Terry Smith Defends 'weakest Returns Since Inception' For Fundsmith Equity

In his annual letter to shareholders, released every January, Smith acknowledged the fund had returned 2.2% over 2018, which was the "weakest [performance] in absolute terms since inception".

However, he highlighted the fund still outperformed its MSCI World benchmark, which was down 3% over the year, and that it remained the top performer in the Investment Association (IA) Global sector.

The manager went on to explain that Fundsmith was in the small minority of products in the IA that produced any positive return at all last year. He said: "There are 2,592 mutual funds in the IA universe in the UK. In 2018, 2,377 or 92% of these produced a negative return.

"13 posted a return of exactly 0% while just 202 had a positive return. Our fund was in the 4th percentile — only 3% of funds performed better.

"Ironically, 2018 was not a great year for our absolute returns but it was actually our second best year relative to all IA mutual funds. 2011, when the market also fell, was our best - probably not coincidentally."

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Smith criticised advisers and commentators who predict crashes and bear markets and suggest investors should take preventative measures. "No one can predict market downturns with any useful level of reliability," he added.

Instead the manager reiterated his three-step investment strategy, which is to "buy good companies, do not overpay and do nothing".  

In justifying his reasoning behind the 'do nothing' step, Smith shone the light on his immediate rivals, many of which turned out to have higher overall costs than Fundsmith due to higher portfolio turnover.

Turnover for the fund was 13.4% over 2018, which was the highest level of annual turnover it has seen to date, though remained small in comparison to its peers.

Smith said: It is perhaps more helpful to know that we spent a total of just 0.018% of the fund's average value over the year on voluntary dealing (which excludes dealing costs associated with fund subscriptions and redemptions as these are involuntary). 

"Too often investors, commentators and advisers focus on - or in some cases obsess about - the annual management charge (AMC) or the ongoing charges figure (OCF), which includes some costs over and above the AMC, charged to the fund.

"The OCF for 2018 for the T Class Accumulation shares was 1.05%. The trouble is that the OCF does not include an important element of costs — the costs of dealing. This can add significantly to the costs of a fund."

"We have long said that we look forward to the day when we can compare our total cost of investment (TCI) with other funds and that day has arrived. The table below shows the TCI of the 15 largest equity and total return funds in the UK and how their TCI differs from their OCF."

While the OCF of Fundsmith Equity was one of the highest among its peers at 1.05%, transaction costs were substantially lower at 0.04% meaning additional costs were the lowest and the TCI was in line with the average.