Fundsmith....New Holding

[monabri]

Understood. Of course if they were also invested in Apple then you might as well buy a S&P 500 index fund, since Apple, MicroSoft, Amazon, Google and Facebook are usually the biggest 5 holdings in that index.

This is part of my thinking. It's rapidly heading towards being an expensive S&P500 tracker when combined with my own large Apple holding!

In terms of performance over the last 5 years...it's already there! Is there much added value ?

source : https://www.hl.co.uk/funds/fund-discoun ... ion/charts

[monabri]

Paypal - down 25% today....

[ADrunkenMarcus]

Paypal - down 25% today....

I’m glad my MasterCard holding is so much bigger! PayPal alone could knock Fundsmith today.

[simoan]

Understood. Of course if they were also invested in Apple then you might as well buy a S&P 500 index fund, since Apple, MicroSoft, Amazon, Google and Facebook are usually the biggest 5 holdings in that index.

This is part of my thinking. It's rapidly heading towards being an expensive S&P500 tracker when combined with my own large Apple holding!

In terms of performance over the last 5 years...it's already there! Is there much added value ?

I think this is a little unfair. It was usefully outperforming the S&P500 until December last year. However, the fund is so big now (if it were listed it would be in the top 25 companies by market cap in the FTSE100) that this creates its own problem. In particular, they are now limited to investing in huge companies only in order to get position sizes that are big enough to move the performance dial which drives them more towards very large cap US shares. And at that point you're looking at the highest weighted companies and struggling to outperform the S&P500.

All the best, Si

[wanderer]

I've sold out of Fundsmith today after holding it since not long after it started. It has been a great performer for a long time, but not so much recently. The recent interview with Terry linked to on here set a lot of alarm bells ringing because he didn't seem to have an answer for the charge that the fund was now so big that it couldn't take stakes in companies like Dominos these days - he just said that they still held Dominos from the old days, which isn't really very persuasive when you're thinking about future sources of outperformance.

Then we have had the recent purchases of companies that he has rubbished in the past (Google, Amazon, Facebook to some extent) but where he has now bought in after having seen them soar to many multiples of their past value. There is little point in having a concentrated, high conviction portfolio if that just means buying the biggest companies in the market; it just becomes an index tracker. Especially when Microsoft is another one of your holdings.

He appears to himself believe that Unilever is a bit of a stinker and he made the wrong call on P&G. And Pay Pal today is another disappointing outcome. I have made far worse stockpicks in the past, of course, but it's clear that Terry is making some mistakes too. And he's charging big fees for doing it.

So, having been a big fan of his for many years, and having benefited hugely from his stockpicking in the past, I've regretfully come to the conclusion that if it is going to be a portfolio which increasingly consists of the big US tech stocks then there are cheaper managed funds out there offering much the same thing. I am also trying to act on my own convictions on a timely basis and not do what I did with Woodford, where I got out before things went completely belly up but long after I had started having doubts.

In practice, I will actually use this as a chance to simplify my portfolio and buy into something resembling a global tracker (BlackRock MyMap6). The only question in my mind is whether to shove it all in now or dripfeed over 6 months.

Then I need to turn to Finsbury Growth and Income and decide whether that's for the chop, too.

[onslow]

Wanderer - out of interest what are your concerns with Finsbury Growth and Income?

I was just thinking yesterday its similar to the "old" Fundsmith, i.e. unglamorous, non sexy companies with large moats which are relatively undervalued.

[simoan]

I've sold out of Fundsmith today after holding it since not long after it started. It has been a great performer for a long time, but not so much recently. The recent interview with Terry linked to on here set a lot of alarm bells ringing because he didn't seem to have an answer for the charge that the fund was now so big that it couldn't take stakes in companies like Dominos these days - he just said that they still held Dominos from the old days, which isn't really very persuasive when you're thinking about future sources of outperformance.

I'm sorry but this is incorrect. Fundsmith Equity no longer owns Dominos Pizza. They sold out of the UK listed entity years ago. I believe the Smithson IT holds Dominos Pizza, the US listed company, last I looked. I hope you find a decent investment to replace your holding. That's easier said than done! In an economic scenario where inflation is high and interest rates stay comparatively low I'd expect Fundsmith to do OK. If interest rate rises go too far and a recession results, it's the kind of thing I'd want to be holding. Whilst I'm not happy with the switch towards US technology companies I was surprised by the relatively low rating of Google (Fwd PER = 24) when I looked the other day.

Then we have had the recent purchases of companies that he has rubbished in the past (Google, Amazon, Facebook to some extent) but where he has now bought in after having seen them soar to many multiples of their past value. There is little point in having a concentrated, high conviction portfolio if that just means buying the biggest companies in the market; it just becomes an index tracker. Especially when Microsoft is another one of your holdings.

It all depends how they are weighted within the fund. It is perfectly possible to outperform the index whilst holding these huge companies if their weighting is very different to that of the S&P500.

He appears to himself believe that Unilever is a bit of a stinker and he made the wrong call on P&G. And Pay Pal today is another disappointing outcome. I have made far worse stockpicks in the past, of course, but it's clear that Terry is making some mistakes too. And he's charging big fees for doing it.

All investors make mistakes, even the most high profile like Munger & Buffett, and Terry Smith. That doesn't mean they can't outperform in the long run. It just gets more difficult as the fund size increases due to liquidity. As an example, he recently sold out of London listed Sage and Intertek. Although he gave fundamental reasons for the sales, the lack of liquidity must have also have been a major concern because to get them even to equal rating in the fund he'd have to owned around £1bn of stock, and the current market caps are only £7.5B and £9B, respectively. I suspect he didn't want to end up with > 10% of either. This is why they launched the Smithson IT to give access to lower market cap companies which do not provide sufficient liquidity for the Equity Fund.

So, having been a big fan of his for many years, and having benefited hugely from his stockpicking in the past, I've regretfully come to the conclusion that if it is going to be a portfolio which increasingly consists of the big US tech stocks then there are cheaper managed funds out there offering much the same thing. I am also trying to act on my own convictions on a timely basis and not do what I did with Woodford, where I got out before things went completely belly up but long after I had started having doubts.

I'm no fan of Terry Smith (a pro-Brexit tax exile) but to compare him with Woodford is completely out of order. Woodford got it all wrong exactly because he didn't consider liquidity within his fund, the exact same thing that is leading Fundsmith to have to hold larger and larger companies as the fund size increases.

All the best, Si

[wanderer]

I'm sorry but this is incorrect. Fundsmith Equity no longer owns Dominos Pizza. They sold out of the UK listed entity years ago. I believe the Smithson IT holds Dominos Pizza, the US listed company, last I looked.

You're right, I misremembered the quote slightly. Here's what was actually said in the interview linked to earlier in the thread:

Q: When fundsmith started one of the biggest winners was dominos pizza which went up over 600% in the five yearsfrom when the fund opened. The fund bought it when its market capitalisation was under 2 billion but the cut off size for new stocks is now larger than that. To what extent do you think fund size is a challenge going forward?

TS: I mean it definitely is a challenge, let me tell you, that but the thing is that you have to bear in mind that the world doesn’t stand still. I was thinking about this in a slightly different context the other day and the slightly different context was that somebody had written up in an article “Fundsmith assets under management up 20% in the year to date. And this of course is true. But since the fund has performed by going up 20% in the year to date, what would you expect to be the outcome exactly? I mean you do kind of miss these things and the world doesn’t stand still so what was a company that was small enough for us to buy in 2010 is a company that is now too small for us to buy, there’s no doubt about that right – hold the US$2bn number in your mind for a moment because we’ll come back to it – but we can’t hold that. But bear in mind – could we buy Dominos pizza – let’s just stick with dealing with the reality of the real world – yes, why, it’s a 20 billion company now so can we still buy that company today, sure we can still buy that company today. What we couldn’t buy is another two billion dollar company, right, that’s not something we can do. Our average unit size in the fund is about 500 million pounds and that means we’d have to hold about a third of the company if we were to buy a 2 billion dollar company. We’re never going to do that.

The concern I have is still the same. Terry's investment universe is shrinking as the size of his fund is growing. Those companies that are left for him to choose from have already very big. That can make it more difficult to outperform a market cap weighted index. There won't be another Dominos Pizza and he doesn't seem able to articulate how he might overcome that. Instead, he just acknowledges that things have changed for the worse.

I'm no fan of Terry Smith (a pro-Brexit tax exile) but to compare him with Woodford is completely out of order. Woodford got it all wrong exactly because he didn't consider liquidity within his fund, the exact same thing that is leading Fundsmith to have to hold larger and larger companies as the fund size increases.

I wasn't comparing Terry to Woodford, I was comparing my psychology re: Fundsmith Vs my psychology with Woodford. With Woodford I had a big holding and stuck it out too long, even when things were happening that I didn't like. In the end, aftter 12 months, I was sent over the edge just before things went belly up - I lost a lot of performance whilst procrastinating, being too reluctant to sell.

Selling Fundsmith in some ways is an even more difficult decision. 15% of my SIPP and a fund I've been really happy to own. On this occasion, though, I'm not hanging around, hoping I'm wrong; a brave decision perhaps by me - time will tell - but too often I have stayed in investments when they get a bad smell and then have regretted it later. Good luck to all the Fundsmith holders; I hope it does as well for you in the future as it has for me in the past.

[Lootman]

The concern I have is still the same. Terry's investment universe is shrinking as the size of his fund is growing. Those companies that are left for him to choose from have already very big. That can make it more difficult to outperform a market cap weighted index. There won't be another Dominos Pizza and he doesn't seem able to articulate how he might overcome that. Instead, he just acknowledges that things have changed for the worse.

Other open-ended funds that became too popular in that way can simply close themselves to new money rather than let excessive size hamper their strategy. But of course that also caps the management fee, albeit at a very high level.

He could also introduce a second fund which would be small enough to take smaller positions.

Smith's later offerings were in an investment trust structure, where fund size is not such an issue.

And stock picking still matters even with megacap shares. Just look at the difference this week between Alphabet (which soared on 4Q results) and Facebook (down 20% last night).

[simoan]

I wasn't comparing Terry to Woodford, I was comparing my psychology re: Fundsmith Vs my psychology with Woodford. With Woodford I had a big holding and stuck it out too long, even when things were happening that I didn't like. In the end, aftter 12 months, I was sent over the edge just before things went belly up - I lost a lot of performance whilst procrastinating, being too reluctant to sell.

The trouble is there was a problem with the Woodford fund built-in from day one and all investors should have spotted it. Why was a well known income investor allowed to hold a large percentage of illiquid or unlisted companies in a supposedly safe fund? the warning was right there and I don't say that with hindsight. I think sometimes you need to look in the mirror as an investor, as opposed to putting all the blame on a fund manager who clearly thought he could no wrong. I wouldn't say Terry Smith is like that and is more than happy to listen to the opinion of others within Fundsmith i.e. Julian Robbins.

BTW is it possible for someone to remove the double posting by monabri above? It hurts my finger scrolling down on my phone

All the best, Si

[wanderer]

Wanderer - out of interest what are your concerns with Finsbury Growth and Income?

I was just thinking yesterday its similar to the "old" Fundsmith, i.e. unglamorous, non sexy companies with large moats which are relatively undervalued.

I need to do a proper review but over 1 year I think it has returned about 4% compared to 19% for the FTSE all share. I think - but haven't checked -there has also been underperformance against global indices and also on a 2 year basis as I think the share price has barely moved. It seems to be going nowhere so I'm inclined to move it into an index until I identify the next sage fundmanager/flavour of the month!!

[wanderer]

the warning was right there and I don't day that with hindsight. I think sometimes you need to look in the mirror as an investor, as opposed to putting all the blame on a fund manager who clearly thought he could no wrong.

I think we are in complete agreement.

[simoan]

Wanderer - out of interest what are your concerns with Finsbury Growth and Income?

I was just thinking yesterday its similar to the "old" Fundsmith, i.e. unglamorous, non sexy companies with large moats which are relatively undervalued.

I need to do a proper review but over 1 year I think it has returned about 4% compared to 19% for the FTSE all share. I think - but haven't checked -there has also been underperformance against global indices and also on a 2 year basis as I think the share price has barely moved. It seems to be going nowhere so I'm inclined to move it into an index until I identify the next sage fundmanager/flavour of the month!!

If you don't mind me saying, that's a very short term approach. One or two bad years does not indicate a bad investment. Nick Train has a very specific investment thesis. You either buy into it or you don't.

[wanderer]

Other open-ended funds that became too popular in that way can simply close themselves to new money rather than let excessive size hamper their strategy. But of course that also caps the management fee, albeit at a very high level.

He could also introduce a second fund which would be small enough to take smaller positions.

Smith's later offerings were in an investment trust structure, where fund size is not such an issue.

None of which is an argument to stay invested in Fundsmith Equity, which is what I've just sold out of.

And stock picking still matters even with megacap shares. Just look at the difference this week between Alphabet (which soared on 4Q results) and Facebook (down 20% last night).

But he owns both of those and hasn't picked between them! He now owns 4 of the big 5 which surely means the fund will gravitate towards the index level of performance (excluding Apple.) There are cheaper ways of buying that.

[wanderer]

If you don't mind me saying, that's a very short term approach. One or two bad years does not indicate a bad investment. Nick Train has a very specific investment thesis. You either buy into it or you don't.

I think what I said was that I needed to decide whether I still bought into it or not. I purchased on 16 May 2016 and it's returned 47% plus dividends. Over the same period, the FTSE all world index has returned around 120%. FGI has not been a bad investment, but it's reasonable to ask myself whether I am getting value for money from Nick Train.

[simoan]

If you don't mind me saying, that's a very short term approach. One or two bad years does not indicate a bad investment. Nick Train has a very specific investment thesis. You either buy into it or you don't.

I think what I said was that I needed to decide whether I still bought into it or not. I purchased on 16 May 2016 and it's returned 47% plus dividends. Over the same period, the FTSE all world index has returned around 120%. FGI has not been a bad investment, but it's reasonable to ask myself whether I am getting value for money from Nick Train.

OK, but your comment was about the performance of FGT over only 1 year, so that's what I was responding to!

[monabri]

"Meta" is not having a good day, neither.

[BullDog]

"Meta" is not having a good day, neither.

In fact a world record no company would ever want - biggest one day loss of value ever recorded. Down $220 billion, around a quarter of the company value.

Oh dear.

[Lootman]

"Meta" is not having a good day, neither.

In fact a world record no company would ever want - biggest one day loss of value ever recorded. Down $220 billion, around a quarter of the company value.

Oh dear.

And yet still double where it was just over 3 years ago.

But of course that is not when Smith bought it.

[BullDog]

"Meta" is not having a good day, neither.

In fact a world record no company would ever want - biggest one day loss of value ever recorded. Down $220 billion, around a quarter of the company value.

Oh dear.

And yet still double where it was just over 3 years ago.

But of course that is not when Smith bought it.

This week must be the worst ever for Fundsmith? PayPal and Meta, both savaged in the market. I wouldn't mind being a fly on the wall when Smith is on Zoom or Teams discussing this with the rest of Fundsmith LLP in the morning.