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Fundsmith review: is it a good investment for 2023?

Fundsmith Equity is one of the most popular investment funds in the UK. However, recently, its performance hasn’t been amazing.

I own Fundsmith in my own portfolio and I’ve always seen it as a core position. Is it still a good choice in light of its recent performance though? Let’s take a look.

Investment approach

Fundsmith is a global equity fund meaning it can invest in companies listed all over the world. A concentrated product (it holds around 20-30 stocks), it only invests in high-quality businesses that meet strict investment criteria.

Specifically, portfolio manager Terry Smith invests in businesses that:

  • Have advantages that are difficult to replicate
  • Have solid growth prospects
  • Are very profitable
  • Have strong balance sheets
  • Are resilient to technological disruption
  • Have attractive valuations

Once he has identified companies that meet this criteria, Smith typically invests for the long term.

Buy good companies, don’t overpay, and do nothing,” is the approach in a nutshell.

I’m still very comfortable with this approach as we start 2023. History shows that over the long term, high-quality businesses tend to produce strong returns for investors.

That said, this approach isn’t going to work all the time.

Holdings

I’m also comfortable with the stocks in the portfolio. At the start of 2023, the fund’s top 10 holdings were:

Microsoft
Novo Nordisk
Philip Morris
L’Oréal
IDEXX
Estée Lauder
LVMH
Stryker
Automatic Data Processing
McCormick
Source: Fundsmith

One thing I like here is the fact that there’s exposure to some powerful themes including cloud computing, diabetes treatment, rising global wealth, and pet care.

Performance

As for performance, it has been a bit disappointing recently.

The table below shows that Fundsmith has underperformed its benchmark the last two years.

2022 2021 2020 2019 2018
Fundsmith return (%) -13.8 22.1 18.3 25.6 2.2
MSCI World index (%) -7.8 22.9 12.3 22.7 -3.0
Outperformance No No Yes Yes Yes
Source: Fundsmith

And in 2022 it was quite a substantial underperformance.

So what went wrong? And is the performance something to be worried about?

Well, the poor outcome last year can be attributed to a few factors. These include:

  • Fundsmith’s style. Terry Smith often invests in stocks that have relatively high valuations. In 2022, a lot of high-multiple stocks underperformed as interest rates rose.
  • Stock selection. Fundsmith made a few howlers last year. PayPal (which was sold in December), for example, fell about 60%.
  • No exposure to energy stocks. This led to underperformance against the benchmark as energy stocks outperformed.

Personally, I’m not too worried about 2022’s woes. As I said earlier, no investment approach works all the time.

And last year’s return needs to be put in perspective. Since Fundsmith’s inception in 2010, it has returned 15.5% per year, which is an excellent result.

Having said that, for the fees I’m paying (0.94% per year through Hargreaves Lansdown) I would want to see it start to outperform again in the not-too-distant future.

Risks for 2023

Whether performance will improve in 2023 remains to be seen, however.

If value stocks remain in vogue this year, Fundsmith may disappoint again. Currently, a lot of stocks in the portfolio have relatively high valuations.

Similarly, if energy is the top sector again, the fund may underperform once more.

I’m holding

I’ll be sticking with Fundsmith in 2023 though. I’m backing it to improve at some stage.

2022 showed that this investment fund isn’t a silver bullet. It can lose value. So, I will be allocating capital to other funds and also buying plenty of individual stocks in 2023 for diversification.

The post Fundsmith review: is it a good investment for 2023? appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Fundsmith Equity, Hargreaves Lansdown Plc, Idexx Laboratories, Microsoft, and PayPal. The Motley Fool UK has recommended Hargreaves Lansdown Plc, Idexx Laboratories, Microsoft, and PayPal. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.