Terry Smith's Biggest Strategy Shift Since Launching $Fundsmith
Terry Smith's Early Investments
Fundsmith's change in strategy
Terry Smith is the Founder and Chief Investment Officer of the UK-based fund $Fundsmith Equity ETF(ETFT)$ . Earlier this month, a letter published by Terry caused a subsequent flurry of commentary concerning a deviation in his investment style.
Terry is a quality-focused investor. His strategy is to run a concentrated and low-turnover portfolio of quality companies trading at a reasonable valuation. In his most recent letter, he announced that he's going to make a slight tweak to this approach:
We will take more account of momentum — both fundamental and share price — in our investment decisions. In particular, we will be much less willing to deploy the time-honoured technique of buying quality companies when they hit a glitch.
The rationale for this change of approach being that:
Buying shares in companies which have hit a glitch is like trying to catch the proverbial falling knife. All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect.
While not a factor considered in the past, Terry is now adding momentum to his list of considerations.
Momentum investing means investing in companies that have seen high share price appreciation. And it's a strategy that can work. The MSCI World Momentum Index has an annualised return of 12.3% since inception, compared to the MSCI World that annualised just 9.0%.
In response to this change in direction, Fundsmith began exiting quality companies with negative momentum and began positions in quality companies with positive momentum. His trades are as follows:
$AppLovin Corporation(APP)$ $GE Aerospace(GE)$ $LeGrand SA(LGRDY)$ $MasterCard(MA)$ $Netflix(NFLX)$ $Nextpower(NXT)$ $SAGE GRP.(SGE.UK)$ $TJX Companies(TJX)$ $Taiwan Semiconductor Manufacturing(TSM)$ $Uber(UBER)$ $Veeva(VEEV)$ $Yum(YUM)$
Fundsmith's historic outperformance and recent underperformance
The pressure to change the fund's direction has come from over half a decade of underperformance. At their peak, Fundsmith had over $41bn of assets under management. They currently have around $16bn.
Fundsmith launched in November 2010. In their first decade they saw consecutive years of outperformance. Then at the turn of the decade, things changed. The 6.5 years have seen consecutive years underperformance. This track record is highlighted in the below table, which compares Fundsmith to their index, the MSCI World.
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