Fundsmith Equity I

Investment Process

The fund has an investment universe of around 70 names. It is selective because Smith and his team seek those rare companies that can defy the laws of capitalism and sustain a high return on invested capital for many years. Smith invests in ‘good’ businesses whose advantages are difficult to replicate, do not require significant levels of debt to generate returns, are resilient to change thanks to technological innovation and that have an attractive valuation based on free cash flow yield. The target companies also need to be able to generate revenue through a high volume of everyday, repeatable, and predictable events. Smith typically avoids less developed countries and sectors including banks, real estate, and insurers. Stock deas are sourced through quantitative screening, and company research including Annual Reports & Accounts. The team also meet management, attend conferences, and read industry publications. The final part of the process is to simply sit back and do nothing. They allow the growth and return on capital which companies generate to compound over the long-term. They will only exit a position if they believe the investment case has weakened such as the company making, in their view, a risky acquisition.