Speaking at a media briefing at the Tullet Prebon London International Boat Show, an apt venue for a discussion on wealth management, Fundsmith founder Terry Smith explained why the firm’s equity fund addresses some of the issues he sees with the industry.

The art of investing is, according to Smith, simple: identify great companies, maintain the willpower to only buy them when they’re cheap, and then “sit on your hands”. The main challenge is, he says, the emotional side: not allowing yourself to get carried away by trends and fads. And as for market timing, Smith says there are those who can’t do it and those who don’t know they can’t do it.

At the same time, it is important to manage clients’ expectations, and for them to understand that by buying into this fund they will not be invested in the latest “big thing”, says Smith. In fact, the firm encourages its clients not to get over-excited by either big gains or drops, because the important issue is not these market swings, but long-term underlying growth.

The fund holds 23 stocks, with the majority of these being in the small-ticket, consumer non-durables sector. The firm does not invest in companies where the performance is reliant on the credit cycle, hence the preference for non-durables. Smith also says the fund does not like companies prone to technological change, “because it’s hard to predict”. And the fact that the average inception date for companies held by the fund is 1887 attests to this.  

Smith is renowned as a blunt speaker and writer about the financial services industry. He recently argued that there are risks in certain exchange-traded fund products, for example. To read about that issue, click here.