Hargreaves Lansdown (HRGV) is continuing to deny the top-performing Fundsmith Equity fund a place in its Wealth 150 list of recommended funds, saying the global fund is expensive and untested in a downturn.
In a research update on Citywire AAA-rated Terry Smith’s fund, Jonathon Curtis, investment analyst at the online stockbroker, said that with an annual charge of 0.95%, ‘we don’t think the fund is good value’.
Curtis added that Smith’s eight-year track record as a fund manager was ‘still relatively short compared to other successful managers in the global sector’ and that he hadn’t been tested ‘during a prolonged market fall or when his investment approach is out of favour’.
‘We like a track record that includes at least a full market cycle, so we can see how a fund manager reacts when the market and the fund goes through a tough patch.’
Fundsmith Equity is the best performing global fund since its launch in November 2010, having delivered 292% to investors. That has helped Smith amass £17.2 billion in his fund, which is set to become the UK’s largest.
But as Fundsmith has continued to top the performance and sales charts, Hargreaves hasn’t budged.
‘There’s no denying the fund’s performance has been excellent,’ he said. ‘Inclusion on the Wealth 150, however, is based on more than performance alone.’
He said that the fund’s charges were ‘more expensive than most other funds in the global sector’.
‘When we weigh up Smith’s experience, track record, buy and hold strategy, and the size of the fund, we think it’s too expensive,’ he added.
‘There are similar funds available, with more experienced managers, whose performance has also been excellent, and whose charges are far lower.’
Smith (pictured) has long argued that fund annual charges are less important than what he calls the total cost of investment, which includes the impact of dealing costs. Through his long-term buy-and-hold strategy, he says this is kept low for investors in his fund.
Of the global funds that do feature on the Wealth 150, the Lindsell Train Global Equity fund is the most similar to Fundsmith in investment style.
Their £5.3 billion fund, which charges 0.54% on Hargreaves, is just pipped by Fundsmith over five years, having delivered 154% versus 156%. Both are well ahead of rivals in the global sector.
In his update on the fund, Curtis highlighted the shift in the fund’s positioning, with technology stocks now a key focus for the fund, accounting for more than a third of the portfolio.
Consumer goods stocks, which had become synonymous with Smith’s investment approach and accounted for 62% of the fund at launch, now occupy just a quarter of the portfolio. Healthcare stocks account for another quarter.
‘When it launched, the fund had no investments in the technology sector. Now tech companies make up the fund’s four biggest investments,’ said Curtis.
‘There are still more consumer goods companies in the fund than from any other sector. But there seems to be a shift towards technology and health care, which both make up more of the fund by percentage.’
Curtis highlighted that nearly all the companies sold from the fund over the last 18 months were in the consumer goods sector.
‘They were Smucker (SJM.N), a maker of spreads and peanut butter; Imperial Brands (IMB), a tobacco company; and Nestlé (NESN.S), the largest food company in the world,’ he said.
‘Soft drinks company Dr Pepper Snapple and medical product maker CR Bard were also removed from the fund when they were taken over by Keurig Green Mountain (KDP.N) and BD (BDX.N), respectively.’