Martin Lewis advises on moving your savings into ISAs
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2022 was a tough year for investors with few hiding places as war in Ukraine, the energy shock, rocketing inflation and rising interest rates destroyed investor confidence.
Many of the country’s most bought funds were hammered as a result, making pension and Isa savers a lot poorer.
The most popular Stocks and Shares Isa fund of all, Fundsmith Equity, crashed 13.8 percent, according to its own figures published today.
That is far worse than its benchmark index MSCI World, which fell just 7.8 percent. Fundsmith is supposed to beat the market, not underperform.
This is a blow for a huge number of ordinary investors as Fundsmith repeatedly tops the best selling Isa fund lists published by wealth platforms such as AJ Bell, Hargreaves Lansdown and Interactive Investor.
It has been the most popular and one of the best performing in the UK for a decade.
Last year was different, though.
The fund’s value fell from more than £28billion to less than £23billion, yet its star fund manager Terry Smith came out nicely ahead.
Under a complex partnership package, Smith’s Mauritius-based business Fundsmith Investment Services (FIS) charged £252million for its services.
Smith owns 61 per cent of FIS so his share could be worth almost £154million. We cannot know for sure as firms are not required to disclose financial accounts in Mauritius.
He was also awarded a £36.5million share of the profits, taking his total payout to just over £190million.
Investment funds still make money when stock markets fall, from the annual management fees they charge investors.
Fundsmith charges investors one percent of their total holdings each year. That may not sound much but soon rolls up given its mammoth size.
This may explain why Smith was so relaxed about last year’s plunge, stating in his annual letter to investors sent out today that: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable.”
Smith said he has consistently warned that no investment strategy will outperform in every reporting period and every type of market condition.
His fund was hit by the US tech stock crash, as top holdings Meta Platforms (formerly Facebook), PayPal, Microsoft and Amazon all crashed.
Fundsmith Equity still boasts an excellent long-term track record, having returned 59.7 percent over the last five years, according to Trustnet.
Laith Khalaf, head of investment analysis at AJ Bell, said Smith had suffered “a rare year of underperformance”.
“2022 was by far the worst calendar year of performance Fundsmith Equity has endured since launch in 2010. Higher inflation and rising interest rates prompted the market to turn against the growth stocks favoured by Smith.”
He said all active managers will endure such periods of underperformance. “Particularly those like Smith, who have a distinctive style bias expressed through a concentrated portfolio.”
Khalaf noted that around 70 percent of the fund is invested in the US, where stocks are falling heavily but still look overvalued.
This means he could underperform again. “Fundsmith investors shouldn’t therefore bank on an immediate return to the glory days of yore.”
Khalaf added: “Smith has plenty of credit in the bank for past performance, and in the long run his simple, well-grounded investment philosophy is likely to deliver results.”
Investors will need to be patient, as a turn around could take time, he said.
Smith finished today’s statement quoting Winston Churchill: “If you are going through hell, keep going. At Fundsmith we intend to”.
Given the outsize rewards he is generating, few would expect him to.
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