Terry Smith in one the UK’s highest-profile fund managers. But according to the website of his asset management firm Fundsmith, he has sold his holding of accountancy software specialist Sage (LSE: SGE) shares.
Smith held the software company in his flagship global portfolio, Fundsmith Equity Fund. The factsheet for May 2021, indicates that the fund manager completed the sale of his stake last month. There was no other comment on the disposal.
Why did he sell?
I reckon Smith may have lost his patience with the FTSE 100 stock. After all, it’s undergoing a turnaround. The company is converting to offering cloud-based software via a subscription model. This makes commercial sense. In my view, recurring revenue is always a good thing as it offers sales visibility and transparency.
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In Smith’s latest annual letter to shareholders in January, Sage was among the top five losers within the fund. The stock delivered a -0.6% return last year.
He even mentioned that “Sage’s share price remains in the doldrums as we wait to see whether the new management team can make the product fit for purpose in the age of the cloud and subscription software and compete effectively with those who can”.
I guess Smith wasn’t impressed by the company’s recent interim results. Sage delivered organic recurring revenue growth of 4.4% during the six-month period.
My view
I disagree with the fund manager’s sale of Sage shares. I actually think now is a buying opportunity. But I must admit that investors like me will have to be patient with the firm’s turnaround. Unfortunately, this can’t happen overnight.
I believe the company is taking the right steps. It’s selling its non-core businesses, which in turn has boosted the strength of its balance sheet. The board expects “organic recurring revenue growth for FY21 to be towards the top end of our guidance range of 3% to 5%”.
So far, I’m pleased with the path the firm is taking. The phrase “short-term pain for long-term gain” springs to mind. And I think this is true for Sage.
Other investors
While Smith, may not be bullish on Sage shares, there are other high-profile UK investors who are. Nick Train, the investment brain behind the Finsbury Growth & Income Trust, still likes the stock.
In fact, according to the investment trust’s April 2021 factsheet, he still owns it. Sage accounts for 5.1% of his portfolio. To me, that shows that Train still has a strong amount of conviction in the company.
But it’s worth noting that he did say in the trust’s recent interim results that “we have had to be patient with our investment in Sage, as the company sacrifices short-term profitability to invest in its cloud software services. We think there are signs Sage’s investment is paying off, but other investors evidently need more certainty”.
Risks
The stock does come with risks. As I mentioned, the turnaround is likely to take time and investors will have to wait and see. There’s also no guarantee that it will be successful.
As Train highlighted, the transition has taken its toll on profitability in the short term, which may impact the stock.
But for now, as a long-term investor, I’d buy Sage shares
