British star stock picker Terry Smith stumbled in 2022 as the sell-off in tech stocks caused steep losses in his portfolio and tested the patience of his army of retail investor cronies.
Smith’s £26.1bn flagship fund, Fundsmith Equity Fund, has fallen around 15% since the start of the year, according to Morningstar data. Notably, two of Fundsmith’s top 10 holdings – US payments group PayPal and Facebook owner Meta Platforms – took particularly heavy hits. PayPal is down 66% from its peak last summer, while Meta is down 45% from its recent high in the fall.
The brutal start to the year for Fundsmith, one of the most popular funds among UK retail investors, highlights long-standing concerns among some analysts that UK fund buyers are too attached to star managers whose performance can quickly deteriorate. For example, last year Nick Train, one of the UK’s best-known fund managers, said he had suffered “arguably the worst period of relative investment performance” in two decades.
Smith, managing director of Fundsmith, defended this year’s underperformance. “It’s not a fund that seeks short-term gains and it doesn’t try to outperform in every reporting period or in every type of market condition,” he told the Financial Times.
“We are focused on delivering strong returns to our investors over the long term,” he added. Fundsmith “is aimed at long-term investors who want their investment to increase in value over the long term. I deliberately said ‘long term’ twice in that sentence”.
Smith added that the fund has grown more than 500% since its inception in November 2010, or 17.4% on an annualized basis, net of fees. While the fund narrowly trailed its benchmark MSCI World in 2021, its longer-term balance sheet remains strong.
One of the City of London’s most prominent financiers, Smith moved to Mauritius in 2014 after leaving his role as managing director of inter-dealer broker Tullett Prebon. He has sometimes been described as the Briton Warren Buffett.
Smith defines his three-step investment strategy as “buy good companies, don’t pay too much, do nothing” – referring to reducing portfolio turnover to cut costs. He tends to focus more on fast-growing companies, even though they’re often more expensive than the bargains the Berkshire Hathaway chairman has made his signature.
So far, Smith’s many retailers have stuck with him despite the short-term losses. In January, Fundsmith retained its top spot as the most popular fund among retail investors on Interactive Investor, the UK’s second largest investment platform. It also held the most bought place among savers choosing funds for their Isas on the AJ Bell platform, and a top 10 place among buyers on Hargreaves Lansdown, in the first month of the year.
Laith Khalaf, head of investment analysis at AJ Bell, said “investors were clearly not discouraged” by January’s plunge.
“Of course, performance should not be judged over such a short period, and the manager’s exceptional career. . . means they have a huge amount of credit in the bank, which is why investors are eyeing a temporary dip in form and continuing to support them for the long term,” he said.
Smith’s losses come during a difficult period for growth investors, as the US Federal Reserve begins to reduce support. Tech stocks, whose high prices are predicated on the potential for windfall future earnings, are seen as particularly sensitive to rising interest rates. Cathie Wood’s Ark Invest also suffered big losses.
Ian Aylward, head of fund selection at Barclays, said Smith’s focus on so-called “quality growth” companies was “unwavering”.
“It has been the most profitable space in the stock market to invest in over the past decade, but there are times when being exposed to such names is relatively painful and the year so far has been the one of those times,” he said.
A turbulent start to the year for global markets, disrupted by the Ukraine crisis and rising central bank interest rates, left many other well-known managers suffering losses, including the $131 billion Fidelity Contrafund. dollars from William Danoff and the £15 billion Scottish Mortgage Investment Trust from Baillie Gifford. , another favorite of UK retail investors.
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