Worth buying Fundsmith at this point?

bowlhead99

trooper147 wrote: »

My logic is that I've been investing in a UK based fund which invests in the US, hence have benefited from a drop in £. If i invest in a US based fund which invests in the UK, if the fund does OK over the next year and the £ recovers a bit, I may be good? I'm not sure if it's actually possible to invest in US funds anyway...?

thoughts anyone?

Sorry, that plan does not really work. Imagine you are a UK investor investing in a UK fund. You invest your £100 in the UK fund and it goes and buys three Microsoft shares for $50 each, which it can afford because £100 = $150.

Then we have a brexit and suddenly £1 is only $1.30 instead of $1.50.

So the $150 of Microsoft shares is now worth £115. So your holding in the UK fund is now £115 instead of £100. Yippee, you made 15% from Brexit even though Microsoft didn't start making any more dollars of profits a year and its share price in USA wasn't changed.

The downside is that now you want to go and buy a copy of Microsoft Office while you are over in New York on holiday, the $150 of software now costs you £115 instead of £100 like it used to, and your room and meals and souvenirs all cost 15% more as well. So you have not necessarily increased your global spending power at all, but you do have a 'winning' fund measured in pound sterling terms.

But lets assume you never travel or buy foreign goods so you're happy with the result of turning £100 into £115.

Now you're looking at how to use the same 'trick' in reverse, by investing in a US fund which will make money by investing in UK when sterling strengthens and dollars weaken.

So you take your £115 out of fundsmith or whatever and go to your FX broker and you buy $150 with your £115. You use that to invest in a US fund which invests internationally.

The US fund manager takes the $150 and sees that it is worth £115 at the current exchange rate of 1.3, and he decides to buy five shares of UK company Bellway Homes which are £23 each for the total of £115.

Then what happens is that USD/GBP rate goes back to 1.5 instead of 1.3. Without the price of Bellway changing, just like the price of Microsoft didn't change in the first example. So the US investment fund has £115 of GBP assets which at a rate of $1.5 to the pound is $172.50

The US fund manager is pretty happy with that performance, having grown your $150 investment, and everyone else's $150 investment, into $172.50 with the convenient boost from sterling strengthening. All his local US investors are happy with that.

However for you personally as a UK resident, that growth from $150 to $172.50 is worth nothing at all. When you take your $172.50 out of the US fund, and convert it at your FX broker to pounds, at the latest rate of $1.50 to the pound, you get.... £115 again. Which is what you already had before you went and invested in the US fund.

So, as a UK person, going and finding a US fund that invests in UK assets, you are not going to benefit from the change in FX rate in that same way. Effectively, although you're complicating things by doing it via a US manager, you are still a UK person invested in UK assets and you will only make money if those UK assets grow in value ; exchange rates are an irrelevance.

In the first 'fundsmith' example you are getting a free currency boost to your GBP returns by being a UK person investing in foreign assets. But in the second example you are simply a UK person investing in domestic UK assets in a needlessly complex way. That doesn't get you a free currency boost to your GBP returns. It just helps you have more dollars in your hand, but dollars are worth less than they were, so you are not getting any improvement on top of the GBP return of nil.

One way of looking at it is that in the first example you took sterling savings and bought US companies in the hope that the dollar would strengthen and you'd get free money. And it did. Now you think sterling is going to strengthen, so don't buy US companies, buy UK ones. But the problem is, if you spend UK savings on buying UK companies, there is no gain from the pound strengthening. You already had pounds and you still do.

So, forget about investing in 'a US fund which invests in the UK' as you're on a hiding to nothing, because you already have pounds and you don't get any more of them by buying pound assets with your pounds.

Obviously if you fear a sharp correction you should sell the fund that owns the Microsoft shares because if the USD:GBP rate goes back to its old 1.5:1 level, the $150 Microsoft shares will only be worth £100 again not £115. So you can 'uninvest' in your foreign assets, but once you have done that, you can't really invest in buying some more pounds, because you don't have any non-pound assets with which to buy the pounds.

Separately there are some much more complex products using currency derivatives which might give you the result you are looking for if you bet the right way on currency movements, but they are somewhat fraught with risk and not for the casual investor. Currency hedged products do exist.

Perhaps the better thing to do is just re-evaluate all your portfolio and consider what would happen if rates changed, what types of companies would be successful in the face of changing rates, do I have many of them, how likely is it that rates will change, etc etc. You can add 'currency risk' in your planning but it is a complicated subject.

hutman

@bowlhead

Upon cashing the £115 - i assume we've realized the gain? Following your example deductively; makes sense not buy foreign fund with British assets.

I think you've touched on it with stock prices remaining still amidst currency fluctuations but could you explain a bit more on the correlation of stock prices and fx moves? And also if we return to cashing in the profit, pls elaborate on the effect of inflation on the erosion of the purchasing power we've inherited? These two points are not making sense in my head when following your example - has the investor benefited at all from this?

Thanks

stringer_bell

the way I see it. I have fundsmith in my pension, I'm not retiring for another 20-30 years.. so the fluctuations in currency do not bother me

aldershot

I am a Fundsmith holder continue to add monthly via my ISA. It is the only active fund I hold. If you believe his philosophy, then invest in the fund. As always, it's better to do it monthly to smooth out the input. Always frustrating to see a lump sum drop the day after you buy something! The fund performance is excellent but should be put in context of the rise in the S&P. Any £ based investor buying the best US funds (or index trackers) over the past 5 years has done exceptionally well. Fundsmith has been one of the very best, but the vast majority of the return has come from the rise in the index.

Chickereeeee

Fundsmith pfft
LTI now there is an IT going place

AnotherJoe

Terry Smith has just put £115M of his own money into his fund.

http://www.telegraph.co.uk/investing/funds/terry-smith-invests-115m-in-his-fundsmith-equity-fund/

talexuser

AnotherJoe beat me to it. Smith obviously feels it worthwhile now, and is dismissive of active managers who do not invest substantial amounts of their own money in the funds they run. In fact he wants regulation to force managers to declare how much of their own money they risk in their own funds. BTW just because Smith has invested now is not a reason in itself for you to do so - this is for the long term, not a short term gamble.

jimjames

Chickereeeee wrote: »

Fundsmith pfft
LTI now there is an IT going place

I hold the UT version, very underrated fund managers in my view but that's good if it avoids them having the big money to try to find a home for! 38% premium would also put me off the LTI.
http://citywire.co.uk/money/investment-trust-watch-lindsell-train-flies-worryingly-high/a916201

AnotherJoe

jimjames wrote: »

I hold the UT version, very underrated fund managers in my view but that's good if it avoids them having the big money to try to find a home for! 38% premium would also put me off the LTI.
http://citywire.co.uk/money/investment-trust-watch-lindsell-train-flies-worryingly-high/a916201

IMO mad to buy with a 38% NAV as you need both the market to grow and the NAV to hold amd that is surely an almost unprecedented premium.

bowlhead99

The LTI trust owns a big slice of the management company which is not an entity which has a daily published fair value.

So, while the price of LTI might appear to be a massive premium to the published market value of its portfolio of listed, 'known value' companies, it is all a bit of guesswork because one of the assets is an investment in the management company which will have a fair valuation of some tens or hundreds of millions but quite difficult to say what the real number should be.

That said, the management team have expressed surprise and urged caution about the high premium, but that is in itself a bit of marketing spin, because it draws attention to how much people are valuing their trust over and above the known portfolio value, which may encourage even more people to stay with them or to join them "to avoid missing out!"