Fundsmith chief warns on financials

Terry Smith, the founder of Fundsmith, has warned investors away from financials and leverage and defended his fund’s ­massive 62% weighting in consumer goods.

Smith says his other financials business, Tullett Prebon, of which he is chief exec­utive, would not be a suitable investment for the Fundsmith Equity fund, the global stocks portfolio and sole product in his Fundsmith range.

The manager has warned investors off high levels of leverage and says while Tullett Prebon itself is unleveraged, many of its customers have high levels of debt. (article continues below)

In his fund, Smith focuses on producers of inexpensive consumer goods with strong brands. These brands make them more likely to be able to pass on inflation in their costs to their customers and deliver high returns on their equity over an economic cycle. Smith also ­concentrates on consumer goods companies that are not dependent on retailers with tough purchasing power and buys firms where a third of sales are made direct to the consumer – a little like Fundsmith itself.

In terms of regions, Smith warns of getting caught up in a bubble in emerging market consumer plays and prefers globally diversified brands.

He says consumer goods firms listed in the developed world look expensive when they list in emerging markets, often with inferior liquidity and corporate governance.

In particular, he warns investors off the notion that there is a correlation between growth and investment returns, particularly in China, where many funds are sold on the basis of such a correlation.

Smith also hinted his fund could reduce its annual management charge from 1% to 0.75% if a price war between asset managers were to develop.