Fundsmith Equity - Opinions

AnotherJoe

MonroeM wrote: »

I'm not saying he the fund will, however it has not been around long enough to experience a downturn so let's wait and see.

I'm also not sure about investing in just 29 funds and mainly US and UK regions as opposed to some other Global funds as an example Old Mutual Global Equity with 500 funds over a more diverse spread of regions.

I think TS would say that the companies he has bought will do better in a downturn than the average, because of the strength of the constituents companies market positions. Whether that turns out to be the case or not time will tell.

I have hedged* my bets, mostly I have index tracker / global funds but i do have a few active funds including Fundsmith.

* (har har see what i did there)

talexuser

I Smith's point of view is that all markets/funds will domino fall in a "serious" crash, and index funds will fall and take a relatively long time to recover. However if Smith believes his companies are robust enough in market share and cashflow, then soon afterwards their performance should make them more attractive to investors, meaning they will recover faster and thus display a superior performance during any recovery compared to any index fund. In time we shall see if he is right.

coyrls

MonroeM wrote: »

I'm not saying the fund will, however it has not been around long enough to experience a downturn so let's wait and see.

I'm also not sure about investing in just 29 funds and mainly US and UK regions as opposed to some other Global funds as an example Old Mutual Global Equity with 500 funds over a more diverse spread of regions.

Performance in previous downturns may give some reassurance but it is possible that the next market downturn will have different features and affect equities in different ways from previous downturns.

AnotherJoe

coyrls wrote: »

Performance in previous downturns may give some reassurance but it is possible that the next market downturn will have different features and affect equities in different ways from previous downturns.

It what way do downturns affect equities in "different ways" other than causing share prices to fall?

badger09

coyrls wrote: »

Performance in previous downturns may give some reassurance but it is possible that the next market downturn will have different features and affect equities in different ways from previous downturns.

This time its different?

coyrls

AnotherJoe wrote: »

It what way do downturns affect equities in "different ways" other than causing share prices to fall?

OK, to be more clear, different equity classes, sectors, geographies etc. can be affected in different ways in downturns; some may fall more than others. I wouldn't see downturns as causing share prices to fall, I would see a downturn as a description of falling share prices, there can by multiple different causes of falls in share prices.

bowlhead99

AnotherJoe wrote: »

It what way do downturns affect equities in "different ways" other than causing share prices to fall?

When you see that 'the market' has taken a downturn you are looking at some weighted average result of how the performance or perceived prospective performance of a lot of disparate businesses have been considered, weighed and balanced by the market participants before, ultimately, the investors' money pronounces the result.

Depending on the underlying reason for the downturn and in which corner(s) of the world it is rooted, different types of holding can be affected differently and the time to rebound may be different.

Some kind of slowdown caused by a rapid rise of interest rates and restriction on available credit could be very painful for the value of both bonds (which are relatively much less valuable if prevailing interest rates or inflation is riding high) and 'bond proxies' such as infrastructure businesses with cash-cow ongoing payments, certain types of equity-income investments etc. And high interest rates are bad for corporate profits and investments too. So some crashes affect multiple asset classes in a substantial way. Other types of slowdown could result from shocks to oil prices, from demand from certain emerging economies, from something funny happening in the banking sector, from a sudden bursting of faith in hitherto overvalued tech companies, international war or disputes, Brexits etc. All of these could affect different asset classes and industries to a greater or lesser extent.

If you look at the last couple of 40% crashes in 2000-02 or 2007-09, recovery of value of major indices on a total return basis only took about three years. If you go April '15 to Feb '16 the capital value of the FTSE dropped 20% from its 7000+ highs, but had already recovered to over 7000 again about eight months' later. So, there are no doubt some people with a misapprehension that crashes are usually shortlived and nothing to worry about ; a real short-term blip.

But if you go back to some other decades where there was a sea-change in market perceptions and value, it's clear that returns can drop, take a different course, and take much longer to recover. Fundsmith has a preference for 'Global consumer defensive' shares or those with similar properties which happen to be in a different sector. But a fund that increases in value by 170% in five years (without starting from the absolute bottom of a market trough) should not be mistaken to be one that could not easily decrease by 50% if market conditions work against it; and assuming that what goes down would come back quickly may be a flawed assumption if there is a step-change in global market trends, as happens every few decades.

AnotherJoe

coyrls wrote: »

OK, to be more clear, different equity classes, sectors, geographies etc. can be affected in different ways in downturns; some may fall more than others. I wouldn't see downturns as causing share prices to fall, I would see a downturn as a description of falling share prices, there can by multiple different causes of falls in share prices.

OK that makes sense once you explain it.

In which case, what cause of a downturn would affect the shares in the FS portfolio worse than (say) the S&P500, rather than another sort of downturn. And on what grounds do you believe that that sort of cause is more likely than another sort which would affect it less ?

Or does your statement really amount to no more than (as badger09 might have put it) "next time it will be different" without any specifics, eg its just a bunch of ifs, buts and maybe's?

coyrls

AnotherJoe wrote: »

OK that makes sense once you explain it.

In which case, what cause of a downturn would affect the shares in the FS portfolio worse than (say) the S&P500, rather than another sort of downturn. And on what grounds do you believe that that sort of cause is more likely than another sort which would affect it less ?

Or does your statement really amount to no more than (as badger09 might have put it) "next time it will be different" without any specifics, eg its just a bunch of ifs, buts and maybe's?

My statement was in response to "MonroeM" who said:

it has not been around long enough to experience a downturn

and my response was that

Performance in previous downturns may give some reassurance but it is possible that the next market downturn will have different features and affect equities in different ways from previous downturns.

My point was a general one that even funds that have performed relatively well in previous downturns may not perform well in the next downturn.

An example of a factor that could affect the Fundsmith portfolio worse than say the S&P 500 would be the emergence of say significant developing world competitors to the companies in which he is invested. One of the criteria for Fundsmith's investments is:

businesses whose advantages are difficult to replicate

A judgement has to be made of this difficulty, which, if wrong, could result in a drop in performance. I'm not saying this is likely or unlikely to happen; it's an example of something that could have a disproportionate effect on Fundsmith.

AnotherJoe

coyrls wrote: »

My statement was in response to "MonroeM" who said:

and my response was that

My point was a general one that even funds that have performed relatively well in previous downturns may not perform well in the next downturn.

An example of a factor that could affect the Fundsmith portfolio worse than say the S&P 500 would be the emergence of say significant developing world competitors to the companies in which he is invested.

A judgement has to be made of this difficulty, which, if wrong, could result in a drop in performance. I'm not saying this is likely or unlikely to happen; it's an example of something that could have a disproportionate effect on Fundsmith.

Thats not really a "downturn" in the generalised sense that this conversation started with*, its a (very unlikely) confluence of events just happening to affect the 29 funds in the FS fund.

* which i understand to be an event affecting an overall geography or sector, if not the world as a whole.