Terry Smith / Fundsmith
high confidence — compiled with source citation from the investment brain.
Terry Smith / Fundsmith
Terry Smith / Fundsmith
Terry Smith is the founder and CEO of Fundsmith LLP. The Fundsmith Equity Fund opened for business on 1 November 2010, and Smith has written an annual letter to shareholders every year since — sixteen letters through 2025 in the corpus. His strategy is three steps and a refusal to trade.
Philosophy: buy good companies, don't overpay, do nothing
The strategy is repeated near-verbatim year after year in three steps — buy good companies, don't overpay, and do nothing. The first leg is measured on a look-through basis — Smith presents the portfolio as if it were a single company and compares its ratios to the indices. The 2017 table reports portfolio ROCE of 28% versus 15% for the S&P 500 and 14% for the FTSE 100, with gross margin 63% versus 44%/41%.
His definition of "good" is quantitative and two-part: "Consistently high returns on capital are one sign we look for when seeking companies to invest in. Another is a source of growth—high returns are not much use if the business is not able to grow and deploy more capital at these high rates." That is the quality-vs-statistical-cheap fork resolved firmly on the quality side, with a growth condition that sets it apart from cigar-butt-investing.
The "do nothing" leg is literal: "Turning to the third leg of our strategy which we succinctly describe as 'do nothing', minimising portfolio turnover remains one of our objectives", achieved in 2017 with "a portfolio turnover of 5.4%". The persistence proof follows: "we have held 13 of our portfolio companies since inception."
Ownership, not "pass the parcel"
The first letter framed an equity holding as a claim on cash flow rather than a resale bet: "We do not regard equity investment as a sophisticated game of pass the parcel in which we buy shares in companies that we don't understand, which may be poorly performing businesses and/or which are over-valued, hoping to sell them to a greater fool." The 2010 portfolio had an average return on operating assets of 50% and an average founding year of 1883.
Cross-links
Smith's quality-growth stance is the long-only pole of kerrisdale-vs-long-only-views; his look-through presentation is the same lens as look-through-earnings; his emphasis on cash returns on capital echoes owner-earnings and capital-allocation. His active-fund defense against indexing is index-vs-active-bets.
Investment philosophy
The compiled, source-grounded version of this investor's beliefs lives at investment philosophy.
Sources
investor-letters/Fundsmith/Letters-Markdown/2010 - Annual Letter to Shareholders.md (letter dated Jan 2011, covering 2010)investor-letters/Fundsmith/Letters-Markdown/2017 - Annual Letter to Shareholders.md