U.K.’s own Warren Buffet, has won several awards for his work. Their no-nonsense approach has the fund investing in great companies globally over the long term; the fund does not take on short term profit approaches. A Fundsmith equity fund review notes that many have specifically requested financial advisors to look out for them specifically.

Their fund size is currently around £25.5bn at 29 holdings, with the average market cap of each holding being £92.4bn and most of them having been founded in the early 1900s – that is, these are companies with long, long histories of success. About 74% of the companies they have invested in are located in the United States.

Fundsmith sets itself apart from other firms with its unique approach to investing. Smith is often compared to Warren Buffet and is considered the UK’s own version of the famous American investor. Fundsmith is guided by three core principles: Buy good companies, Don’t overpay and Do nothing.

This approach is inspired by Sir John Templeton’s quote that to outperform the crowd, one must do things differently from the crowd. The most challenging aspect of Fundsmith’s philosophy is the “do nothing” approach, as it goes against the natural inclination of investors to take profits. Despite this, Fundsmith’s strategy has earned it a reputation as one of the best-performing global equity funds in recent history.

Note that the annualized return mentioned is based on the T Acc share class, which is accessible to retail investors in the UK. The R share class has slightly higher annual management fees, resulting in a slightly lower return. The R share class is typically available through investment-linked policies and platforms in Singapore.

Cool, But Why Is It So Good?

Fundsmith invests in a relatively niche way. Instead of investing in every potentially good company that comes their way, they carefully curate their portfolio for businesses that can sustain high returns, whose unique value propositions serve as a high barrier to entry in replication, that are adaptable to changing circumstances and disruptive innovations.

While they are well aware that this approach drastically limits potential choices for their portfolio – about 20 to 30 stocks – this method makes them laser-focused and capable of delivering high results and returns on the investors they work with them.

On top of that, Fundsmith also does not invest in any derivatives; this is to ensure that they have direct exposure to the companies they are investing in, so that this knowledge and reduced degree of separation may guarantee higher chances of return.

Fundsmith’s Promise

No Fees for Performance
No Upfront Fees
No Nonsense
No Debt or Derivatives
No Shorting
No Market Timing
No Index Hugging
No Trading
No Hedging
No Fees for Performance
No Upfront Fees
No Nonsense
No Debt or Derivatives
No Shorting
No Market Timing
No Index Hugging
No Trading
No Hedging

Source: Fundsmith

Well, what are they investing in then?

Per their website, Fundsmith’s portfolio is 32.4% consumer staples companies, then 27.1% in tech and 22.1% in healthcare. In short, Fundsmith primarily invests in essentials and technological advancement. They’ve noted that the top 10 Fundsmith holdings consist of the following companies:

Top 10 holdings (Update for June 2023)

• • Microsoft
  • Novo Nordisk
  • L’Oréal
  • LVMH
  • Meta Platforms
  • Stryker
  • Philip Morris
  • IDEXX
  • Visa
  • McCormick

Source: Fundsmith

You will notice that while many of these names are familiar, a lot of them also aren’t. On the other hand, there are many names you might generally expect in a ‘top 10’ that don’t appear.

What principles do they follow to make them so successful?

As can be seen from above, Fundsmith believes firmly in the work they do. They carefully analyse each and every potential holding and keep themselves to a very small number of them in order to maximise the growth of their investments. They also are not interested, as mentioned, in short-term investments; an example they gave was in regards to the Dotcom mania:

“If you weren’t invested in technology stocks in that period (and we wouldn’t have been) then you would have underperformed the market. We would be happy to have done so, as we would never own a share in a company which we did not think was both good and at worst fairly valued. We would not own something because it is fashionable and might go up. Because eventually it goes down. Usually by a lot.”

– Fundsmith’s Owner’s Manual (Fundsmith Fund factsheet)

Examining Business Quality Through Five Variables:

Return on Capital Employed (ROCE)

Warren Buffett, in his role as Chairman of Berkshire Hathaway in his 1979 annual letter, coined ROCE as the ‘essential gauge of managerial economic achievement.’ Terry Smith deems ROCE as a critical factor. The Fundsmith Equity Fund flaunts an impressive ROCE of 32%, vastly exceeding the FTSE index’s 18%.

ROCE offers insight into how effectively a company utilizes its invested capital to yield profits. A robust ROCE implies a company is successful in leveraging every dollar of invested capital into higher profits, signaling efficient capital deployment for returns generation.

Gross Margin

The Fundsmith Equity Fund’s substantial gross margin of 64% outshines the FTSE index’s 42%. Gross margin is calculated by deducting the cost of goods from sales. This means that the companies within the Fundsmith Equity Fund are typically businesses that operate with less capital.

Operating Margin

The operating margin of Fundsmith’s Equity Fund stands at 28%, trumping the index’s 18%. In times of rampant inflation, holding shares in companies with higher operating margins is advantageous, as it illustrates that these businesses have significant pricing power.

Cash Conversion

Despite a drop to 88% in 2022, the Fundsmith Equity Fund’s cash conversion still surpasses the FTSE index’s 66%. This metric examines how proficiently companies transform profit into cash. Companies requiring more capital expenditure and working capital for their operations tend to have a lower cash conversion percentage.

Interest Coverage

The interest coverage ratio of the Fundsmith Equity Fund, standing at 20x, significantly outperforms the FTSE index’s 11x. Simplified, this means that the profits of the Fundsmith Equity Fund are twenty times its debt interest charges, providing strong evidence that these companies can meet their debt obligations even under recessionary conditions.

Returns Since Inception 2010

How can I invest in Fundsmith Fund in Singapore?

To invest in Fundsmith Equity in Singapore, there are only a few options available, with the easiest being to become an accredited investor. To qualify as an accredited investor in Singapore as an individual, you must meet at least one of the following three criteria:

1. Earn an annual income of $300,000 or more in the preceding 12 months
2. Have net personal assets exceeding SGD2 million (or its foreign currency equivalent) in value, with the net value of the investor’s primary place of residence limited to SGD1 million
3. Possess net financial assets exceeding SGD1 million (or its foreign currency equivalent) in value.

How To Be Qualified As An Accredited Investor

• Minimum income of S$300,000 in the last 12 months (or its equivalent in a foreign currency)
• At least S$2 million of net personal assets, of which the net value of your primary place of residence can only contribute up to S$1 million
• At least S$1 million value of Net Financial Assets (or its equivalent in a foreign currency)

Source: DBS

Assuming you meet the requirements and have the necessary documentation to qualify as an Accredited Investor, you can invest in Fundsmith through the IFAST or Phillip Capital platform either independently or through a Licensed Financial Advisor who has access to either or both platforms. The minimum investment amount varies depending on the platform, ranging from SGD $5,000 or $20,000 for a single premium, or as low as $100 per month.

How Retail Investors Can Invest In Fundsmith Fund

The Fundsmith Equity Fund is not accessible to retail investors through the previously mentioned platforms, as it is a restricted foreign fund with no registered company in Singapore. Although it is not available for retail investors to invest in the fund directly, retail investors however can also invest in Fundsmith in Singapore through Investment Plans. They are offered by five companies: Tokio Marine, Singlife, Etiqa, FWD, and HSBC Life. Depending on their budget and time horizon, investors can invest in this fund with a monthly budget as low as $200 or a lump sum of $1,000. Despite common misconceptions, the cost on these platforms is not necessarily high. Breakeven yields vary across insurers and can be shared upon inquiry.

The premiums you pay are first used to invest in the Fundsmith fund in Singapore. This works even at the smaller premium amounts because the premiums of large numbers of ILP investors are pooled together to make one great investment in Fundsmith.

These are 100% investment ILPs (different from the traditional ILPs that have higher cost of insurance) and all your funds will be invested into the funds of your choosing. For many who are already paying premiums for insurance, ILPs provide a chance to use their money in investments on top of having insurance, a way to doubly ensure that your money is put to use growing your wealth rather than simply sitting passively in a savings account. In this aspect, the insurance element protects your wealth in the event of death. It does not pay out exceedingly in the event of Death or diagnosis of Critical Illness, as that will cost and definitely going to charge the investor.

Find out more How To Invest in Fundsmith

Best Investment- Linked Policy Detailed In-Depth Comparison Singapore 2023

This is invaluable for retail investors because ILPs also allow access to many funds that would otherwise be inaccessible – including the Fundsmith equity fund price.

What To Do Next?

To find out how you can invest in Fundsmith fund, it is advised to speak with a professional Financial Advisor to better assess your concerns and most importantly, your investment objectives, time horizon you are looking at, the returns you are expecting as well as your risk appetite.

With returns ranging from near 16% to an all time high ranging 22% to 25.6% (2019), the Fundsmith Fund is ranging from moderately aggressive to aggressive risk profile and is important to know that the volatility is high. With high returns, come high risks.

Remember as always, do your own due diligence when it comes to investment.

To that end, do approach our advisors by filling the form below for a discussion on the Fundsmith Equity Fund if you are interested; our licensed Financial Advisors are more than happy to talk with you about whether or not the fund would be suitable for your investment needs and risk profile!

As always, they are non-obligatory, no hidden fees and  all advice are of no charges.