Fund manager Terry Smith is the Cristiano Ronaldo of the investment world.
He is right at the top of his profession and, like the footballing maestro, he is handsomely rewarded for his particular ‘craft’ – an ability to generate stellar returns for investors that most rival managers do not possess.
Yet, while most people accept that footballers such as Ronaldo are worth every penny of the millions they earn every year – presumably because of the entertainment they provide – they don’t all think the same way about fund managers.
Fat cat? In the year to the end of March 2019, the company owned by Terry Smith and seven other ‘members’ made profits of £26.4million, with Smith receiving at least £16.2million
They are viewed as fat cats, pure and simple. Part of the City’s greed culture that sucked us into the 2008 financial crisis and made us endure years of austerity. Last week, 66-year-old Smith, the boss of investment house Fundsmith and manager of £18.8billion investment vehicle Fundsmith Equity, was not spared the fat cat jibes as his latest report and accounts were released.
In the year to the end of March 2019, the company that he owns with seven other ‘members’ made profits of £26.4million with Smith receiving at least £16.2 million. He was immediately dubbed a fat cat fund manager.
Maybe his cause was not helped by the fact that on the same day his company’s accounts were published, so were those for disgraced rival Neil Woodford. These showed that in the year to the end of March 2019, Woodford – and his business partner Craig Newman – pocketed an outrageous £13.8million in dividends.
Although Woodford’s flagship fund Equity Income had yet to hit crisis point – that came in June 2019 when fund dealings were suspended – concerns were already being raised in regulatory circles about the illiquid nature of many of Equity Income’s holdings.
Some £13.8million of rewards for failure? Absolutely. Fat cattery? Absolutely.
‘Poor timing,’ was Smith’s chirpy response when I tracked him down on Thursday to ask him about his own ‘fat cat’ label. ‘Just my luck to have our accounts published on the same day as Woodford’s.’
His only quibble was the press’s suggestion that he had received far more than £16.2million as a result of his undisclosed share of £115.8million paid by Fundsmith to associated company Fundsmith Investment Services.
The differentials are similar when the three funds are compared from the time Woodford Equity Income was launched in June 2014
Certainly not the figure of £87million quoted by some, he said. Although he wouldn’t tell me the amount when I pressed him.
Smith has been living in Mauritius, an island state in the Indian Ocean, since 2014. It is from there that he manages Fundsmith Equity, the UK’s biggest investment fund. Although tax may have been a factor, he insists that he moved to the island to get away from the distracting noise of the City and to set up an emerging markets investment trust.
Maybe Smith’s good mood was explained by the fact the sun was shining after two weeks of incessant rain. Maybe he has so much money that criticism is water off a duck’s back. And maybe he always expected to get a tough press.
‘Criticising success is a very British habit,’ he said, ‘but I think people should look at things in a different way. My view is that if people – my investors – are happy with the returns I have made for them, then they should just focus on that and remain happy.
‘If they’re not happy with what they are getting from me, then they shouldn’t be invested in our funds.’
He also said his personal rewards were not fat cattery, but a result of all the hard work he had put in – and the risks he had taken – in starting a fund management operation from scratch back in 2010. This is after a career that saw him work for a number of companies, including an investment offshoot of Barclays, the bank UBS, and stockbrokers Collins Stewart and Tullett Prebon.
Smith has been living in Mauritius, an island state in the Indian Ocean, since 2014
A career not without its falling-outs and dismissals – as befits the son of an East London lorry driver who grew up the hard way and has his idiosyncrasies (despite his age, he still indulges in regular bouts of Thai kickboxing).
‘I’m a big believer in capitalism,’ he said. ‘It’s the only system that works. The alternative is Venezuela or North Korea, and we don’t want their systems foisted on us. I’m a believer in equality of opportunity, but not equality of outcome, which many people seem to want.
‘If you look at what I’ve done at Fundsmith, I put up most of the initial capital – millions of pounds – to start the business and hire staff.
‘At the start, I was the only investor in the Fundsmith Equity Fund and I wasn’t paid a single penny for the first couple of years. I could have lost the lot. I took risks. I think this needs to be taken into account when judging my rewards.’
To reinforce this point, he referred to a spat in 1877 between art critic John Ruskin and American artist James Whistler over the latter’s painting Nocturne In Black And Gold: The Falling Rocket. Ruskin wrote that he never expected a ‘coxcomb to ask 200 guineas for flinging a pot of paint in the public’s face’. Whistler issued a writ for libel and in court Ruskin’s counsel asked Whistler how long it had taken him to paint the work.
His response was two days, which prompted counsel to ask: ‘The labour of two days is that for which you ask 200 guineas?’
‘No,’ replied the painter. ‘I ask it for the knowledge I have gained in the work of a lifetime.’
Smith’s point is that his rewards from Fundsmith result from a lifetime spent in the City equipping him with the tools to become a fund manager par excellence. They haven’t come overnight.
He certainly has his fans in the investment adviser community – unlike Woodford. Brian Dennehy is managing director of FundExpert and one of the shrewdest judges of fund managers.
He saw through Woodford before he launched his fund management business in 2014. He says: ‘If Terry Smith happens to make a stack of money because he has made me or my clients a stack of money, then I am happy. But when Neil Woodford makes a war chest of money from failure, that leaves a bad taste in my mouth.’
Dzmitry Lipski, head of fund research at Interactive Investor, is equally effusive. He says: ‘He’s worth every penny. He’s a great investor. Yes, it’s a large amount – £16.2million – but relative to what? He has delivered and remember you have professional footballers kicking a ball around a pitch earning millions of pounds a year.’
Certainly, the investment performance numbers underpinning Fundsmith Equity are compelling. In the past five years, it has turned an investment of £10,000 into a holding worth more than £23,000.
Over the same period, Lindsell UK Equity – another fund run by a star manager (Nick Train) – has grown a £10,000 investment into £18,000, while Woodford’s old fund, Equity Income, has shrunk the same investment to £7,800 (with worse to come as the fund is broken up and holdings sold off).
The differentials are similar when the three funds are compared from the time Woodford Equity Income was launched in June 2014 . Since launch in November 2010, Fundsmith Equity has delivered average annual returns in excess of 18 per cent.
Woodford dividend payout is ‘obscene’
Nobody contacted by us over the past few days had a kind word to say about Neil Woodford’s decision to take £13.8million in dividends (money shared between him and colleague Craig Newman) – just before Equity Income ran into trouble in June last year. Trouble that led to the flagship fund’s suspension and has resulted in the break-up of the fund, crystallising losses for investors that could exceed 50 per cent.
Adrian Lowcock, at fund scrutineer Willis Owen, says the fact that Woodford can walk away with millions of pounds while Equity Income investors are still waiting to see how much money they will get back is ‘sickening’.
‘Rewarded for failure’: Fund manager Neil Woodford
Patrick Connolly, at financial adviser Chase de Vere, says the dividends look ‘obscene’. He adds: ‘Woodford is being rewarded for failure while his investors are suffering.’
Bob Rennison, who invested in Equity Income on the recommendation of broker Hargreaves Lansdown, says Woodford ‘deserves to go to prison’ – though he accepts the dividends paid are legal.
Fund manager Alan Miller helped Wealth uncover some of the decisions Woodford made, confirming our view that the Woodford business was living on borrowed time.
He says the regulator should never have allowed Woodford and Newman to take the dividends when it knew the risk profile of Equity Income had changed for the worse.
He is also scornful of the note attached to Woodford’s accounts stating ‘negative press coverage’ was partly to blame for the fund’s suspension, saying: ‘It was his dismal record that led to investors giving up on him.’
Although some of Fundsmith Equity’s outperformance (especially against Train’s UK Equity fund) is down to its two-thirds exposure to a strong US stock market, it is also a result of a disciplined investment process honed over many years by Smith and his head of research Julian Robins (his designated successor when Smith decides finally to hang up his boots and wear his flip-flops 24/7).
It sounds simple in Smith’s words – ‘buy good companies, try not to overpay for them, then sit on your hands and do nothing but hold them’ – but it’s based on meticulous and painstaking research.
‘We work very hard to analyse companies and most of our work ends up in the bin,’ said Smith. In other words, the firms just don’t pass muster. Currently, Fundsmith Equity is invested in just 28 mega companies – the likes of Microsoft, Estee Lauder, PayPal and Facebook. They are all quality growth stocks that could fall out of favour.
But as Jason Hollands, of wealth manager Tilney, says: ‘Smith’s overall investment approach has worked well over the long term, and there is no reason to believe this won’t be the case in the future.’
Although Fundsmith is primarily all about Terry Smith, what stands the company apart from Woodford Investment Management is that investment is its heartbeat – not marketing or sales.
While Smith rules with an iron fist, he surrounds himself with investment experts who think and act the Smith way. Nowhere is this demonstrated more than with the £7.8billion investment trust Smithson. Launched in October 2018 to invest in small to medium-sized companies that are out of the reach of Fundsmith Equity because of its size, it has so far delivered returns in excess of 30 per cent.
The fund, comprising 29 stocks, is run by Simon Barnard and Will Morgan, but no trade is made without being sanctioned by Smith.
‘One day, some of the companies in Smithson could be big enough to merit inclusion in Fundsmith Equity,’ Smith said. Next on his agenda is a meeting with the new chairman of Unilever, a company in Fundsmith Equity’s portfolio.
Come torrential rain or glorious sunshine, Smith is busy making money for himself, his employees and fellow members – and, most important of all, for his fund’s investors. Everyone’s a winner. Capitalism in action.
If you want to participate, buy into his funds. Happiness is not guaranteed, but the chances are that you will be a lot happier than if you were investing elsewhere.
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