Terry Smith: 'We don't own banks and never will'

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Terry Smith, the founder of Fundsmith, has told investors that his fund will "never" own shares in banks, which might be "bust" but for bail-outs from the authorities.

Reporting a 12.5pc return on the Fundsmith Equity fund over the past year in his annual letter to investors, Mr Smith said central banks' quantitative easing had propped up the share prices of banks and other cyclical companies.

He said the pledge by the head of the European Central Bank to do "whatever it takes" to save the euro was "likely to buoy the share prices of financial stocks, cyclical companies, those who might otherwise be bust, or at least in difficulty, and indeed a whole series of assets which we will never own in our fund".

"We do not own any banks stocks and will never do so," he added.

Mr Smith, who also heads Tullett Prebon (LSE: TLPR.L - news) , the broker, said the main contributors to the fund's outperformance in 2012 its benchmark, the MSCI World index rose by 11.4pc were Intercontinental Hotels (Other OTC: ICHGF - news) , L'Oreal, drinks company Diageo (LSE: DGE.L - news) , households goods maker Reckitt Benckiser (LSE: RB.L - news) and Kone (Other OTC: KNYJF - news) , which makes lifts.

The main detractors from the fund's performance were Procter & Gamble (NYSE: PG - news) , McDonald's, Imperial Tobacco (LSE: IMT.L - news) , medical suppliers Becton Dickinson, and "a consumer company which we are in the course of buying a position in and so would prefer not to name at this point".

Portfolio turnover in the fund in 2012 was just 0.48pc. Our only outright sale during the year was of SGS (Other OTC: SGSOY - news) , the Swiss testing company. "We remain convinced that it and the sector are good quality businesses, but the shares had reached the point at which they were one of the most highly rated," Mr Smith said in his letter.

Outright purchases for the year were Choice Hotels, Domino's Pizza, McDonald's, Visa (NYSE: V - news) and the unnamed consumer company. The fund finished the year with 28 holdings, up from 24 holdings at the end of 2011 "towards the top end of our range".

The average company in the portfolio was founded in 1902, against 1894 this time last year. Fundsmith Equity remains the best performing fund in the IMA Global Sector since inception to the end of December 2012.

Mr Smith said he was "rather surprised" that the fund managed to outperform the market in 2012, as central banks' loose monetary policy tended to encourage investors to buy shares indiscriminately. Funds that have taken large positions in banks have generally outperformed due to the rally in shares prices in the sector since last summer.

"All that liquidity has to go somewhere and indeed the supply of liquidity by central banks' purchases of bonds helps to push investors towards the purchase of riskier assets, as does the regime of record low interest rates."