저자: TerrySmith · 외국인
요약 보기
2015년 Fundsmith Equity Fund 연차서한 요약. 2015년 T-class 15.7% 수익(MSCI World 4.9%, FTSE100 -1.0%, S&P500 1.4% 대비 우위), 설립 후 연환산 17.6%. 금리상승/채권대용주 우려에 대해 시장타이밍 불가·품질 중심 장기보유 원칙 강조. 포트폴리오 ROCE·현금전환율 등 품질 지표와 FCF 수익률 4.3% 제시, 낮은 회전율과 TCI(1.13%) 공개를 통해 비용 투명성 강조.
다듬은 글
Welcome, curious minds. Today, we're taking a deep dive into the world of investment insights. We're uh pulling back the curtain on how one very successful fund talks to its investors. Yeah, we're digging into the January 2016 annual letter from the Fundsmith Equity Fund. It's written by the CEO, Terry Smith.
And this isn't just some, you know, standard yearly update. People often describe these letters as a bit of a master class in investment thinking. Absolutely. It really lays out their philosophy quite clearly. So, our mission today is to pull out the key nuggets from this report. We want to help you understand Fundsmith's specific approach, how they performed, and really what they believe truly matters for long-term investing straight from the source.
Right. And there's a lot to unpack there. Okay. So, if it's a master class, where does lesson one begin? What's the first thing jumping out from this 2015 review? Well, the immediate thing is uh performance naturally. This was their sixth letter marking five years since they launched back in November 2010.
Five years in. Yeah. And the 2015 numbers were well pretty striking especially when you compare them to the wider market. The fundsmith equity fund, the T-class accumulation shares returned positive 15.7% for the year. Okay. 15.7%. And you said striking when compared. How did the benchmarks do because you know context is everything here.
It really is. So the Msei World Index, that's a big global benchmark. It only managed plus 4.9% in sterling with dividends reinvested. Okay, so quite a gap already. What about closer to home like the UK market? Even starker there, the Footsie 100 index was actually down 4.9%. And even if you add dividends back in, the total return was still negative 1.0%.
Wow. Down 1%. Yeah. And for US dollar investors looking at the S&P 500, it finished 2015 down.7% or uh plus 1.4% with dividends. So Fundsmith's 15.7% that meant they outperformed the MSEI world by 10.8% in just that one year. A 10.8% beat. That's uh that's significant. And wasn't this part of a pattern by then?
It was. And this is where it gets really interesting philosophically. This was their fifth consecutive year of outperforming that index five years straight. But, and this is key, the fund explicitly states they are not actively trying to achieve short-term outperformance year after year. Right? That's the irony, isn't it?
They say they don't chase it, but they keep delivering it. It really speaks to their long-term focus, I think. And if you zoom out, look at the performance since they started from inception to the end of 2015. Yeah. The cumulative picture. Fundsmith was up 131.4%. That works out to an annualized return of 17.6% per year.
Okay, 17.6% annualized over 5 years. And the MSEI world over that same period, it managed a cumulative 64.3% which is an annualized return of 10.1%. So a huge difference compounded over time, nearly double the cumulative return. Exactly. It really shows the power of that consistent, even if not intentionally short-term outperformance.
And how did that stack up against other funds in their category? Well, within the investment association's global sector, they were the third best performing fund out of 203 over that period. Third out of over 200. Pretty good. Yeah. Why not first? Did they say they did? The letter points out the top two spots were held by specialist healthcare funds.
This was during a massive boom in the biotech sector. Ah, okay. A sector specific surge, right? And Terry Smith is very clear that's a game fund doesn't play. They don't claim any skill in picking the next hot sector. And frankly, he notes it's a game most other investors fail at, too. So, the takeaway is that their broad-based quality focused approach still put them near the very top, even without riding a specific, potentially short-lived sector boom.
Precisely. Consistent quality versus chasing heat. Now, speaking of challenges, 2015 wasn't exactly a walk in the park for markets generally, was it? No, definitely not. The letter mentioned several headwinds holding equities back. You had the slowdown in China causing jitters, setbacks in emerging markets generally.
The end of quantitative easing or QE in the US and then the big one perhaps the first US Federal Reserve interest rate rise in nearly 10 years. That happened in December 2015. Right. The Fed finally started tightening. And this backdrop led to a specific criticism aimed at funds like Fundsmith, didn't it?
Something about bond proxies. Yes, exactly. The bond proxy argument was a common theme back then. The basic idea was that Fundsmith holds these highquality stable companies, companies that often generate pretty reliable earnings and dividends. Okay. And the argument went that because these stocks felt safe and reliable almost like bonds, they were substitutes or proxies for bonds.
And the fear was that as interest rates started to rise, these bond-like stocks would get hammered just like actual bond prices would fall. Uh-huh. So the narrative was beware these stocks, rates are going up. Makes intuitive sense, I suppose. But Fundsmith pushed back. They did quite strongly. First, they just pointed to the scoreboard essentially.
While all these warnings were being shouted, the fund and its holdings were, as we just discussed, significantly outperforming. So reality wasn't matching the narrative. Not at all. If you'd acted on that fear and sold those bond proxies, you'd have missed out big time. Okay, that's a practical point.
What else? Did they challenge the logic itself? Yes, they also complicated the picture around interest rates. They pointed out that the Fed directly controls short-term rates, but the longerterm rates, which arguably matter more for equity valuations, are influenced by things like the US Treasury bond market and the swap market, right?
It's not just one rate. Exactly. And at the time, for instance, the 30-year US Treasury yield was near 3%. not exactly ultra low and maybe not destined to shoot up just because the Fed nudged the short end. So the link wasn't as simple as the narrative suggested. Interesting nuance. And they also had a point about simply identifying a problem versus finding a good solution, didn't they?
Yeah, that was quite pointed. They critiqued the common suggestion that investors should just switch out of these quality stocks and into say cyclical stocks. They basically asked rhetorically what could possibly go wrong with that strategy, implying it introduces a whole new set of risks. Precisely.
Identifying a potential problem, rising rates impacting some stocks is one thing. Jumping into a completely different type of investment as the solution is often much harder and riskier than it sounds. So, the core message seems to be don't just react to broad market narratives, especially fear-based ones.
Dig into the details. Absolutely. And this ties directly into their very firm stance on market timing. Ah, yes. What do they say about trying to jump in and out based on these kinds of forecasts? Terry Smith is very blunt. He acknowledges the fund will inevitably have periods when it underperforms the market.
That's just statistics. Sure. But trying to time those periods, trying to get out before a downturn and jump back in before the upswing, he says quite simply, I can't accomplish that successfully. Just a flat rejection of market timing is a viable strategy for them. Yes, it aligns perfectly with their whole philosophy.
It's a defiant stand against that constant pressure to do something in response to every market wobble. So, if market timing is out and chasing hot sectors is out, what is the core philosophy? It sounds almost deceptively simple. It does. It boils down to buying shares in good companies. That's the bedrock.
The main focus is owning businesses that can intrinsically grow their value over time, right? Not trying to predict share price movements daytoday, but focusing on the underlying business quality. Exactly. It's a stand against what the letter calls the obsession with share prices over the underlying fundamental economics.
And they have a pretty compelling way of demonstrating the quality they aim for, don't they? Treating the portfolio itself like a single company. Yes, this is fascinating. They present data comparing the aggregate financial characteristics of their portfolio companies against the Footsie 100 and the S&P 500, excluding financials for a cleaner comparison.
And what do those comparisons show? How good are these companies on average? Well, the metrics are pretty revealing. Take return on capital employed or ROC. Fundsmith's portfolio averaged 26.0%. 26%. That sounds high. It is. Compare that to the Footsie 100 average of 14.8% 8% and the S&P 500 average of 17.5%.
Significantly higher returns on the capital invested in the businesses. Okay, what about profitability margins? Same story. Fundsmith's average gross margin was 61.1%. Operating profit margin was 25.0%. Again, much higher than the benchmarks. These aren't just slightly better numbers. They suggest fundamentally more profitable business models.
And does that profitability translate into actual cash? Because profits aren't always cash. Great point. And yes, their cash conversion was excellent at 98.4%. Meaning nearly all the reported profit turned into real cash flow for the companies. That compares to around 70% for both the Footsie 100 and S&P 500 averages.
Wow. Nearly 100% cash conversion. That's strong. And how are these companies funded? Are they taking on lots of debt to get those returns? Quite the opposite, actually. They're more conservatively funded. lower leverage around 29.3% on average and much higher interest cover at 16.1 times. So less debt and easily able to cover their interest payments.
Exactly. The overall picture is clear. The portfolio companies demonstrate significantly better financial performance and are more conservatively financed than the average company in the major indices. It's quality across the board. A clear picture of fundamental strength, which brings us back to that point about focusing on fundamentals over share prices.
But the question always comes up, do you have to pay a huge premium for this kind of quality? How do they address valuation? Yeah, the valuation question is crucial. Despite owning these demonstrably superior businesses, they point out the portfolio's weighted average free cash flow yield at the end of 2015 was 4.3%.
Okay, 4.3% FCF yield. How does that compare? Well, it compared quite favorably to the median FCF yields of non-financial stocks in the S&P 500, which was 4.4% and the Footsie 100 at 3.8%. So basically a similar or even slightly better yield than the broader market despite the higher quality pretty much.
And perhaps even more importantly, the free cash flow per share of their portfolio companies had grown by 9.7% during that year. So you had a decent starting yield plus strong underlying growth, which suggests that considering the quality, these stocks weren't bad value at all, maybe even good value.
That's certainly the argument they make. It reinforces their view that if you focus on finding genuinely highquality businesses first, you can often find them at reasonable or even attractive valuations relative to that quality. The obsession shouldn't just be low price, but value relative to quality.
Makes sense. Let's shift gears then to the portfolio itself. It's always interesting to see which specific companies drove the results and what changes they made. Who were the big winners for them in 2015? Sure. The top five contributors to performance that year were Dr. Pepper Snapple ah beverages Imperial Tobacco, Microsoft, Sage, the UK software company, and Wreckit Benaziser, the consumer goods giant.
A mix of sectors there, but mostly consumer staples, tech, tobacco. Defensive seem well represented. Yes, typical fundsmith territory. These all added significantly to that overall 15.7% return. And on the flip side, which holdings detracted or didn't contribute much? The bottom performers list for 2015 included Proctor and Gamble, another consumer giant, right?
Also, PayPal, which was newly spun off, 3M, Cone, the Elevator Company, and Colgate Palm Olive. Interesting. Some big well-known quality names in there, too. Did they mention any specific concerns, particularly about PNG? Yes, the letter specifically notes a concern about Proctor and Gamble being on its third internally sourced CEO in just a few years.
Ah, leadership turn. That can definitely be a red flag even for a great company. It suggests potential issues with stability or strategy that they were clearly monitoring. Beyond just performance, the sales they made in 2015 really highlight their discipline, don't they? They do. One really notable sale was Domino's Pizza.
Selling Domino's? Why? It's often seen as a quality growth stock, not because the business was failing, but purely on valuation grounds. They felt the share price had run up so much that it was only justifiable if you believed its very rapid growth could continue indefinitely, which they doubted. So valuation discipline trumped even a successful holding.
Exactly. And get this, they mentioned it had been their single best performing share since the fund started. They sold it with regret and trepidation and even said they'd love to own it again if the valuation became more reasonable. That takes discipline, selling your biggest winner because the price got too high.
What else? Another interesting sale was Choice Hotels. This one wasn't about valuation, but strategy. Okay. They sold it because they were concerned about the risk versus reward of Choic's investment in something called Skyouch, a third party hotel reservation system. Funmith saw this as being outside Choice Hotel's core area of competence.
Ah, so it highlights their preference for companies sticking to their knitting. Precisely. They don't like it when their investy companies venture into different exciting things that are outside their established expertise. It influences unnecessary risk in their view. Stick to what you know applies to the companies they own too.
Anything else sold. They also sold eBay after it split from PayPal. They decided to keep the PayPal shares and sell the remaining eBay business. Again, focusing on the part they felt had the stronger moat and prospects. Okay, clear rationale. And what about new companies coming into the portfolio? In 2015, they initiated a holding in Waters Corporation.
That's a US company that makes high-tech lab equipment, things like mass spectrometry, liquid chromatography. Sounds specialized. What was the attraction? They liked its strong recurring revenues from consumables, service spares, and software. Plus, it tapped into a long-term trend of increasing product testing and certification requirements globally.
Growth potential there. Makes sense. High-tech, but with a strong, sticky business model. Any others mentioned? The letter also mentioned they were building positions in another unnamed testing company and a new consumer staples company. So, sticking to familiar themes, right? And all this activity or relative lack thereof, what did it mean for portfolio turnover?
Extremely low. Their objective is always to minimize turnover reflecting that do nothing ethos. In 2015, portfolio turnover was just 2%. Only 2% of the portfolio changed hands. Yep. And this has a direct positive impact on costs. The cost of voluntary dealing. So the trades they chose to make, not forced by inflows outflows, was tiny.
Just under half a million pounds, which worked out to only 014% of the fund's assets. Wow. 1.4 basis points. That's incredibly low friction. It really is. And this brings us to a really important point Terry Smith makes about the true cost of investing. Right. Because most people just look at the management fee or the OCF.
Exactly. Investors, commentators, advisers, they tend to focus only on the annual management charge AMC or the ongoing charges figure OCF. For Fundsmith's T-class shares in 2015, the OCF was 1.07%. Okay. 1.07%. Seems reasonable. But what's missing? What's missing, and this is crucial, is that the OCF does not include those dealing costs we just talked about.
Things like brokerage commissions, the bid offer spread you pay when buying or selling shares, stamp duty in the UK, a trading cost. Yes, these costs absolutely eat into your returns, but they're not captured in that standard OCF figure. It can give a misleadingly low impression of a fund's total expenses, especially for funds that trade a lot.
So, Fundsmith calculates something different. They do. They calculate what they call the total cost of investment or TCI. This includes everything the OCF plus all dealing costs, both voluntary ones they initiate and involuntary ones caused by investor flows. And what was their TCI for 2015? For the T-class shares, the TCI was 1.13%.
So only slightly higher than the OCF at 1.07% versus 1.13%. Exactly. Which reflects that incredibly low turnover and dealing cost figure we mentioned. They make the point that this TCI is likely very low compared to most other actively managed funds. Though they weren't exactly holding their breath, waiting for the rest of the industry to adopt this level of transparency.
It's a powerful point about hidden costs. But they also caution against just focusing on costs. Yes, absolutely. They warn against an obsession with charges that makes investors lose sight of what really matters, the net performance after all cost. You get what you pay for potentially. That's the idea.
They reiterate that those strong performance numbers, we started with the plus 15.7% in 2015, the plus 17.6% annualized since inception, those are after all fees and costs have been deducted. A slightly higher stated fee can be a fantastic deal if the fund delivers superior net returns consistently.
Focusing only on the lowest possible OCF might lead you to underperforming funds. It's about the end result in your pocket, not just the sticker price. Okay, so let's try and sum up. What are the big lessons we've pulled from this deep dive into Fundsmith's 2015 thinking? Well, we definitely saw how that disciplined focus on high-quality companies, refusing to time the market or chase fads, paid off in terms of long-term results, even in a tricky year like 2015.
Yeah, the numbers speak for themselves. And we also got that really clear, transparent take on costs, challenging the industry standard OCF, and showing how low turnover benefits the end investor. And I think beyond just this one fund, it's really about understanding a robust investment philosophy. It pushes you to think about the difference between market noise, all those forecasts and fears, and the actual fundamental economics of the businesses you might own and the power of patience.
Maybe just letting quality companies do their thing. Definitely patience and conviction seem key. So maybe a final thought for you listening to consider in a world that's always yelling about the next big thing and encouraging constant trading. How much real intrinsic value might investors be leaving behind by not focusing deeply on the quality and long-term potential of the companies they own?
Yeah. What could happen if you truly embrace the idea of doing nothing with your best investments? just letting that compounding work its magic over years, even decades, instead of reacting to every headline or quarterly report. Something to ponder. A very different approach to the constant activity we often see.
Thanks for walking us through that letter. My pleasure. Lots of food for thought there.
Comments 0