- Fundsmith’s semi-annual shareholder letter reveals the fund’s abrupt Amazon exit was sparked by concerns over investment in the grocery business
- Portfolio companies face tougher conditions
- Fundsmith continues to focus on the micro not the macro
Laith Khalaf, head of investment analysis, AJ Bell:
“Fundsmith’s latest shareholder missive was distinctly short on barbed comments, which probably elicited a sigh of relief at Unilever headquarters, seeing as the company’s management has found itself hoisted up as Terry Smith’s favourite punchbag in recent times. A much better year of absolute performance might explain the more mellow vibes. Fundsmith Equity returned 8.5% in the first half of this year, compared to a 13.8% fall over the course of 2022. The MSCI World Index was a sliver ahead of Fundsmith’s return at 8.9%.
“Like many other global growth funds, the Fundsmith portfolio has benefited from falling inflation in the US this year, which has dampened the need for further interest rate rises. Growth managers had an uncharacteristically tough year in 2022, and will collectively be relatively happy that the rapid change to a higher interest rate environment has not been more damaging to their portfolios. At least not yet, in any case.
“Terry Smith also explains his rather abrupt Amazon exit earlier this year. Fundsmith only built a position in the stock from July 2021, so to sell out so soon was an unexpected volte-face, especially in light of the fund’s well-established philosophy of holding companies for the long term. Smith puts the early exit down to concerns over potential capital misallocation by Amazon, in particular the tech giant’s continued interest in growing its footprint in grocery retail. It seems there is too much grocery in Amazon’s basket for Fundsmith’s liking.
“Amazon bought Whole Foods in 2017 for $13.7 billion, and isn’t exactly known for shying away from industry domination. But it seems Terry Smith was given the confidence to invest in the stock by the arrival of new CEO Andy Jassy, formerly head of the hugely profitable AWS division, and the principles for investment which he espoused. However, Smith believes the continued investment in grocery runs counter to these principles, and that Jassy isn’t walking the walk when it comes to allocating capital to business segments that can deliver a good return on capital.
“Smith also goes on to lament the lack of response from company boards to Fundsmith’s attempts at engagement, which suggests his recommendations to Amazon may have fallen on deaf ears. He quite rightly points out that this only serves to encourage him to exit a stock, if his concerns are ignored. While the quick Amazon sale is undoubtedly a departure from Fundsmith’s core investment philosophy of holding stocks for the very long term, it’s a rare exception, and also shows the manager is willing to be pragmatic rather than dogmatic. As the John Maynard Keynes saying goes: ‘when the facts change, I change my mind.’
“Terry Smith says that companies in his portfolio are facing tougher conditions, namely slower revenue growth and higher input costs, both of which can be largely laid at the door of the inflationary environment. But the fund continues to focus on company fundamentals rather than the macro-economic picture, which is highly uncertain in its course and its effect on markets. This should give investors confidence that Fundsmith is sticking to the core investment philosophy which has served them so well for so long.”
