New asset management company Fundsmith has released its inaugural shareholder letter revealing the Fundsmith Equity Fund has gained 6.14% net of fees since November.
The £61m fund, unveiled by UK financier Terry Smith on 1 November, has outperformed the MSCI EAFE index at 5.76% and the FSTE 100 at 4.4%. The fund underperformed the broader MSCI index, which also includes US stocks.
The report reveals the best performing stocks were Del Monte Foods, Becton Dickinson, Domino's Pizza, Nestle and Stryker Corp.
Conversely, detractors from the fund's performance include Secro Group, Imperial Tobacco, Dr Pepper Snapple and Reckitt Benckiser.
Smith says the Equity fund launch was "somewhat against the tide of events" as it was unveiled at the end of a decade in which equities have performed badly and the average active fund manager has underperformed the index.
"Faced with this failure of active management, it is hardly surprising investors have turned their backs on active management and headed for lower cost, passive alternatives," he says.
"As a result, the rise of ETFs has been a major feature of the investment landscape in recent years. By the third quarter of 2010, there were 2,379 ETFs with 5,204 listings on 45 exchanges managing $1,181.3bn of assets."
He adds: "So what is the problem? I suspect the average investor regards all ETFs as just another form of index fund, and indeed many of them are. But many are not, and therein lies the potential for misunderstanding. Or worse."
Some ETFs replicate the performance of an index by using a swap agreement with counterparties - known as synthetic replication - who agree to provide a monetary return which matches the underlying asset class or the index the ETF is seeking to track.
Smith says: "Anyone who has studied the events of the credit crisis should be able to spot a potential problem here: what if the counterparty supplying the swaps defaults? This risk may once have been considered theoretical, but after the collapse of Lehman and the need to rescue AIG in order to prevent the contagion from a default it surely no longer is.
"True, the ETF should be holding collateral against such a failure, but collateral is an imperfect science even where it is held, which is not in all cases."
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