Fundsmith Fails to Do Well Against Quality or High Profitability Comparables for the Past Two Years.

I profiled the returns of the popular fund Fundsmith here in September 2023.

Since we have ended 2023, I thought it would be good to do a summary of how Fundsmith have done versus good comparables.

Here is the performance comparison for the last 5 years:

The fund’s performance is usually listed in GBP, and so we have to convert the performance to USD by factoring in foreign exchange.

For 2023, the Fundsmith performance was 12% but USD depreciated 5% against GBP, so the performance ended with around 17.5%. In 2022, Fundsmith has the largest drawdown among the comparables. They were down 13.8% in GBP but USD appreciated 12.5% against GBP. Net-net, the returns in USD look worse due to that.

The comparables are indexes, unit trusts or ETFS that mainly give you exposure to market risk premium, or quality/profitability premium. DURPX is a US unit trust so that will be hard for you to invest but there is currently a Dimensional US High Profitability ETF traded on the US exchange with the ticker DUHP.

For the 5 years, the US profitability/quality index or funds have done better with the Dimensional US Hi Relative Profitability Institutional Fund doing well but because we do not have the December 2023 data for GMO Quality Investment Fund (available under Endowus), we are not sure if the GMO fund would have done better.

Very often, we would think that the manager is doing something very special, but if they explain their investment philosophy well and we have transparency to their execution, we may be able to distil the risk exposure they undertake in their portfolio.

In this case, we identify a specific target to market risk and profitability/quality risk in a global large-cap opportunity set.

When we compare against the correct comparables, what we will notice is that:

1. The returns are driven by the region and risk exposures (Global/US, market-risk, profitability/quality)
2. We can see over time if the managers do add value aside from #1. Very often, we do not see value aside from #1

The underlying message is more: The fund is not doing anything special. For those passive investors who prefers a more tax efficient, low-cost options, they can invest in IUQA, IWQA, DGRA, GGRA through Interactive Brokers. My write-up on GGRA is here.

5 years is a short time to judge the performance and Terry Smith have shown consistency in his investment philosophy. To do better, your portfolios have to be unique compare to others, and that would mean a difference in performance. We cannot expect a manager to give exceptional performance by holding the same thing as others.

This is the risk you take with an active manager.

They will deviate from the index and you need to be comfortable with the tracking error.

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