Tag: Fundsmith Equity Fund

Fundsmith Equity Fund, Greggs and Book Review

Last week was not a good one for my stock market portfolio. Greggs (GRG) issued a trading update on the Thursday and it read positively to me – total sales for the year up 11.3% to a record level and Q4 sales up 7.7%. More shops opened and new national distribution centre well advanced. But the shares promptly fell over 10%! 

The full year outcome for Greggs should be as anticipated but there were a few negative comments about consumer confidence, street footfall and higher taxes. If that was a profit warning, it was a very mild one. Paul Scott pointed out in his blog that other retail focussed companies have been reporting negative figures so maybe it’s simply contagion. I shall study Greggs in more detail to see if this is a buying opportunity.

The Fundsmith Equity Fund issued its Annual Report last week. It’s always worth reading what Terry Smith has to say. The fund achieved a Total Return of 8.9% last year which is below their equities benchmark of 20.8% (the MSCI World Index). But Terry points out that he has still beaten that index in the longer term. You can read his letter to investors here: https://www.fundsmith.co.uk/media/pirmvyly/fundsmith-annual-letter-to-shareholders-2024.pdf

The 8.9% return is comparable to the FTSE All-Share and my own overall portfolio performance so I see no reason to change my holding. Fundsmith has again been affected by being underweight in the large US tech stocks which is no bad thing as far as I am concerned. Us equities are being driven by momentum effects which may not last.        

And now for something completely different. Here’s a review of a recently published book I read over Christmas. It’s a biography of Alexander Hamilton by Ron Chernow who wrote a very good biography of John D. Rockefeller entitled “Titan” which I can recommend. It explains how to become the richest person in the world by monopolistic practices – rather like Microsoft, Apple, Amazon and Alphabet in the modern era.

Alexander Hamilton was one of the leaders of the American independence revolution. He was a close aide to George Washington in the revolutionary wars and had a big hand in creating the US constitution. From a poor background he achieved a great deal.

He died in a duel with Aaron Burr which he could easily have avoided. Burr was a crack shot and the events surrounding the duel are covered in some detail in this book. The book will interest anyone who wishes to learn more about US history and how their constitution evolved.

But the book is way too long at 1450 pages. It could best have been edited  down to a third of that length. This seems to be a modern failing of authors and publishers. For example the book Titan is only 770 pages. Increased length does not improve the quality.

Roger Lawson (Twitter: https://x.com/RogerWLawson  )

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Fundsmith Shareholder Meeting

I just watched a recording of the Fundsmith Equity Fund Shareholder Meeting – see https://www.fundsmith.co.uk/tv/ . As usual it was a mixture of jokes and serious analysis of Terry Smith’s investment process.

Yet again his prejudices (and to a large extent mine) were made plain – no banks, no insurance companies, no miners, no oil/gas companies, no property companies, etc. But the portfolio companies achieved a Return on Capital Employed of 32%. That’s better than in previous years and almost twice the return of companies in the FTSE-100.

I have no doubt that the Fundsmith Equity Fund will continue to have a decent performance so I am happy to continue holding.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Silicon Valley Bank Collapse, Wandisco Discussion and Fundsmith Equity Fund Annual Meeting

The collapse of Silicon Valley Bank (SVB) is a typical story of a bank run after depositors lost confidence and rushed to the exit door. This bank may not be well known to UK investors but they were very active on funding and providing banking services to early-stage US technology companies on the West Coast. This could have a severe impact on the tech sector.

The UK entity has also ceased trading and a letter signed by more than 140 companies was sent to the Chancellor begging him to step in with emergency funding. Without access to their funds, companies won’t be able to meet payroll or other commitments so might have to also enter administration.

There may be some justification for intervention in this case and hopefully keeping depositors protected will not cost an enormous amount.

The Nasdaq fell sharply on Friday and expect the same on Monday.

Also on Monday, Mello are hosting a panel discussion on Wandisco (I am on the panel) from 5.00 onwards – see  https://melloevents.com/mm13march2023/

I made some comments on the apparent fraud at Wandisco in a previous blog post and it is clear that many private investors were suckered into investing in the company (not me in this case). You should get some good tips on how to avoid such disasters.

I have just watched a recording of the Fundsmith Equity Fund annual shareholder meeting – see https://www.fundsmith.co.uk/tv/ . Terry Smith gave his usual slick performance and brushed off the negative 13.8% fund performance last year with the comment that “it was predictable” after such a long run of positive returns.

The detractors in the fund’s holdings were mainly tech stocks such as Meta, Paypal, Microsoft and Amazon. He reiterated the investment strategy of “only investing in good companies, don’t overpay and then do nothing”.

It is worth watching the video. I will continue to hold the fund as the formula followed is still likely to be effective.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Fundsmith Annual Investor Letter

Terry Smith has published his thirteenth annual letter for investors in the Fundsmith Equity Fund (which I hold). As usual it’s a good mixture of sound analysis of market events and witticisms. I’ll cover a few significant points:

The fund underperformed the MSCI World Index with a total return of minus 13.8%, which was better than my own portfolio. As he points out the only way to beat the market last year was to hold energy stocks and nothing else. But both I and Fundsmith have a focus on growth companies so we have been under-weight in the dinosaurs of the investment world.

As Terry says: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable. We have consistently warned that no investment strategy will outperform in every reporting period and every type of market condition. So, as much as we may not like it, we can expect some periods of underperformance” which is a fair comment.

Terry points out that we have gone through a period of “easy money” when central banks ignored the consequences of their actions. He says “One of the problems of easy money is that it leads to bad capital allocation or investment decisions which are exposed as the tide goes out”.

He is particularly critical about the management of Paypal and Facebook  (Meta) plus makes negative comments on Alphabet and Amazon and their expenditure on non-core businesses. He is scathing about the failure of some companies in which the fund has holdings to engage or even to provide information about the return they are getting on investments. He says: “What I am complaining about is the bipolar response some companies have to long-standing shareholders versus newly arrived activists”.

He has a particular attack on Unilever as in previous years and makes this acerbic comment on their marketing of soap: “When I last checked it was for washing. However, apparently that is not the purpose of Lux, the Unilever brand, which apparently is all about ‘Inspiring women to rise above everyday sexist judgements and express their beauty and femininity unapologetically”.

Lastly he attacks the exclusion of share-based compensation from financial reporting which can completely distort comparisons with other company’s figures.

In summary, another thoughtful report from Terry Smith and I am happy with the funds continued focus on investing in companies with a high return on capital and high margins with good cash conversion.

The Fundsmith EquIty Fund letter can be read in full here: https://www.fundsmith.co.uk/media/bm0lyc22/annual-letter-to-shareholders-2022.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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