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Manager in fighting spirits after narrowly undershooting the index last year
Thursday 31 Mar 2022 Author: Ian Conway

This year’s Fundsmith Equity Fund (B41YBW7) annual shareholder meeting had to convene over the internet, after group co-founder and chief investment officer Terry Smith contracted Covid.

However, it was well up to the usual standard with no shortage of blunt observations about markets and one or two eyebrow-raising comments including a salvo fired at the management team of long-term holding Unilever (ULVR).

Overall, the fund lagged the MSCI World Index very slightly last year returning 22.1% against 22.9%, but considering its superior track record since inception and especially over the last few years investors certainly shouldn’t be concerned.

As Smith explained the portfolio is made up of a balance of businesses, some of which did well during the pandemic and less well during the recovery phase and some of which did the opposite.

Taking a two-year view, the fact the fund beat the benchmark by around 5% was a ‘pretty satisfactory outcome’ in his assessment.

Reviewing the top five positive contributors, Smith referred to ‘making money with old friends’ given that four of the five have made multiple appearances in the list, reinforcing the message that investors should run their winners.

Regarding the top losers, Smith lamented the lack of focus at previous repeat winner Paypal, which let itself get distracted by M&A possibilities, but he reserved his fiercest criticism for Marmite and Magnum maker Unilever for letting margins deteriorate.

‘This should be a business which is capable of performing better than it has,’ said Smith. ‘To be blunt, we think it’s easier to change the management than it is to change the business.’

‘We hope they will try and get back to what they were producing, but I’ve got to say to date the odds look against that.’

Equally revealing was Smith’s explanation of why he finally bought shares in Amazon after dismissing the tech behemoth for years.

‘We always said we didn’t like the returns, but the returns have started to come through an awful lot better. If you go back to 2014 the return on capital was negative, it’s now in the teens,’ he reasoned.

Besides the web services division, which he believes has decades of growth to come, another key reason to like Amazon is the increase in third-party e-commerce revenues, which translate into almost pure profit.

Third-party sales now account for over 50% of revenues, and Smith believes the investment community has yet to fully grasp its importance.

Investors can watch the online shareholder meeting in full by going to the company’s website.

Disclaimer: The author of this story (Ian Conway) and the editor (Dan Coatsworth) own shares in Fundsmith Equity Fund.

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