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Terry Smith hints at plan to target smaller companies

Citywire AAA-rated manager acknowledges size of £14 billion Fundsmith Equity fund puts companies outside of mega-caps out of reach.

Terry Smith hints at plan to target smaller companies

Terry Smith has hinted at a 'plan' to target smaller companies than the mega-caps that make up his top-performing Fundsmith Equity fund.

Speaking at the annual general meeting (AGM) for the fund, Citywire AAA-rated Smith acknowledged the size of his £14 billion mandate meant he could not invest outside these large companies.

'When we started, one of our successful investments was Domino’s Pizza, and Domino’s Pizza when we invested was about a $2 billion market value,' he said.

'Today we couldn’t buy it, because we would have to buy 25% of the company. We can’t do that. You should never, in my view, combine illiquid investments in 25% of a company in an open-ended daily dealing fund.

'You can’t combine that safely and there are lots of examples of people having illiquid investments in open-ended funds – they always end badly. So liquidity is a very large part of it.'

Domino's Pizza (DPZ.N), the US-listed pizza company that is not to be confused with FTSE 250-listed Domino's Pizza (DOM), which operates in the UK and Ireland, has been one of Smith's most successful investments since he launched his Fundsmith Equity fund in 2010.

It was a feature of the portfolio at the outset and sold with 'regret and trepidation' five years later, with Smith having made around six times his money.

Questioned at the AGM about his inability to replicate this sort of investment with the fund, Smith acknowledged 'that's not available to us'.

'But we do have a plan in regards to that,' he said. Fundsmith declined to comment further.

Fundsmith runs just three funds available to UK investors: the flagship Fundsmith Equity fund, the Fundsmith Emerging Equities (FEET ) investment trust, launched in 2014, and the Sustainable Equity fund, launched last year but available only to institutions.

While his flagship fund's top performance has led to it consistently topping the sales charts, Smith said he was not concerned about its size on liquidity grounds.

He said the average market capitalisation of the companies he invested in was £84 billion. With 28 stocks in the portfolio, that amounted to a combined market value of £2.4 trillion, meaning, at £14 billion, Fundsmith Equity owned on average just 0.6% of the shares of its companies. 

14 comments so far. Why not have your say?


Feb 28, 2018 at 16:25

Smith is a great fund manager, one of the very best. It would be great if he did launch such a fund and I hope he does and there clearly are some great smaller companies with very strong and fast growing franchises listed across the world.

I've wondered whether he would do that, but thought he might not because such a fund would by definition be quite small (relative to the main one he runs) in that he likes to limit the number of holdings to appx 30. A lot also depends on what he means by 'smaller' companies - would they have caps in the 100s millions or couple of billion?

The fund would have to be big enough to be worth his while in terms of time / fees related to running it.

That might make an open ended structure unsuitable and like with his emerging market fund (FEET) may opt for an investment trust and someone of his stature would surely have little problem finding investors.

However, I do note that someone is already doing something similar - namely the CFD SDL Buffettology fund run by Keith Ashworth-Lord, which has done well and mostly focuses on smaller UK companies.

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Jim S

Feb 28, 2018 at 17:28

I'm a big fan of the fundsmith 'quality filter' approach for Global large caps, but a similar approcach with FEET has underperformed so far. I'm also a bit cautious about talented fund managers who decide to jump into another sector, sometimes this doesn't turn out so well.

If they start a global midcap fund I might be interested, but for small cap's I'd want to see some track record first.

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King Lodos

Feb 28, 2018 at 19:45

The fee and valuations on FEET make me a little cautious – as does the high early portfolio turnover..

But so much of the EM rally's been driven by tech giants, and presumably none of them would pass Smith's criteria as they're all fighting for market share, and presumably one (or none) of them is going to win.

Quality investing can go through quite long stretches of slow, plodding performance – as it did in the 90s, when Tech was leading that rally

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geoffrey mulford

Feb 28, 2018 at 21:31

Dosn't make much sense to me starting a smaller company's fund.

Terry said one of the reasons to only have 30 companies is that it is easier to know a lot about 30 companies than it is to know a lot about 100. But now he is going to have to know a lot about 30 companies in his main fund plus all the companies in his other funds.

If Terry finds say 10 good small companies I would rather he get rid of the worse large company and it replaced with those 10.

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Feb 28, 2018 at 23:32

His IT is not doing all that well and even Fundsmith may start failing when the value factor returns. He is now biting more than he can chew. It happened before.

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geoffrey mulford

Mar 01, 2018 at 05:01

FEET has out performed the main fund over the last 12 months.

Just saying

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chubby bunny

Mar 01, 2018 at 12:36

He'll end up stretching himself too thin. Must be getting bored in Mauritius.

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Jim S

Mar 01, 2018 at 17:29

Geoffrey, unless you look at the 1 year view, FEET hasn't done well yet. Even over 12 months, its NAV has improved by a couple of % less than Fundsmith Equity (14.89%, which qualifies a poor year for Fundsmith).

I do take your point though, and I am hopeful FEET will improve, its certainly not in the WPCT category. I just think Terry & team should focus on their current funds before starting another.

Incidentally, I'm assuming any new fund would probably be Global smaller cos, rather than UK, so not necessarily competing with CFD SDL Buffettology.

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mark spurrier

Mar 02, 2018 at 06:50

I am not sure he specifically means a smaller company fund. The size of FE is such that he cant't take a reasonable holding that would impact FE performance. A5% holding is a $1Bin investment.

I think he means that he needs to start a new fund and manage its size

FE could prob grow to 30Bn or more and still be able to trade in the current stock selection but it does fix you to a limited number of companies that are large enough that FE can deploy their capital

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Dennis .

Mar 02, 2018 at 09:30

I wonder if this is a hint that Fundsmith could be "soft closed". If the fund gets too big then the number of companies in his "investable universe" is reduced and investment becomes more constricted. £14bn sounds like a big fund but does anyone know how big these things can get?

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Ivor Grouse

Mar 02, 2018 at 11:23

Whichever way Fundsmith turns I will follow.

His track record over the last 6 years is to my mind one of the best.

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Dennis .

Mar 02, 2018 at 11:38

Careful with that comment, I have over £330K with Fundsmith but I remember how Antony Bolton and recently Woodford lost the plot so I don't put all of my money with Terry and what about FEET? Are you happy with that?

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Ivor Grouse

Mar 02, 2018 at 19:48


FEET has performed equally well as the larger international Equity fund.

A slide at the outset was perhaps inevitable as the £200m funds took time to invest. After the first year (when I made my first investment) it has comfortably managed over 12% + per annum. In common with many others I have no discomforts about Fundsmith's style or for that matter FEET per se.

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Mar 02, 2018 at 22:08

@ dennis

I don't think TS will "soft close" the fund, because as I recall he was asked this question in the 2017 AGM. The fund value was much less then than it is now. Its value now is 13.8 billion spread over 28 companies (valued at 94.8 billion each), so it still represents a small % in each company. I shall continue my monthly investment via and ISA, and hope the Fund doubles in the next 7 yrs. If it does "soft close", so what, there will always be people releasing money for some reason, and the trading will be with like minded fellow investors.

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