Is Fundsmith a new improved fund manager or just a different packaging?
This article first appeared in Aimzine, www.aimzine.co.uk .
There’s nothing I like better on a Wednesday evening than sitting down with a glass of red wine to watch The Apprentice. It’s so warming on a cold evening to be able to righteously mock the young candidates undertaking tasks when they make mistakes that we probably all made at that age but had the good fortune to not have broadcast on prime time TV.
A recent task that was especially challenging was to create a launch advert for a new cleaning product. It sounds quite mundane but that was the point. How do you inject new ideas into a product category that frankly has been advertised to death for the last fifty years? A product category in which there are few, if any, real improvements and in which enhancements are typically product variations such as tablets rather than powder, or a fresh scent. One of the teams produced a TV advert which impressively, but I assume unintentionally, managed to combine sexism, cheesiness, ritual humiliation and a 1960’s style all into a 30 second piece http://www.bbc.co.uk/programmes/p00c2bs6 . I doubt it could have been any better (or worse, depending on your view) if it had been an intentional parody of a 1960’s advert. Worryingly, that team won, or as the Sugar daddy put it, “The other team lost”.
In the real world, this month saw the launch of another apparently new variation of a long established product. Terry Smith launched Fundsmith; a new fund management company. Like selling cleaning products, it’s difficult to make any truly new claims about a fund manager so it all comes down to marketing and advertising messages and Mr Smith has those in abundance.
Mr Smith says that the fund management industry is congested with fund managers ranging from the mediocre to the bad who trade too often thereby eroding investor returns, and that many fund managers are bloated with high fee levels.
Therefore, the Fundsmith whiter-than-white approach will be to run a fund which will have a unique investment process, a long term view and lower costs.
The investment process is that the fund will select a relatively small number of global stocks, probably 20 to 30, and will hold them for long periods with lower levels of trading than other funds, and hence lower expenses being incurred in the fund. It all sounds quite sensible and you begin to wonder why other funds don’t do the same thing. Well, one reason could be that if as a fund manager you’re not buying and selling stocks it can look as if you’re not doing much work at all. In which case how do you justify your fat fees? Another reason is that you want investment ideas which often come from brokers, but brokers aren’t going to call you if you never trade with them. The flow of broker commissions from fund managers can be an important factor as to which fund managers the broker will call from his list.
Clearly some fund managers have done well by this approach of selecting global stocks for the long term. The obvious example is Warren Buffett who has held stakes in companies such as Coca Cola, American Express and Wells Fargo for many years, through his investment vehicle Berkshire Hathaway which was formed over 40 years ago. So, perhaps the Fundsmith investment process isn’t actually so new or unique.
Fundsmith’s claim to be taking the long term view should also be questioned. No long-only fund manager would claim to run their fund on a short term view, although the old joke that a long-term investment is a short-term investment gone wrong probably applies more often than many fund managers would care to admit. A long term view is possible if a fund or fund manager has a track record of performing over the long term but for a new fund it can be difficult to hold out if performance is poor in the short term because the widespread ability that investors have these days of comparing fund performance through online tools makes the pressure on underperforming funds all the greater.
Finally the advantage of lower costs is an interesting one. There is the benefit of lower trading expenses mentioned above. On top of that Fundsmith is charging 1% to 1.5% as an annual fee but that’s no lower than any other fund manager. Infact some fund managers investing in exchange traded funds charge as little as 0.6%. Fundsmith has no initial fee on investment into the fund but, whilst this always used to be a big drag on returns and was usually around 5%, for some time now it has been handed back to investors when they invest through an online funds website.
So, all in all it’s difficult to see any compelling reason for investing in Fundsmith funds as opposed to any other. At least with cleaning products, you can hold your white sheets up to the sun and see that the gravy and ketchup stains have been dissolved away but anyone investing in Fundsmith does not have anything tangible on which to make the buying decision. Many of course will be swayed by Mr Smith’s decision to put his money where his mouth is, but then some might say that he has plenty of both of those assets to play with. Even so, an investment of £25 million isn’t pin money even to Terry Smith.
As with washing powder, it may claim to be new and improved and it might well be, but frankly it’s quite difficult to tell the difference between two white sheets, and right now it’s even more difficult to tell the difference between Fundsmith and other fund managers. If you like the idea of investing to the Fundsmith tune then you could always use their selection criteria (on their website) to build your own portfolio of 20-30 companies or even better still wait for their investment reports to be published and then buy into those stocks directly
Ash Mehta is an independent Finance Director consultant working with a portfolio of growing companies, having recently sold Orchard Growth Partners where he was Founder and CEO. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations. You can read his blog at www.ashmehta.co.uk and comment on this article by emailing ash@ashmehta.co.uk .
