Fundsmith significantly underperforms index post Brexit

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Terry Smith’s £9.1bn global equity fund significantly underperformed the benchmark in the period following the UK’s vote to leave the European Union even though it was one of the best selling funds over the period.

The Fundsmith Equity fund returned 12.3 per cent between 24 June, when the Brexit vote was revealed, and the end of the year, compared to 21.5 per cent in the MSCI World index, FE data shows.

The IA Global sector returned 19.2 per cent over the period.

The underperformance contrasts with investor appetite for the fund, which saw it top Interactive Investors most bought funds in 2016. It was the second most traded fund at The Share Centre behind the Woodford Equity Income fund.

According to FE data, the fund’s size has increased by almost 50 per cent over the last year with approximately £2.9bn of inflows.

“The weakness of sterling post Brexit meant that investors were driven to go into equity markets for a currency boost and Fundsmith Equity is one of the largest funds in the sector,” says FE research manager Charles Younes. “The fund has a strong exposure to the US dollar which the market expected to do well in this environment.”

The end of year performance contrasts with the first half of the year before the Brexit referendum vote on 23 June.

Over that period the fund returned 7.5 per cent compared to 2.8 per cent in the MSCI World index, while the IA sector returned 0.9 per cent.

Across the year the fund almost came out even with the benchmark returning 28.2 per cent compared to 29.1 per cent for the MSCI World.

Tilney Group managing director Jason Hollands says the Fundsmith fund suffered from the market shift away from bond proxies towards value and cyclical businesses on the election of US president Donald Trump, which radically reset expectations around US growth and inflation.

However, Hollands says Smith had a “stellar” start to the year and delivered investors good returns over the year as a whole. “It remains to be seen whether the strong bounce in cyclical companies is over exuberance about what the Trump administration might achieve,” Hollands adds.

Younes agrees that the Trump reflation trade has favoured sectors that Smith typically avoids like banks and oil companies with low valuations.

Younes adds: “Looking forward, the fund’s approach could still work, especially if equity markets have gone too far.  It is generally thought that a black swan event is no longer priced into the market, so Fundsmith Equity, with its very low turnover, could remain a good option for the cautious investor.”