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Fundsmith crafts equity fund

New fund management company Fundsmith has based the only equity fund it will ever manage on a set of values that include no initial or performance fees, no derivatives, no over-diversification and no closet tracking.

The company was established this year by former Collins Stewart chief executive Terry Smith, and has pitched its first fund as an alternative to existing equity funds. Smith will invest his own money in to the Fundsmith equity fund, which will invest globally in equities over the long term.

The fund’s focus is firmly on quality businesses that can sustain high returns with competitive advantages that are difficult for other to replicate. Firms that can adapt to change, particularly in relation to new technology, are favoured and it is important for firms to reinvest in their businesses with a high rate of return. Finally, companies that make it in to the portfolio will need to be attractively priced.

The fund will not use short-term trading strategies, it will avoid firms who need to borrow money and will not invest in other equity funds. Neither will it take short positions or hedge currency exposure. It says the cost of currency hedging can turn out to be higher than it initially appears and that hedging has no bearing on the real performance of a fund. Similarly, it will not use shorting as it believes this can be costly and detracts from its task of finding quality firms to buy and hold.

Fundsmith acknowledges its criteria will limit the number of potential investments. It expects the portfolio to contain just 20 to 30 stocks, which it believes will ensure there is no over-diversification of stocks or closet indexing. A concentrated portfolio ensures the fund will contain only the manager’s best ideas, which will be held for the longer term.

Fundsmith says most equity funds own too many stocks so, in effect, are tracking an index, while investors are being charged for active management and in some cases pay performance fees that may encourage managers to take too much risk.

Advisers may agree with many of the principals on which this fund was built. However, a concentrated ‘buy and hold’ equity portfolio may seem too much of a risk for some, particularly during volatile markets.


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