Terry Smith: 6 Criteria For Finding Exceptional Businesses

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Fundsmith has just released its latest factsheet in which Terry Smith outlines his six criteria for finding exceptional businesses. Also included is the optimum number of stocks to hold. Here’s an excerpt from the factsheet:

The Company will invest in equities on a global basis. The Company’s approach is to be a long-term investor in its chosen stocks. It will not adopt short-term trading strategies. The Company has stringent investment criteria which the ACD and Fundsmith Investment Services Limited as investment manager adheres to in selecting securities for the Company’s investment portfolio.

These criteria aim to ensure that the Company invests in:

  • high quality businesses that can sustain a high return on operating capital employed;
  • businesses whose advantages are difficult to replicate;
  • businesses which do not require significant leverage to generate returns;
  • businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;
  • businesses that are resilient to change, particularly technological innovation;
  • businesses whose valuation is considered by the Company to be attractive.

Investors should be aware that the application of these investment criteria significantly limits the number of potential investments for the Company’s portfolio. It is envisaged that the investment portfolio of the Company will be concentrated, generally comprising between 20 and 30 stocks.

The Company will not invest in derivatives and will not hedge any currency exposure arising from within the operations of an investee business nor from the holding of an investment denominated in a currency other than sterling.

You can find the original Factsheet here:

Fundsmith Factsheet August 2021

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