The suspension of Neil Woodford’s flagship Equity Income Fund has served as a reminder that highly-regarded professional money managers can fall from grace in dramatic fashion. Nevertheless, one that many continue to have a lot of time for is Terry Smith, chief executive of Fundsmith.
Smith’s investment philosophy is simple: Buy quality companies, don’t overpay and then do nothing. It’s been a winning strategy for many years with his Fundsmith Equity Fund generating a 19.2% annualised return since its inception (compared to the 12% achieved by the MSCI World Index) as of the end of June.
Importantly, this fund only contains between 20 and 30 holdings at any one time, few of which are London-listed. Here, however, are three that do make the grade.
It’s not surprising that drinks giant Diageo (LSE: DGE) holds a spot since it has a number of attributes Smith looks for when evaluating investment opportunities. The company generates consistently high returns on the money it invests and has such a grip on its industry that attempting to build a rival from scratch would be extremely hard to do.
By contrast to your average technology stock, Diageo also look fairly resilient to change. While younger generations may be drinking less these days, they seem happy to spend more when they do, hence the popularity of premium spirits the company specialises in. As such, it seems pretty likely revenue and profits will continue rising in the future.
Unfortunately, Diageo’s defensive characteristics mean its stock rarely goes on sale. Should you want to add it to your own portfolio, you’ll need to pay almost 25 times forecast FY2020 earnings.
Unilever (LSE: ULVR) is another holding within the Fundsmith Equity Fund that ticks many of the same boxes as Diageo. The £131bn-cap specialises in producing the things Smith looks for — low ticket items that people buy again and again whatever the economic weather.
Consumers may reign in their spending on large, discretionary goods when the going gets tough, but they’re less likely to do so with jars of Marmite, bars of Dove soap or boxes of PG Tips. The power of its brands is also why Unilever continues to make heaps of cash even though shoppers are able to buy cheaper alternatives.
Like Diageo, Unilever rarely enters ‘bargain’ territory. Is 22 times forecast earnings too expensive though? For the quality on offer, I’d say not.
Perhaps the most interesting UK-based inclusion in the Fundsmith portfolio right now is fellow consumer goods company Reckitt Benckiser (LSE: RB). Shares in the owner of brands such as Durex and Dettol are currently almost 20% below the peak hit back in June 2017.
That follows a well-publicised cyber attack, manufacturing problems, investor concern over the pricey acquisition of Mead Johnson and criticism of the pay of (soon-to-depart) CEO Rakesh Kapoor.
More recently, the company has been embroiled in controversy surrounding the marketing of opioid treatment Suboxone Film by Indivior — a former subsidiary of that was spun-off in 2014. Last week, Reckitt wrote a cheque for $1.4bn to US authorities to put an end to this investigation.
Despite all this, Smith doesn’t look like dropping the stock anytime soon. Indeed, with Reckitt currently trading at 19 times earnings (lower than its five-year average of 22.5), it’s possible he may consider adding to his position.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019