Funds that fit with Fundsmith Equity

ONE of the best-selling ISA and SIPP funds on Fidelity Personal Investing in July and August was Fundsmith Equity, which is managed by Terry Smith. It has a distinctive approach that has generated impressive results since the high-profile launch in November 2010.

Fundsmith Equity invests in large, well-established companies from around the world that have high quality businesses, which can maintain a significant level of profitability. They typically have advantages that are difficult to replicate, do not require significant debt and are resilient to change. Well-known examples include: software giant Microsoft, the beauty specialist L'Oréal, luxury group LVMH, as well as Facebook and WhatsApp owner Meta Platforms.

Last year was a difficult one for the fund, which lost 13.8% in 2022 as its growth style fell out of favour. This was its first ever annual loss and it has enabled savvy investors to pick up these fantastic businesses at more attractive valuations.

If you are one of the many people to have invested in Fundsmith and are looking to diversify your portfolio with different investment styles, there are several global mandates that could work well alongside it. A good example is the Edinburgh Worldwide Investment Trust, managed by Baillie Gifford. It is a member of our Select 50 list of handpicked funds and has a different style to that of Terry Smith.

Like many of Baillie Gifford’s other vehicles, it focuses on stocks with the potential for very high future earnings growth, whereas Fundsmith looks for high quality businesses that can compound their returns over many years. It also differs in that it has a small-cap bias.

Lead manager Douglas Brodie and his team are not afraid to take risks in order to deliver upside and they understand that one cannot come without the other. Their investment process is designed to ride the winners, which opens up the possibility of owning a company whose share price might increase many times over.

This is only possible because they are prepared to hold their positions during the tough times and absorb losses to enable the fund to achieve the upside that such a philosophy should deliver. The track record suggests that it is a good approach, although it has struggled in recent months as the high growth style has fallen out of favour due to the increase in interest rates.

Another fund in the Select 50 with a different style to Fundsmith is Schroder Global Recovery Fund, which has a deep value approach to stock selection that is well suited to the current macro-economic environment. If you invest alongside Fundsmith Equity there is unlikely to be any overlap between the two portfolios.

Lead manager Nick Kirrage and his team has a proven philosophy that has been tested through some really tough periods. This is a quality that should not be underestimated as they have shown that they will stick to their process and that their stakeholders will support them.

Detailed analysis suggests that they have a consistent approach, so investors know what they are getting. The team also tends to gain in conviction as prices fall and are often most comfortable owning what others are selling, which is an important trait when investing in unloved stocks.

Fundsmith Equity Fund Geographic split

• US - 66.8%
• Denmark -11.5%
• France - 11.4%
• UK - 5.0%
• Spain - 2.9%
• Cash - 2.5%

^{Source: Fundsmith, as at 31 August 2023, by country of listing.}

Fundsmith Equity Fund - top 10 holdings

1. Novo Nordisk
2. Microsoft
3. L’Oréal
4. LVMH
5. Philip Morris
6. Stryker
7. IDEXX
8. Meta Platforms
9. Visa
10. Automatic Data Processing

^{Source: Fundsmith, as at 31 August 2023}

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The Edinburgh Worldwide Investment Trust plc invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. Shares in the Edinburgh Worldwide Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Schroder Global Recovery Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice