The UK’s most popular investment fund, Fundsmith Equity, isn’t having a good run in 2022. For the first four months of the year, it posted a decline of 11.1% (versus -6.2% for the MSCI World index). It’s also down around 4% over 12 months.
I own Fundsmith in my own investment portfolio and it’s quite a large position for me. In fact, it’s my largest actively-managed fund holding. So, what’s the best move now? Should I reduce my exposure to the fund, do nothing, or buy more?
Why has Fundsmith fallen?
In order to answer that question, I first want to examine why the fund has fallen this year. Looking at the Fundsmith portfolio, I can see two main reasons.
For starters, it has a large weighting to US stocks. At the end of April, 74% of the fund was allocated to US equities. This year, the US market has underperformed on the back of inflation and interest rate concerns. Year to date, the S&P 500 is down more than 10%. So, this will have had an impact on Fundsmith.
Secondly, many of Fundsmith’s holdings have been hit hard in 2022. PayPal, for example, is down nearly 60%. Pet care company Idexx Laboratories is down about 40%. Estée Lauder is down around 35%. The issue here is that Fundsmith is a concentrated fund. It only holds around 30 stocks. So, if individual holdings tank, it can have a big impact on overall fund performance.
As for why it has underperformed the MSCI World index, one reason will be the fact that Fundsmith has no exposure to the oil sector. Oil has been a standout performer this year, as the Russia-Ukraine crisis has put a rocket under energy prices. This isn’t a sector that portfolio manager Terry Smith invests in, however. He doesn’t view oil companies as high-quality businesses, as they’re very cyclical in nature.
I’m adding to Fundsmith now
The thing is, these were always risks I was aware of. I knew the fund was concentrated and had high exposure to the US. So, I shouldn’t be surprised by the recent fall.
In terms of my move now, I’m going to keep putting money into Fundsmith.
One reason I’m going to continue investing in it is that the fall this year is very normal. Markets never move up in a straight line and volatility is to be expected at times. Meanwhile, Terry Smith has warned in the past that there will be times when his fund underperforms the market. It’s worth pointing out that in the last three calendar years, Fundsmith returned 22.1%, 18.3%, and 25.6%. So, a pullback was always a possibility.
Another reason I’m backing the fund is that it owns many high-quality companies including Microsoft, Diageo, PepsiCo, and Intuit. Such companies should be able to withstand the economic turmoil we’re currently experiencing. Meanwhile, they all have pricing power and high gross margins meaning they should be able to navigate the inflation crisis.
Of course, Fundsmith could continue to generate disappointing returns in the short term. There’s a lot of economic uncertainty right now. But it’s worth pointing out that a lot of the stocks in the portfolio still have high valuations.
However, I’m convinced that in the long run, this fund – with its focus on high-quality businesses – will keep delivering good results. That’s why I’m adding to it now.
