Terry Smith to share £10.6m windfall as Fundsmith quadruples profits

Terry Smith, the fund manager famed for his “buy and hold” philosophy, is set to share a £10.6m windfall with seven members of his new firm Fundsmith after reporting a quadrupling in profits.

Smith, who stepped down as chief executive of one of the City’s most well-known interdealer brokers, Tullett Prebon, last June, to focus on Fundsmith, managed a 23pc rise in performance, compared to a 11.5pc rise of global equities.

Despite only starting in November 2010, Fundsmith now has £3bn of assets under management and expects to own a lean portfolio of between 20 and 30 stocks.

Smith wrote to shareholders in December about his strategy: “In order to minimise the cost of dealing and avoid the mistakes, which seem to result when we sell stakes in good businesses, our mantra is: ‘Don’t just do something, sit there.’”

The fund grew turnover from £7.2m to £15.2m while pre-tax profits rose fourfold from £2.9m to £10.6m in the year to 31 March 2014, according to latest filings at Companies House.

Smith has put £50m of personal wealth into the fund, meaning he owns about half of it. He has started another emerging equities trust – targeting consumer businesses in developing markets.

Fundsmith’s top 10 performing investments last year were mostly household names: Dr Pepper Snapple, Microsoft, Domino’s Pizza, Stryker, Becton Dickinson, Imperial Tobacco, Unilever, Kone, Reckitt Benckiser and Philip Morris. Drinks maker Diageo and tobacco business Swedish Match were the only two out of the fund’s 27 portfolio companies that experienced negative performance in 2014. Despite this, Smith said the fund only decided to sell its stake in Swedish Match after taking a view on the e-cigarette market.

Fundsmith recently bought a stake in online marketplace eBay, in a break with his usual antipathy towards activist investors. “We are not fans of the commonest form of this activity … however in the case of eBay an activist acquired a stake and pushed the company to agree to separate its marketplaces and PayPal business and we tend to agree that they may be better separated”. Smith stresses that Fundsmith started buying its stake before seasoned corporate raider Carl Icahn declared his attack on the online marketplace.

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The fund also recently started buying shares in the UK’s biggest software company, Sage. Fundsmith admired its move to an online subscription payment model.

Smith is critical of “fund managers who buy bad companies” thinking they will improve because of a change in the economic or business cycle, or management. “Whilst fund managers await the kiss that will turn their corporate frogs into princes, they steadily erode value”, he said.

Smith said that he aims to have the fund fully invested in “companies of the sort we like”. He also revealed that he sold the shares he received in the demerger of Reckitt Benckiser’s Indivior.

Fundsmith Equity's top 10 holdings

• Dr Pepper Snapple

• Microsoft

• Domino's Pizza

• Becton Dickinson

• Stryker

• Unilever

• Imperial Tobacco

• Kone

• Reckitt Benckiser

• Phillip Morris