The new year means a few things for investors, from reflecting on last year's performance to making portfolio additions as the tax year end draws closer. For Fundsmith Equity (GB00B4Q5X527) fans it's also a chance to read Terry Smith's annual letter to shareholders, which tends to contain some useful information about the fund's year.
Smith notes that the fund's T class accumulation shares (the most commonly held share class) rose by 12.4 per cent last year which, while nothing to be sniffed at, compares with a 16.8 per cent total return for the MSCI World index in sterling terms. This is the third consecutive calendar year in which the fund has underperformed the index, even if it did so only very marginally in 2021, and might prompt a few questions.
Smith does argue that the long-term track record remains highly impressive, with the fund outperforming MSCI World comfortably since launch "with significantly less downside price volatility", while also outpacing rival funds. The concentrated nature of returns in 2023 has also made it hard to beat global markets – although investors may still wonder how the fund holds up in a world of higher rates, and how well certain decisions might pan out (including the team famously selling down Amazon (US:AMZN) after a relatively short holding period).
What has happened in the fund itself? We have covered some of this before but the team also sold Adobe (US:ADBE) and Estee Lauder (US:EL), meanwhile taking stakes in Procter & Gamble (US:PG), Marriott (US:MAR) and Fortinet (US:FTNT). The latter is also a holding for Smithson (SSON).
Fans of the Fundsmith brand will be more than familiar with the "do nothing" mantra, and it's interesting to see Smith downplay a higher level of churn in 2023, noting: "This may seem a lot of names for what is not a lot of turnover as in some cases the size of the holding sold or bought was small". Turnover amounted to 11.1 per cent in 2023 versus 7.5 in 2022, 5.6 in 2021 and 4.1 in 2020.
Smith's letter also covers the top five contributors to (and detractors from) returns, from the struggles of Estee Lauder whose "mishandling of the demand/supply situation in China following reopening post-Covid and in the travel retail market revealed serious inadequacies in its supply chain" to Diageo (DGE) suffering from softening demand.
It's worth noting that some more controversial buys have produced good returns. "Meta Platforms' (US:META) performance makes me wonder whether I should have a fund which invests solely in the one stock in our portfolio each year for which we have received the most critical comments," Smith writes.
"Meta makes its third appearance in this list of top contributors while Microsoft (US:MSFT) appears for the eighth time having attracted strident criticism when we started buying at about $25 (£19.66) a share in 2011 (2023 year end price $354)."
It's finally worth touching on two of Smith's broader points. One is that markets may have identified Nvidia (US:NVDA) and Microsoft as winners in artificial intelligence but that early leaders – from AOL as an internet service provider to Nokia with mobile phones – have not always tended to dominate an area in the longer run. The second is that, even with bonds trading on juicy yields, equities still stand out for their ability to compound returns.
