Terry Smith, England's Warren Buffet

Welcome to the 76th Pari Passu Newsletter,

This week, we will learn about a successful investor, Terry Smith. Deemed as England’s version of Warren Buffett, Terry Smith is at the forefront of the equity fund Fundsmith. Terry Smith is an outspoken and transparent commentator on investments and markets; he shares his views publicly in many articles, podcasts, and publications on the fundsmith.co.uk website. In addition, his investment style resonates with Warren Buffett as he takes inspiration from, but interestingly enough, he is not afraid to go against the crowd in certain situations, as we will see in his biography section.

With AUM reaching approximately $44.5 billion, of which $32 billion is concentrated in its flagship Equity Fund, Fundsmith stands as one of the largest active funds globally. From its inception on November 1, 2010, to the end of February 2024, Fundsmith achieved a net return of 596%, translating to an annualized return of 15.7%. This performance is notably superior to its benchmarks, with the S&P 500 ETF (SPY) and the MSCI World Index yielding returns of 392% and 254% respectively over the same period. Although the NASDAQ 100, represented by QQQ, surpassed Fundsmith with a total return of 747%, Fundsmith's consistent outperformance against the majority of its benchmarks, coupled with its resilience in maintaining positive annual returns in all but one year (2022), underscores its robust investment strategy. This is particularly impressive given that these achievements were realized without resorting to shorting or hedging techniques [1].

We will split this breakdown of Terry Smith and Fundsmith into three sections: Who is Terry Smith, Fundsmith’s Strategy, and Lessons and Going Forward. There is a lot to learn from this investor, so let’s get to it!

Section 1: Who is Terry Smith

From a rising banker…

Terry Smith's journey to the pinnacle of the investment world is as fascinating as it is unconventional. Born in England in 1953, Smith's early life gave little indication of the financial titan he was destined to become. A product of Stratford Grammar School and a history graduate from University College Cardiff in 1974, Smith’s academic pursuits were far removed from the world of finance and investment. His foray into boxing during his youth adds an intriguing layer to his character, suggesting a resilience and competitive spirit that would later define his professional demeanor.

Smith’s entry into the business world was marked by a pivotal decision to reject an offer for a research fellowship, opting instead for a career in the banking sector. His initial motivation for joining Barclays Bank remains a matter of speculation, with financial aspirations likely at the forefront. During his tenure at Barclays, Smith not only became an associate of the Chartered Institute of Bankers—a testament to his commitment to mastering the intricacies of banking—but also began to cultivate a keen interest in investing. This period served as Smith's informal education in finance, laying the groundwork for his future endeavors.

By 1984, Smith's career took a significant turn as he transitioned to a stock brokerage firm, where he distinguished himself as London's top-rated banking analyst. It's a role that would seem paradoxical in hindsight, given his eventual distaste for banks as investment vehicles. Following SVB’s collapse, Terry Smith expressed in March 2023 why he is not a fan of investing in banks, ironically: 

“Having spent the first decade of my career working in a bank and then becoming a top-rated bank analyst, I find that people often express surprise that I never invest in bank shares.

But I think it is precisely because I understand banks that I never invest in their shares. The recent events surrounding the collapse of Silicon Valley Bank (“SVB”) and Credit Suisse reinforce this stance. Why?

Firstly, I never invest in anything that requires leverage to make an adequate return. Banks have a very small amount of equity to support their balance sheet.” [2]

Smith’s nuanced understanding of banking, fostered through a decade of hands-on experience, informed his critical stance on the sector's inherent risks, particularly the volatile nature of deposit flows and the slim margins of safety they offered. His philosophy, deeply rooted in the principle of margin of safety, mirrors that of other esteemed investors like Warren Buffett, whom he frequently quotes. This adherence to fundamental investment principles, combined with distinct confidence—or smugness, as some might interpret—shapes Smith's public persona.

To a stern investor…

His professional journey is marked by instances that reveal not just his investment acumen but also his unyielding commitment to transparency and truth, even at the risk of controversy. His early days at BZW, a brokerage firm owned by Barclays, and shortly after his tenure at the bank, offer a striking example of his character. Within his first week, Smith issued a sell recommendation on Barclays itself, an audacious move that speaks volumes about his integrity and willingness to challenge the status quo. This decision shows Smith's readiness to prioritize analytical honesty over corporate allegiance, setting a precedent for his career.

Smith's tenure in the financial industry is punctuated with moments that accentuate his reputation as a provocative figure, unafraid to stir the pot. His critical stance on IBM and its valuation, especially in opposition to Warren Buffett's investment, exemplifies his analytical rigor and courage to dissent from prevailing market sentiments. At a time when questioning Buffett’s choices was almost heretical in investment circles, Smith’s skepticism of IBM's prospects highlighted his independent thinking and deep conviction in his analyses. Moreover, Smith's interactions outside the boardroom have further cemented his reputation as a fiercely passionate individual. Anecdotes like the reported incident where he headbutted a client at a black tie event harken back to his boxing days, showcasing a physicality that mirrors his combative approach to investment discourse. Such incidents, while controversial, underscore Smith's intense personality and his unwillingness to shy away from conflict, whether verbal or physical. The financial community's perception of Smith has shifted; his outspoken nature and feisty demeanor are now often viewed as hallmarks of his rigorous commitment to investment truth, rather than mere provocations.

Accounting for Growth and Fundsmith

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