Inside one fund’s £20,000 bet against Fundsmith

Mark Ellis, manager of the Nutshell Growth fund, is on the brink of winning £20,000 for his boss in an unusual way.

Ellis spoke to City AM following the news that City grandee Michael Spencer had become chair of his firm, Nutshell Asset Management, while upping his stake in the business from 25 per cent to over 40 per cent.

Spencer, who is known to have a rivalry with stockpicker Terry Smith, bet £20,000 at the start of the year that Nutshell would outperform Smith’s fund throughout 2024.

So far, Nutshell has grown 23.7 per cent, while Smith’s Fundsmith Equity has grown just 10.7 per cent. Smith declined to comment to City AM about the bet.

Following an intricate model that uses over 30 variables, Nutshell’s Ellis aims to provide a “hedge fund methodology” to a traditional retail fund, rebalancing it constantly.

This leads to extremely high turnover, setting it apart from other growth funds in the same sector, which may not significantly shift their portfolios for years on end.

“The likes of Fundsmith, he does some research, and it takes weeks. [A new position] comes in two months later, and bear in mind that when he’s when he’s doing that, he’s driving the price away from away from him, whether he’s buying or selling, because he’s doing it for a number of weeks,” said Ellis.

Ellis’ frequent intra-day trading and shifting of his portfolio has even led him to cut Asian stocks from the portfolio, since the fund receives such a large benefit from intraday trading it isn’t possible with the offset timezone.

“For Terry Smith and his process, now the velocity of information and change is so quick that those guys are yesterday’s methodology,” he added.

FTSE 100 failing

While Ellis has a global focus for buying stocks like Smith, his portfolio has much fewer British stocks inside.

Ellis holds only one FTSE 100 stock in Rightmove, and one FTSE 250 company, the “nimble” Alpha Group.

Rightmove is “a great one to trade around,” Ellis said, as the fund was invested in the run-up to the takeover offer and “sold it right at the top” and when the takeover attempt was abandoned, Ellis jumped right back in.

However, the quality of companies on London’s main index has left him disappointed, going as far as to describe investing in a FTSE 100 index as a “bad idea”.

“I went through the entire FTSE market, and it is dominated by over-regulated financial industries,” said Ellis.

Another significant sector on the FTSE 100 is natural resources, and Ellis was reluctant to touch them due to their “noisy cyclical earnings with the headwinds of ESG and reduced carbon footprints”.

Despite his pessimism about the FTSE 100, Ellis thinks that “now is probably the best time” to launch a UK-focused fund “because it’s performed so badly and no one really likes it”.

“Every time we run our models, the top 20 UK names would have massively outperformed the index. There is a decent list, with things like Auto Trader, but they don’t quite make our portfolio,” said Ellis.