Fundsmith Equity Fund, one of the UK’s most popular funds, has boasted an annualised return of over 16% since its inception in 2010. Yet in 2022 it’s down over 15%. That doesn’t read well for me as an existing investor and I’m desperate for my investment to stop plummeting.
Will the price fall further or does this represent a fantastic opportunity for me to add to my holding?
Fundsmith and the energy sector
The Fundsmith portfolio is fairly concentrated with less than 30 holdings. Manager Terry Smith looks to identify market leaders with an economic moat and often a technological advantage. Crucially, these companies must produce sustainably high cash flows year after year.
But while energy companies are riding high at present, companies in that sector don’t fit the Fundsmith bill. Smith says the fund aims to own businesses that “can go on delivering value forever”. This can’t be true for companies dealing with finite and depleting commodities. He also doesn’t like this sector as it’s heavily cyclical. In the long term, this may well be true. On the other hand, in a sea of red in 2022, the energy sector stands out with exceptional returns. Funds that don’t own energy stocks are therefore highly likely to underperform the wider market in the current environment.
And this trend in sector performance could continue for a while yet. The twin issues of a slowing economy and soaring inflation are negatively impacting growth stocks. Not only is this troubling economic outlook spooking investors, there could be a big negative impact in the business performance of some of Fundsmith’s holdings.
FCA review looming
The fund has a long term view with an ideal holding period of forever. Despite the current issues, Smith is confident that its businesses are high-quality and resilient. And to be fair, quality growth companies like those it holds should be able to ride this economic turbulence and come out the other side unscathed.
Nonetheless, the short-term outlook is concerning. If we look at the top 10 holdings in the fund, nine of them are down this year. And five are down by more than 15%. Most worryingly, the price-to-earnings (P/E) ratios are still looking high for many of these companies with eight of them still above 25.
| Holding | YTD Performance | 12 Month Performance | P/E Ratio |
| Microsoft | – 27.63% | – 6.8% | 25.28 |
| Novo Nordisk | – 1.1 % | 27. 42% | 35.46 |
| Philip Morris | 2.89% | – 1.99% | 17.05 |
| L’Oréal | – 27.63% | – 19.83% | 37.54 |
| Estée Lauder | – 35.66% | – 21.42% | 26.04 |
| IDEXX | – 46.72% | – 43.24% | 39.46 |
| Stryker | – 22.84% | – 19.00% | 39.31 |
| McCormick | – 9.22% | – 2.09% | 31.28 |
| Pepsico | – 7.65% | 7.52% | 21.84 |
| Intuit | – 42.36% | – 23.69% | 41.33 |
Meanwhile, Fundsmith has been asked to review its operations by the Financial Conduct Authority. It’s not known what issue may have led to it needing to conduct this review, but I’ll be keeping an eye on this in the coming weeks. It remains to be seen what impact, if any, this will have for shareholders.
Buy, sell or hold?
Fundsmith aims to only invest in good companies and tries not to overpay when buying shares. The most difficult part according to Terry Smith is to then do nothing and allow returns to compound. Hard though it may be, ‘nothing’ is exactly what I’ll do for now. I do see the bull case, especially when considering the fund’s and Terry Smith’s track record. However, in this economic environment, I’m in no rush to add to my position in this growth fund. I certainly won’t sell though as I remain optimistic in the long run.
