- With 2022 challenging many an investment thesis, we look at how the biggest names are now positioned
- Some big differences have emerged
The biggest global equity funds are trying to move on from a year to forget. Fundsmith Equity (GB00B4Q5X527) suffered a 13.8 per cent hit in 2022, while Scottish Mortgage (SMT) lived up to its reputation as a high-octane investment by taking a 45 per cent share price loss. Meanwhile Rathbone Global Opportunities (GB00BH0P2M97) was down by around a fifth for the year, while Lindsell Train Global Equity (IE00BJSPMJ28) gained ground against peers by taking a much more modest 4.4 per cent hit. With the MSCI World index down by 7.8 per cent in sterling terms, passive funds also suffered – albeit less so than many of the big active names.
Markets have taken a turn for the better in recent months, and the biggest global equity funds have certainly participated in that recovery. But with 2022 having challenged many an investment thesis, it’s worth assessing just how the biggest global portfolios are positioned as we move into what could be another difficult year.
The big beasts
To start with, the biggest two global equity funds, Fundsmith Equity and Scottish Mortgage, have made a few notable changes in the past year while staying true to their broader approach. The Fundsmith Equity team, as noted in Terry Smith’s latest annual letter to shareholders, exited positions including Johnson & Johnson (US:JNJ), Starbucks (US:SBUX), Intuit (US:INTU) and PayPal (US:PYPL). On Intuit, Smith pointed to the company’s 2021 acquisition of online marketing platform Mailchimp for $12bn (£10bn), a deal he said was priced at 12 times Mailchimp’s revenues, while he criticised PayPal for its lack of engagement with Fundsmith on issues such as cost control and “value-destroying” acquisitions.
The fund has also continued its recent trend of backing the Faang stocks, with Apple (US:AAPL) entering the portfolio last year alongside names such as Adobe (US:ADBE). The team has already backed Alphabet (US:GOOGL) and Amazon (US:AMZN) recently, with Meta (US:META) and Microsoft (US:MSFT) also among its holdings.
That puts Fundsmith at odds with the likes of the Scottish Mortgage team, which despite its tech focus has lost conviction in the Faangs in recent years and sought opportunities elsewhere. However, it’s worth noting that Smith downplayed his tech exposure, stating in the shareholder letter that Alphabet, Amazon, Apple, Adobe and Meta made up just 9 per cent of the portfolio, with Microsoft representing a further 7.6 per cent.
Such allocations certainly hurt the fund in the short run, with Meta, PayPal, Microsoft, Idexx (US:IDXX) and Amazon serving as the biggest five detractors from returns in 2022. Smith has argued, however, that headwinds facing the sector, such as a possible slowdown in tech spending and online advertising, could at least force companies to become leaner and focus on their core businesses.
Turning to the other big beast: as we noted last year, the Scottish Mortgage team has reiterated its long-termist approach, while still making the case for major holdings such as Tesla (US:TSLA), Moderna (US:MRNA) and ASML (NL:ASML). Yet issues have emerged: the team cited regulatory challenges as a reason for cutting back on the likes of internet majors in China, while the fact that the trust’s exposure to unlisted holdings has exceeded its limit of 30 per cent causes concerns that this might prevent the team from financing cash calls in that part of the portfolio. The trust’s shares do continue to look cheap by certain metrics, having recently traded at a discount of nearly 15 per cent to portfolio net asset value (NAV). However, the sheer volatility of the trust might remind investors that it can sometimes serve best as a satellite holding.
To focus on one of the other Baillie Gifford vehicles among the largest global equity funds, Monks (MNKS) has once again demonstrated a more flexible and slightly less high-octane approach than Scottish Mortgage via a “ruthless portfolio weeding exercise” outlined in a set of interim reports published in December. “Year to date we have sold 20 holdings and established nine new ones,” the report noted. The team sold companies it viewed as looking challenged by inflation or exposed to a tapering of consumer demand, such as small positions in Peloton (US:PTON) and Carvana (US:CVNA), while also cutting back on its exposure to China and exiting positions where the investment case appears to have played out, such as recruiters Hays (HAS) and Page Group (PAGE). The Monks team also sold out of companies where they had been disappointed by management’s ability to deliver on their promises, including ride-hailing company Lyft (US:LYFT).
Other rejigs
Other big global managers have also repositioned on the back of a challenging 2022. Already less exposed to tech companies than peers early last year, the Rathbone Global Opportunities team noted recently that many of the growth stocks among their weakest performers from last year were “unlikely to regain their pre-inflation era price earnings multiples”, resulting in them changing around a fifth of the portfolio. This involved replacing names such as Uber (US:UBER), Fevertree (FEVR) and Adobe with “higher quality, more predictable and resilient growth companies that have weathered several business and economic cycles” such as Apple and luxury brands conglomerate LVMH (FR:MC). More generally, the team is attempting to balance out different investment styles without what it describes as “value washing” the fund.
Lindsell Train Global Equity (IE00BJSPMJ28) underperformed many of its peers in 2020 and 2021 for a variety of reasons, from limited tech exposure to a focus on quality shares that missed out on rallies for both the growth and value investing styles in that period. But the fund proved much more resilient than peers last year, albeit with some very mixed results in terms of individual holdings. As manager James Bullock put it in a recent commentary: “Our best-performing stocks, WWE (US:WWE) and new-this-year-FICO (US:FICO), both rose more than 35 per cent, while our worst, Disney (US:DIS) and PayPal, fell 44 per cent and 62 per cent, respectively.” Still very much a concentrated portfolio with big allocations to companies such as Diageo (DGE), London Stock Exchange (LSEG), Nintendo (JP:7974) and Heineken (NL:HEIA), the fund continues to stand out from peers for its low exposure to tech, a big onus on consumer staples and big weightings to the UK and Japan.
We’ve noted before that some other big global funds have successfully ducked and dived with the market rotations, from F&C (FCIT) to JPMorgan Global Growth & Income (JGGI). The extent to which funds stick with a distinctive style or attempt to move with the times could make a big difference to returns – as could the extent to which they stay away from the Faangs and other erstwhile market leaders.
