Terry
Smith,
manager
of
the
UK’s
biggest
fund
Fundsmith
Equity,
has
published
his
annual
letter
to
investors
outlining
his
thoughts
on
the
past
year,
explaining
why
the
fund
underperformed
against
the
global
stock
market.
In
2023,
Fundsmith
underperformed
the
MSCI
World
Index
for
the
third
year
in
a
row
(although
the
fund
is
not
managed
with
reference
to
any
benchmark,
Smith
states).
The
fund’s
T
class
accumulation
shares
rose
by
12.4%
in
2023,
versus
MSCI
World’s
16.8%
net
growth.
However,
the
fund’s
annualised
return
since
2010
is
about
4
points
ahead
of
the
index,
at
15.3%.
Picking
the
AI
Winners
So
why
did
the
Morningstar
Gold-rated
fund
lag
the
overall
global
market?
Notably,
Fundsmith
does
not
hold
Nvidia
(NVDA),
one
of
the
key
share
price
success
stories
of
last
year.
The
stock
alone
accounted
for
11%
of
the
Nasdaq
Composite
Index’
43%
growth.
In
the
letter,
Smith
discusses
his
reservations
–
for
one,
he
does
not
want
to
hold
all
“Magnificent
Seven”
stocks
due
to
concentration
risk,
even
if
they
all
fitted
the
fund’s
investment
criteria.
He
also
observes
that
the
stock
market
“has
decided
at
the
outset
that
it
can
identify
winners
in
AI
in
the
form
of
Nvidia
designing
the
chips
on
which
the
generative
AI
models
will
run
and
Microsoft
(MSFT)
as
a
provider
of
an
AI
model.
If
it
can
do
so
at
this
stage
it
would
seem
to
me
to
be
a
break
with
tradition.”
He
goes
on
to
name
some
early
leaders
that
have
since
more
or
less
disappeared
from
their
sectors:
BlackBerry
for
smartphones,
Yahoo!
for
search
engines,
and
Myspace
for
social
media.
Fundsmith’s
Portfolio
Winners
…
and
Losers
Smith
does
however
hold
Microsoft,
which
was
the
fund’s
second
biggest
performance
driver
last
year
(3.9%),
and
Meta
Platforms
(META),
the
top
contributor
to
the
fund
(4.5%).
Also
contributing
to
the
strategy’s
double
digit
growth
was
Novo
Nordisk
(NOVO
B)
with
3.6%,
L’Oreál
(OR)
2.1%,
and
IDEXX
Laboratories
(IDXX)
with
1.4%.
He
says:
“Meta
Platforms’
(formerly
Facebook)
performance
makes
me
wonder
whether
I
should
have
a
fund
which
invests
solely
in
the
one
stock
in
our
portfolio
each
year
for
which
we
have
received
the
most
critical
comments.
Meta
makes
its
third
appearance
in
this
list
of
top
contributors
while
Microsoft
appears
for
the
eighth
time
having
attracted
strident
criticism
when
we
started
buying
at
about
$25
a
share
in
2011
(2023
year
end
price
$354).”
Not
all
the
fund’s
bets
were
winners
this
year
either.
Estée
Lauder
(EL)
detracted
1.8%
after
its
mishandling
of
the
supply
and
demand
situation
in
China
as
it
reopened
after
Covid-19.
Fundsmith
has
subsequently
decided
to
sell
its
stake
in
the
company.
McCormick
(MKC)
accounted
for
a
1.1%
reduction
but
the
company
will
remain
in
the
fund
as
Smith
awaits
profit
margins
to
return
to
pre-covid
levels
in
its
food
service
business.
These
were
followed
by
Diageo
(DGE),
Mettler-Toledo
(MTD),
and
Brown
Forman
(BF.B),
all
detracting
about
half
a
percentage
point
each.
Smith’s
Stock
Sales
As
well
as
selling
its
Estée
Lauder
stake,
Fundsmith
Equity
also
disposed
of
Adobe
(ADBE)
and
Amazon
(AMZN)
and
purchased
Procter
&
Gamble
(PG),
Marriott
(MAR)
and
Fortinet
(FTNT)
shares.
“As
last
year
this
may
seem
a
lot
of
names
for
what
is
not
a
lot
of
turnover
as
in
some
cases
the
size
of
the
holding
sold
or
bought
was
small.
We
have
held
ten
of
our
companies
for
more
than
10
years,
five
of
which
since
inception
in
2010,”
Smith
said,
highlighting
the
fund
house’s
three-step
investment
strategy:
buy
good
companies,
don’t
overpay,
do
nothing.
Earlier
this
week,
we
covered
the
best
and
worst
performing
funds
available
to
UK
investors.
Fundsmith
didn’t
feature
in
either
of
the
lists,
but
it
did
end
the
year
in
the
top
20th
percentile
overall.
Commenting
on
Terry
Smith’s
letter
to
investors,
Laith
Khalaf,
head
of
investment
analysis
at
AJ
Bell,
comments:
“While
returns
were
behind
the
global
stock
market
last
year,
in
absolute
terms
they
were
still
strong,
so
existing
investors
won’t
be
too
miffed
about
the
fund’s
2023
performance.
Terry
Smith
has
a
loyal
following
and
a
great
deal
of
credit
in
the
bank
due
to
his
long-term
track
record.
“The
problem
is
Fundsmith
Equity
is
now
underperforming
on
both
a
three-
and
five-year
view,
which
are
key
periods
fund
buyers
look
at,
so
it
might
be
harder
for
the
fund
to
find
new
converts.”
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