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Fundsmith Equity, run by star fund manager Terry Smith, and Scottish Mortgage Investment Trust have made investors a small fortune over the last decade. Yet the last year has been tough as both funds have been hammered and now many investors have had enough.
Both star investment funds can be purchased inside your annual £20,000 ISA allowance, so you can take all the dividend income and capital growth entirely free of tax.
Some investors may not have realised that these funds largely invest in the US stock market, and were shocked to see their money plunge in value as Wall Street crashed earlier this year, falling more than 20 percent.
Disillusioned investors have now pulled more than £1billion from Fundsmith Equity in just three months, according to data provider FE Fundinfo.
Similarly, Scottish Mortgage, a type of investment fund that trades as a stock, has seen its share price fallen 15.4 percent in a year as investors sell up. It used to sell at a premium to its underlying assets, now it is trading at a discount as investor demand plunges.
Of the two, Fundsmith is lower risk fund, investing in solid income and growth stocks like Microsoft, tobacco maker Philip Morris and L’Oréal.
Scottish Mortgage is more aggressive, investing in fast-growing tech stocks such as Tesla and Chinese web giant Tencent, which have sold off hard lately.
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Despite this year’s disappointing performance, investors should not abandon Fundsmith, said James Yardley, senior research analyst at FundCalibre. “The fund is still excellent, as is manager Terry Smith, and I wouldn’t sell out now.”
Fundsmith has fallen 5.6 percent measured over 12 months, while its benchmark index IA Global has fallen just 0.8 percent. It has underperformed.
However, it is showing signs of recovery, rising 13.2 percent over three months, a period when stock markets rebounded strongly, against 9 percent on its benchmark.
Scottish Mortgage is riskier and has fallen further, crashing a thumping 39 percent in a year.
That is, more than double the 15.3 percent drop on its IT Global benchmark, Trustnet shows.
Again, though, it outperformed in the summer bounce, rising 11.9 percent in the last three months, against 7.1 percent for its benchmark.
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Yardley said many long-term Scottish Mortgage investors will be feeling uncomfortable given how far it has fallen, but those who cash out now will turn paper losses into real ones and risk missing out on the recovery.
“The trust should do well again, if you are prepared to wait it out.”
FundCalibre continues to include both funds on its Super 60 list of highly rated funds, Yardley added: “We flag Fundsmith Equity as a potential ‘core’ holding, whilst Scottish Mortgage is for more adventurous investors.”
Dzmitry Lipski, head of funds research at Interactive Investor, said Terry Smith’s portfolio will not outperform in all market conditions.
Like many stock market investments, it is cyclical and may swing in and out of fashion. “It may be out of favour at the moment, but that could change just as quickly.”
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Scottish Mortgage is higher risk because it has much greater exposure to unquoted companies and tech stocks, and uses gearing, which involves borrowing money to invest. “It works better as a satellite holding in a well-diversified portfolio.”
Lipski said there are no guarantees when investing, and past performance is no guide to the future. “Even the best fund managers can get it wrong, so always spread your investments over a range of different asset classes, regions, and sectors.”
Fundsmith refused to comment but James Budden, director of marketing and distribution at Baillie Gifford, which runs Scottish Mortgage, said the shares in its portfolio have been “indiscriminately” hit by rising inflation and interest rates, but still offer strong growth prospects.
“We acknowledge that recent volatility has been painful for investors, but seek their patience and ask to be judged on a five or even 10-year view.”
Nobody should invest in stocks and shares for a period of less than five years, and ideally much longer than that.
Over such a time period even the best funds have ups and downs, so do not panic just yet. Instead, monitor performance and if these funds do not recover over when markets do, then it may be time to move on.
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