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"How Does It Feel To Be A Legend? Pleasing, Obviously"
Famous fund manager, market commentator and author Terry Smith has had a successful decade running money. These are his key investing principles.
Terrence Smith was raised in East London and attended Stratford Grammar School before enrolling in University College Cardiff's history programme in 1974, where he took first place. He declined a research fellowship offer to pursue a business career.
He then traditionally began his career as an equities analyst for Barclays and UBS in the London banks.
Several FTSE 100 companies filed for bankruptcy in 1990. Clients of Mr Smith, who was head of UK corporate research at UBS then, were curious about why these businesses had failed despite generating what appeared to be sizable profits. In response, Mr. Smith penned a circular for analysts demonstrating how these businesses had battled with cash flow as opposed to profitability and, in some instances, had intentionally misled investors.
Smith's article, examining 12 of these techniques, was well received and led to a publishing contract with Random House. The book Accounting for Growth was then published. UBS asked Smith to withdraw the book from sale, which Smith and Random House refused to do. Terry Smith was fired from UBS.
The controversy helped propel the book to the top of the bestseller list - more than 100,000 copies sold - and gave Terry Smith a solid reputation as a manager.
In 2010, Mr Smith founded Fundsmith, a London-based fund management company that provides long-term investment solutions for individual and institutional investors. By August 2023, this hugely successful asset management company had over £35 billion under management.
The firm's investment philosophy is centred around a "Buy and Hold" strategy, emphasising quality over quantity regarding stock selection.
Key points about Terry Smith and Fundsmith:
Investment Philosophy: Terry Smith is known for his straightforward and conservative approach to investing. He seeks to invest in high-quality, well-established companies with strong brand recognition and competitive advantages. He typically avoids speculative or high-growth companies, instead favouring companies with a proven track record of delivering consistent returns.
Concentrated Portfolio: Fundsmith's portfolios are relatively concentrated compared to many other investment funds. The firm tends to hold a limited number of stocks, focusing on a select group of companies that meet its strict criteria.
Long-Term Focus: Fundsmith's investment horizon is long-term, and Terry Smith encourages investors to have a patient and disciplined approach to investing. He often references Warren Buffett's maxim of buying and holding “wonderful businesses” for the long haul.
Global Approach: Fundsmith invests globally, seeking opportunities in developed and emerging markets. The fund manager looks for companies with the potential for sustainable growth and a global presence.
Performance: Fundsmith has achieved strong performance since its inception. For example, its flagship Fundsmith Equity Fund has outperformed many of its peers and benchmarks, garnering attention from investors worldwide.
Transparency: Terry Smith and Fundsmith are known for their commitment to transparency. They provide detailed information about their holdings and investment philosophy, and Terry Smith regularly communicates with investors through letters and presentations.
From its inception on November 3, 2010, to August 25, 2023, the Fundsmith Equity Fund T Acc (in GBP) has generated a total return of +522%, compared with just +191% for its benchmark. This gives a much higher return than the market, with a CAGR of 15.6% for the fund versus 9% for its benchmark.
True to his investment philosophy, his portfolio is made up of qualitative companies, often market leaders, with significant moats, such as Microsoft, L'Oréal, Novo Nordisk, LVMH, Meta Platforms, Stryker, Idexx Laboratories, Visa, McCormick, Philip Morris and others.
Terry Smith closely follows certain fundamentals when selecting and monitoring his positions. In particular, he uses ROCE (Return On Capital Employed), gross margin and operating margin (= EBIT margin) as well as the Interest Coverage Ratio (EBIT/Interest expense), i.e. profitability and solvency ratios. Of course, he also uses other data, but these five give us a good idea of which companies might be of interest to him in the future.
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The goal of this portfolio? Outperform the S&P 500 by at least 3% per year in the long term by investing in:
Owner-operated stocks (family companies or companies that their founders still run).
Monopolies and oligopolies (Only one or a few companies dominate the entire industry).
Cannibal stocks (Quality stocks which heavily buy back their own shares).
Access to this portfolio also brings you the benefits of investment courses, company research, investment resources, and weekly news.
Since 2011, Compounding Quality’s investable universe has increased by 1100% (CAGR of 21.0%) compared to 184% for the MSCI World (CAGR of 8.4%).
This is an annual outperformance of 12.6%! You can sign up for this portfolio via the link above.