In a six-month period which included a significant downturn in global stock markets, and during which long-dated assets like high-quality growth companies have underperformed short-dated, lower-quality companies, it’s no surprise the Fundsmith Equity Fund (B41YBW7) trailed its benchmark.

For the first half of 2022, the fund lost 17.8% of its value compared with an 11.3% decline for the MSCI World index, net in sterling terms.

Interestingly, the absence of value stocks in Fundsmith’s portfolio such as financials, miners and energy companies didn’t make a big difference to the fund.

‘The much talked about rotation from growth to value stocks during the first half of 2022 was rather underwhelming from the perspective of the latter,’ says manager and Fundsmith founder Terry Smith.

While the S&P Value index fell less than the S&P Growth index, ‘falling less than others when times are tough isn’t a sufficient payback for the long preceding wait during which value stocks underperformed massively,’ adds Smith.

The biggest drags on the Fundsmith portfolio during the first half were Paypal (PYPL:NASDAQ), Meta Platforms (META:NASDAQ), IDEXX (IDXX:NASDAQ), Intuit (INTU:NASDAQ) and Microsoft (MSFT:NASDAQ), which made negative contributions of between 1% and 3% each.

‘Of these, PayPal and maybe Intuit, exacerbated their situation with self-inflicted wounds that negatively impacted their underlying performance,’ observes Smith. ‘IDEXX and Microsoft really didn’t see any slowdown at all.’

On Meta Platforms, the fact it trades on a free cash flow yield of 8.7% means it’s either cheap or a value trap. ‘We will let you know which when we find out, but we are inclined to believe it is the former,’ says Smith.

Positive contributions came from Philip Morris (PM:NYSE), Novo Nordisk (NOVO-B:CPH), Brown-Forman (BF.A:NYSE), PepsiCo (PEP:NASDAQ) and Waters (WAT:NYSE).

Fundamentally, the companies in the portfolio had a good half, with particularly strong revenue growth at firms like Adobe (ADBE:NASDAQ), Alphabet (GOOD:NASDAQ), Brown-Forman, Intuit, Microsoft, Paypal and Waters.

The weighted average free cash flow per share rose by 4% during the half, equivalent to an 8% annualised rate which is line with its historic average.

While it is too early to look through the current inflationary and interest rate rise cycle, the structure and profitability of the portfolio gives Smith and his team ‘considerable comfort’.

‘From a fundamental perspective, which is what we seek to focus on, we are confident that our portfolio companies will perform relatively well over an inflationary and recessionary cycle,’ he says.

‘Sooner or later share prices reflect fundamentals, not the other way around.’

DISCLAIMER: The author (Ian Conway) and editor (Daniel Coatsworth) own units in Fundsmith Equity Fund.

‹ Previous2022-07-14Next ›