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View the article online at http://citywire.co.uk/wealth-manager/article/a445710

Terry Smith launches fund designed to repair a 'broken' industry

by Dylan Lobo on Nov 02, 2010 at 00:01

Former Collins Stewart boss Terry Smith (pictured) has launched a blistering attack on the funds industry to set the scene for the launch of a high conviction fund for his new investment firm Fundsmith.  

Smith, one of the City's most recognised investment bankers brought the curtain down on his 18-year career at Collins Stewart last month so he could focus on Fundsmith, which he said he established because most equity funds have failed to deliver on their promises.

Smith believes the combination of poor performance and high fees is a huge problem in the funds profession.     

'The fund management industry is broken. The vast majority of fund investors suffer from punitive fee structures, overtrading, fund proliferation, closet indexing and over-diversification. The net result is poor performance. The average IMA Global Growth fund delivered a total return of just 0.7% in the ten years to July 2010, underperforming the index by 5.3%.'

He added: 'By contrast, the Tullett Liberty Pension fund, which was significantly underfunded in 2003 when I took over as investment advisor, was returned to surplus by 2010, despite the market turmoil that took place in 2008, having employed a discretionary manager whose strategy is very similar to the one Fundsmith employs.'   

A high conviction fund at a low cost

To back his forceful view Smith has launched the Fundsmith Equity fund, which he will run alongside his firm's head of research Julian Robins. The fund invests in a concentrated portfolio of between 20 and 30 stocks dotted across the globe, all of which will be held for the long term. And he is putting his money where his mouth is, investing £25 million of his personal wealth in the portfolio.

The fund will levy a flat 1% annual management charge with the total expense ratio running at a similar level as trading cost will be low due to a very low portfolio turnover.

'We are conviction investors. It requires emotional discipline not to chase after the latest fad. I will manage the fund, and have worked with Julian Roberts, our head of research, for the best part of twenty five years. Where investments are concerned we see eye to eye. Fees create an enormous drag on performance. The Fundsmith Equity fund is ideal as a core holding in an institutional portfolio. Until now, such a quality global equity fund has rarely been available to retail investors, and never at this price.' 

We won't play 'hokey cokey'

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15 comments so far. Why not have your say?

IFAIpswich

Nov 02, 2010 at 08:38

I do hope this venture works well - it will be interesting to watch. How ironic that he is seeding the fund with his own £25 million (!!??) and then being critical of high charges in the industry. It's a bit like pulling the ladder up once you've climbed it.

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Victorian Assets

Nov 02, 2010 at 08:49

Bravo Mr Smith. Having someone of your profile make the case for what used to be Investing 101 is a delight to see. Best of Luck!!

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Anonymous 1 needed this 'off the record'

Nov 02, 2010 at 09:10

Pah....yet another low cost, big claims boutique. Equity fund with 20 to 30 stocks "with attractive valuations".....snore. Will probably take in a lot of money due to the names behind it but I'm skeptical

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Victorian Assets

Nov 02, 2010 at 09:20

To Anonymous 1: you can hear the axes grinding from Omaha.

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X- Factor

Nov 02, 2010 at 09:28

Rubish, another gimick. As there are so few private investors it must be a obvious that the majority will not beat the index. however good managers always float to the top. This is nothing new and if he is not carefull by not changing with the times could be one of the also runs.

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Victorian Assets

Nov 02, 2010 at 09:42

X-Factor: Like most of the wannabes that appear on that show, neither can you spell, nor string a cogent argument together. He is not trying to beat the index (in the short-term anyway) that is the whole point! This strategy will deliver superioir returns over the long term to the index and peers, with considerably less volatility and lower levels of absolute risk.

The index is full of absolute risk: banks (imposs to value), commodity companies (v expensive)...and on and on...but these investing realities i fear might be beyond your analytical powers.

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Stephen Charles

Nov 02, 2010 at 09:48

Looks like nobody on here can spell...ha ha

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Anonymous 1 needed this 'off the record'

Nov 02, 2010 at 09:57

@ Victorian Assets: starting to sound like you might work for Fundsmith!! Long term stock picking (not trading) is pretty much redundant these days. ETFs have ruined the efficient market theory as dud companies are now lumped together with higher quality names. Index / passive investing looks great over the long term but what if you were 70yrs old 10 years ago and followed that approach? You'd now be 80 and no better off. Basing your investment philosophy on the distance past is a dangerous thing to do when markets are becoming more and more random and the whole way in which we trade has changed so dramatically.

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Anonymous 1 needed this 'off the record'

Nov 02, 2010 at 09:58

Sorry distant past I meant before you correct me!

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Victorian Assets

Nov 02, 2010 at 10:14

Anon 1: God (or maybe Terry) save us from these lunatic traders. The only sentence your diatribe missed was "This time is different". I promise you Anon 1, nothing is different. There are imperfections caused by ETF's (which wont last) and there are SERIOUS imbalances being caused by the unelected, bearded wonders (the Fed) with QE. The music will stop, and as sure as night follows day the clever, "greatest fool" traders who have so brilliantly locked on to the new philosophy that you refer to will be caught out (again), and you will have to learn that stock market investing is about buying the dividend streams of good companies at reasonable prices.

I appreciate that i can hardly talk given my nom de plume, but it is just as well you remain Anonymous.

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Anonymous 1 needed this 'off the record'

Nov 02, 2010 at 10:48

Sounds like a threat. Agree to disagree. Should be "ETFs"....you don't need an apostrophe there.

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Cynical Sid

Nov 02, 2010 at 11:44

I'm underwhelmed by TS - i'd expected more. This fund is a sheep in sheep's clothing - oh and it aims to outperform over a cycle - whatever that is.

Will the real TS please stand up !

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ray silvester

Nov 02, 2010 at 12:11

It all seems so simple and I expect it is. I think Terry Smith deserves some respect in view of his track record.

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Anonymous 2 needed this 'off the record'

Nov 02, 2010 at 12:59

I simply do not see what is different about this offering, there are plenty of fund managers managing money this way, at lower cost. He is still offering a share class with a management fee of 1.5% (and paying IFA's 0.5% trail). His institutional share class is 0.9% - which is middle of the road in terms of value. Presumably every time a small investor puts money into the fund the administrator charges a fee and the costs of looking after all those direct investors will be extremely high. Most direct investors are also savvy enough to buy through a discount broker anyway. Mr Smith needs to be very careful about implying that the "fund management industry is broken", the low cost ETF is upping active managers game anyway, not this !

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Ladysaver

Jan 22, 2011 at 20:01

The charges are not much less (possibly even slightly higher) than certain well-managed low-cost Investment Trusts and some of these have similar approaches in selecting holdings. Similarly, there are a few other funds with no initial charges and for those that do have initial charges, investors can buy at zero initial charge through a discount broker. Mr Smith has said he did not want to go the IT route as investors should be able to expect unit prices to reflect performance, rather than being affected by the other factors that drive an IT's discount / premium. Fair enough.

He gives this as an example of the transparency that he says is important. Transparency is also emphasised in the Fundsmith 'Owner's Manual', which says Fundsmith wants investors to 'understand exactly' what the fund is doing.

In view of this, I find the opacity around the fund's holdings rather disconcerting. You will search the literature in vain for e.g. the 10 largest holdings, sectors, etc., and Mr Smith has declined to state whether or not he will ever advise investors what the fund is invested in.

That seems slightly unusual for a fund that stresses transparency.

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