Trade secrets How £13.8bn manager Terry Smith does it

£13.8bn fund manager Terry Smith tells Sam Brodbeck how he runs Britain’s bestselling fund

Every year thousands of investors pour their money into Terry Smith’s funds. His flagship £13.8bn global fund is a perennial favourite of Isa investors, and for good reason. If you’d have invested £1,000 at launch in 2010, it would now have turned into £3,600. Last year, the fund returned more than double the FTSE 100 index of UK companies.

A renowned straight-talker, Mr Smith promises no performance fees, no trading and “no nonsense”. In a rare interview, he told Telegraph Money why he just bought Facebook and rails against rival fund managers who try to predict the future.

What’s your investment strategy?

Invest in good companies, try not to overpay, and then simply do nothing.

Some big investors have predicted a significant market correction, do you agree?

I remain amazed by the number of commentators, analysts, fund managers and investors who seem to be obsessed with trying to predict global events on which to base their investment decisions.

The fact that they are seemingly unable to predict what happens does not seem to stop them trying. Even if you could correctly predict how world affairs would develop, including the timing of them, this would not enable you to use this as a basis of investment decisions.

To usefully employ your predictions you would not only have to be mostly correct, but you would also need to gauge what the markets expected to occur in order to predict how they would react.

For example, most commentators thought that Donald Trump would not win the American presidential election but that if he did the market would fall. They were wrong on both counts. This is the reason I waste little or no time trying to guess what will happen to factors I cannot control and deploy most of my time and effort on things I can control. Two of those are whether we own good companies and what price we pay to own their shares.

What sectors do you like?

We favour technology, consumer staples and healthcare.

Are there shares or sectors you are avoiding?

We don’t invest in sectors that do not create value for shareholders over the long term, such as heavily cyclical sectors [tied to the fortunes of the broader economy], financials, extractive industries [mining], and airlines.

You’re known for how seldom you make changes to the portfolio. What firms have you held forever?

We have held the following stocks since the fund’s inception: Becton Dickinson and Stryker [two medical technology firms]

Colgate-Palmolive, Reckitt Benckiser, Johnson & Johnson and Unilever [consumer goods firms] Diageo [the drinks giant] InterContinental Hotels and Kone [a lift and escalator company] Nestlé and PepsiCo Philip Morris Why? Because we think they are good companies.

What have been your best and worst investments over your career?

Fundsmith is my best investment. My worst, which was before setting up Fundsmith, was a small holding in a quoted restaurant group that went to zero. I won’t say which one, though.

You recently bought Facebook at near all-time highs – are you worried you’ve missed the boat?

Facebook’s share price may still now be high, but its cash flows and earnings have grown faster than the share price, which may make it cheap.

Facebook is on a trailing [backward looking] price-to-earnings (p/e) ratio of about 29 times. If analyst forecasts of its growth prove to be correct that falls to a forward p/e of 23. This contrasts with a p/e of 50-plus in 2014.

People spend too much time thinking about valuation. They should focus on whether or not it’s a good business because the returns it delivers will mostly be driven by how much capital it can invest and what sort of returns this will make over the long term, not its valuation.

Do you have your own money in the fund?

I have over £200m invested in Fundsmith’s funds, which is a substantial proportion of my wealth. It is important fund managers have skin in the game to truly deliver alignment of interest with investors.

What would you have done if you weren’t a fund manager?

I’d have been a professional boxer.