Fundsmith Equity – the UK’s most popular investment fund – has had a poor run recently. Between the start of 2022 and the end of July, the fund returned -11.8% (versus -4.5% for the MSCI World index). Meanwhile, over the last year, the fund has returned about -8%.
I’m an investor in Fundsmith myself and it’s quite a large holding for me, relative to my overall investment portfolio. So, should I be worried about the recent poor performance here? Or is this just a short-term issue that’s likely to blow over?
Why has Fundsmith delivered negative returns in 2022?
It’s not hard to see why Fundsmith has gone backwards recently.
For starters, the fund has a high weighting to US stocks (74% at 29 July) and the US market has performed quite poorly this year (after a very strong run over the last decade). For the first half of 2022, the S&P 500 index delivered its worst performance since 1970, falling 20.6%. This weakness from US equities will have a big impact on Fundsmith’s returns.
Secondly, a number of holdings in the portfolio have underperformed in 2022. FinTech company PayPal is a good example. Year to date, it’s down about 50%.
The issue here is that portfolio manager Terry Smith runs a concentrated portfolio. Typically, Fundsmith only holds around 25 to 30 stocks at any one time. This means that the returns from individual portfolio holdings can have quite a large impact on overall returns.
One other issue that’s worth pointing out is that Terry Smith doesn’t like to invest in oil stocks. He doesn’t like their cyclical nature. This explains why the fund has underperformed the MSCI World index in 2022. This year, oil stocks have been some of the best performing stocks on the market.
Time to worry?
Am I concerned about the fund’s poor performance lately? Not at all.
While Fundsmith has an excellent long-term track record (£10,000 invested at inception in late 2010 would now be worth about £60,000), I always knew that it was susceptible to a period of weakness at some stage. No fund manager, or investment style, does well all the time.
Looking ahead, I expect the fund’s performance to improve as global stock markets recover from the pullbacks they’ve experienced in 2022. This might not happen overnight. But in the medium-to-long term, I think the fund should do well.
One reason I’m confident here is that the fund invests in high-quality companies (Microsoft is a good example). And high-quality companies tend to produce strong returns for investors over time.
My move now
Having said all that, I don’t see Fundsmith as a one-stop shop. As I said earlier, this fund only holds around 30 stocks. So, I think it doesn’t offer me a high enough level of diversification. And Terry Smith has a very specific investment approach, which isn’t going to perform well all of the time.
So, while I will be holding Fundsmith (and adding to it on stock market weakness) I will also be investing in other funds and individual stocks I’m bullish on. Doing this will help me create a more balanced investment portfolio, and give me a better chance of generating strong returns over the long run.
