UK investment manager Terry Smith has blamed his £22.5bn fund’s underperformance on the end of “easy money” and warned that central banks could tip the economy into recession through too much monetary tightening.
In his annual letter to shareholders, Smith said the 14 per cent drop in the value of his flagship Fundsmith Equity fund in 2022 was the result of moves by central banks, from scaling back quantitative easing to raising interest rates.
Smith is considered one of the UK’s top stockpickers and has delivered returns of 478 per cent since his popular equity fund was launched in 2010.
But the past year has been tough for the Mauritius-based investor, who focuses largely on growth stocks including technology companies while also holding a third of his fund in consumer staples businesses, such as Unilever.
Tech stocks were pummelled last year and the Fundsmith holdings that were worst hit include Facebook owner Meta, PayPal, Microsoft, Amazon, and healthcare innovation company Idexx. Its holdings in Google owner Alphabet, Amazon, Apple, Adobe and Meta amount to 9 per cent, while Microsoft accounts for 7.6 per cent.
However, Smith pointed out that despite attracting attention for his technology investments, the sector is only the third-largest in his fund, behind healthcare and consumer staples.
He said: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable.
“Why has this happened? We have exited a long period of ‘easy money’: a period of large fiscal deficits, where government spending significantly exceeds revenues, and low interest rates.”
Smith also warned that central banks risked squeezing economies through too much monetary tightening.
“We have no idea when the current period of inflation and central bank interest rate rises which caused this prediction to come true will end. It is sometimes said that central bank policy is always either too lax or too tight, it is never exactly right,” he said. “Presumably at some point it will become too tight and quite probably tip the major economies into recession.”
He added that a slowdown should mean tech companies “stop behaving as though money is free and halt some of the less promising projects outside their core business,” pointing to some of Amazon’s food delivery projects as an example.
Smith’s letter comes just as it emerged that he earned about £36mn last year after his company Fundsmith posted a record profit after tax in the 12 months to the end of March 2022 of £58.2mn
He signed off the letter citing former prime minister Winston Churchill’s phrase “if you are going through hell, keep going,” adding “at Fundsmith we intend to”.
Smith attracted attention last year after attacking consumer goods company Unilever following its rejected bids for GSK’s consumer health division.
Activist investor Nelson Peltz soon after took a stake in Unilever through his firm Trian Partners and gained a seat on the board.
Smith said: “What I find questionable is that companies mouth platitudes about wanting to attract long-term shareholders yet based on our experience, we tend to get ignored, whereas an activist who has held shares for fewer months than we have held in years gets invited to board meetings.”
He said that, despite investing in Unilever since the fund’s inception, the company did not make contact with Fundsmith for the first eight years.
“The first contact was when we were asked to vote in favour of moving the headquarters and listing to the Netherlands,” said Smith. “As I remarked at the time, it is not a good way to manage relationships to ignore people until you need their support.”
He also drew parallels with US payments company PayPal, which Fundsmith has recently sold. Activist investor Elliott Management took a stake and a seat on the board last year. Smith said that when he was “continually ignored there is another even easier option to sell the shares which we turn to when all other remedies fail”.