One of the best-performing investment funds of the last decade is not a secretive Wall Street hedge fund. It's not even a private office or exchange-traded fund. Fundsmith Equity is a U.K.-based investment fund managed by Terry Smith. The fund operates out of the U.K., but that does not mean its investment universe is limited. The firm invests all over the world. At present, 67% of the fund is invested in the U.S., with 14% in the U.K. The rest is invested in equities in regions such as Denmark and France.
Buy and hold strategy
Fundsmith's investment strategy is straightforward, and it has yielded tremendous results.
According to its investment literature, the fund wants to buy "a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time, and in which we invest our own money."
By using this approach, Fundsmith Equity returned 440% in the past decade, an annualized return of 18.2%. The management fee is less than 1% from most share classes.
The top 10 investment holdings of this champion investment fund provide an excellent guide as to the sort of companies Smith and his team wants to buy.
The top two holdings, which make up around 18% of assets, are PayPal Holdings Inc.(PYPL, Financial) and Microsoft Corp. (MSFT, Financial). Other top holdings include Facebook Inc. (FB, Financial), Idexx Laboratories Inc. (IDXX, Financial) and Novo Nordisk AS (OSTO:NOVO B).
All of these companies have durable competitive advantages and, more importantly, produce products that consumers rely on every day.
This is a core principle of Smith's investment process, which he outlined in his 2020 letter to investors:
"The main assets of the companies we seek to invest in are often intangible. Some examples of intangible assets are brands, copyrights, patents, know-how, installed bases of equipment which require servicing and maintenance and so produce customers who are locked-in to the supplier, software systems which are critical to a business or person and so-called network effects. They are distinct from tangible assets such as real estate, machinery and equipment, and vehicles".
Smith also highlighted his "do-nothing" style of investing:
"Turning to the third leg of our strategy, which we succinctly describe as 'Do nothing,' minimizing portfolio turnover remains one of our objectives and this was again achieved with a portfolio turnover of 4.1% during the period. It is perhaps more helpful to know that we spent a total of just 0.03% (3 basis points) 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). We have held nine of our portfolio companies since inception in 2010."
Do-nothing
Smith might not have the sort of the recognition in the global investment community as other highly respected value investors such as Warren Buffett (Trades, Portfolio), but his returns over the past several years show just how successful a do-nothing strategy based around the idea of finding high-quality stocks to buy, and leaving them to do their thing, can be.
Critics may argue this investor has benefited significantly over the past 12 months from the pandemic. Many of his top holdings are technology stocks, which have profited considerably from increased demand.
While that is true, the pandemic has only reinforced these companies' competitive advantages.
This implies that while their valuations may drop back, the qualities that attracted Smith to the businesses in the first place will remain. The key is discipline. Smith could have sold these investments at any point in the past decade, but he didn't, and the benefits have been enormous.
Other investors can learn from the strategy, as it's yet more proof that time in the market is far more important than timing the market.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Nick Sleep: The Best Founders Don't Care About Money
- Howard Marks: A Roadmap for Investors to Follow
- What We Can Learn From Bill Ackman's Outstanding Comeback
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