Yesterday, I began to question something that I believed to be previously unthinkable: is it time for me to sell my Fundsmith Equity shares?
Let me explain why.
Poor performer
First off, this doesn’t have anything to do with the recent performance of one of the UK’s most popular investment vehicles. That said, it’s worth reflecting on just how bad this has been.
According to its latest factsheet, Fundsmith Equity had dropped by a little over 16% in 2022 by the end of October. That’s quite a fall, especially given that its benchmark — the MSCI World Index — was down by just 6%.
Even the FTSE 100 — which contains many of the companies star manager Terry Smith avoids like the plague — is down just 4% year to date.
In Terry I trust
But I’m not bothered by this at all. We only need to look at the long-term track record of Fundsmith shares for evidence that Smith’s strategy of only buying stocks that “shoot the lights out” is sound.
In 12 years, Smith and his team have grown investors’ money by 461%. Dividends excluded, the FTSE 100 itself is up around 25%. This is why looking at the performance of any investment over several years is so important, even though it’s no guide to what may happen in the future.
No, my dilemma with Fundsmith actually relates to something else entirely, namely recent changes in its portfolio.
Too much of a good thing?
In his most recent communication to shareholders, Smith announced that he’d taken a stake in tech titan Apple. Again, this isn’t a problem in itself. I can see why Smith has keen to buy.
Apple dominates the smartphone market and has stacks of cash to spare. Its customers are unlikely to switch to a rival due to the effort it would take. That’s a powerful ‘economic moat’, to quote master investor (and major shareholder) Warren Buffett.
The problem I have now is simply that many of my quality-focused funds – both active and passive — are starting to look pretty similar in terms of what they’re invested in. In theory, this raises my risk level. It means I’m becoming increasingly dependent on a smaller pool of stocks for growing my wealth.
So should I sell Fundsmith?
Reasons to stick around
There are arguments for not being too hasty. One is that Fundsmith doesn’t yet own anything like the same proportion of Apple, Amazon, Alphabet or Microsoft shares as the other funds in my portfolio.
Another reason relates to what may happen in 2023. Having done appallingly in 2022, there’s always a chance that the technology sector could have a stonking 2023. Should this be the case, it seems logical to try and capture as much of that recovery as possible.
Then again, there’s no guarantee this will happen. Tech could remain under the cosh for some time to come. This could be doubly problematic for Fundsmith holders since the fund is so concentrated (with just 29 holdings in total).
Stand fast
For now, I’ll continue to monitor the situation. However, further evidence that I’m getting too heavily exposed to just a few companies and a bit of spring-cleaning (and more diversification) might be in order.
