The manager of the £23bn Fundsmith Equity Fund, Terry Smith, has urged his tech holdings to stop “behaving like money is free” in 2023 as the global economy weakens.
Fundsmith’s CEO said in his annual letter to investors on Tuesday that the tech sector is facing “fundamental headwinds” amid rising interest rates and slowing revenue growth, and should exit. “less promising” projects outside of its core business.
Like many high-profile fund managers, Smith endured a torrid 2022 in which portfolio stocks like Meta, Amazon and Microsoft contributed to his strategy underperforming the broader market.
He pointed to Meta – the tech star formerly known as Facebook – and its costly foray into the metaverse, as well as Google parent Alphabet’s big bets on new ventures, but said he It was clear that some of these big spenders were holding things back.
Fundsmith CEO Terry Smith blamed a bad 2022 on the end of the post-2008 era ‘easy money’ environment
Fundsmith Equity is down 13.8% in 2022, but its long-term returns are strong
Fundsmith Equity, which invests 20.7% of its portfolio in stocks classified as technology, lost 13.8% in 2022, compared to a 7.8% drop for the MSCI World index.
It was a rare period of poor performance for the fund which has delivered a cumulative return of 478% to investors, an average of 15.5% per year, since its launch in 2010.
Smith, who added Apple to Fundsmith’s portfolio in November, told investors: “In addition to lower valuations caused by higher rates, tech stocks face fundamental headwinds.”
“A slowdown in the growth of technology spending is hardly surprising after the massive growth caused by digitalization during the pandemic.
“Furthermore, the cyclicality of technology spending and online advertising is likely about to become evident as the economy slows and possibly falls into recession.”
With interest rates yet to peak and the economy expected to weaken further, 2023 is expected to be another tough year for the tech industry, which typically thrives in times of high growth and lower interest rates. low interest.
Fundsmith’s worst performance of 2022 was led by Meta, formerly known as Facebook
Fundsmith’s best performers in 2022 were overtaken by Novo Nordisk and Philip Morris
Smith is estimated to have pocketed as much as £190m last year from his wider investment business.
He said: ‘However, there may be a silver lining to this cloud (no pun intended) as this pressure on revenue growth may cause some of the tech companies we invest in to stop behaving as if the money was free and to stop some of the less promising projects outside of their core business.
He pointed to “other hugely loss-making bets” from Google-owner Alphabet, warning the search engine and advertising-focused group that “lighting doesn’t strike twice.”
Smith added: “Amazon…has already pulled out of food delivery and technical education in India (who knew?). They have a very successful e-commerce and cloud computing business to focus on. .
‘Meta [is] stop or reduce spending on the metaverse. Without these expenses, we would own a leading single-digit price-to-earnings digital communications and advertising business.
More broadly, Smith acknowledged his fund’s poor performance in 2022, which he says gives “credibility to those who suffer from triskaidekaphobia” – the fear of the number 13.
However, he added, “unless you restricted your equity investments to the energy sector, you were almost certain to have experienced a decline in value.”
Smith blamed a bad 2022 on the end of the post-2008 era “easy money” environment “of large budget deficits, where government spending far exceeds revenue, and low interest rates.”
He said: “Attempts to suppress volatility will only exacerbate it in the long run. If you count current events, we’ve now had three economic and financial crises this century and it’s still in its first quarter.
“This latest round of easy money post-pandemic has led to all the usual bad investments people make when they are led to assume that money is endlessly available and costs nothing to borrow or raise.
“We can see the unraveling of these reckless investments, for example, in the collapse of FTX, the cryptocurrency “exchange” (sic) and the collapse of the stock prices of these technology companies without profits, flow of cash or even income.
“It is inevitable that when interest rates rise, because they now have to fight inflation, longer-term bonds will fall more than short-term bonds, and the same goes for equities with equities. higher-rated – which discount earnings or cash flow more in the future – suffering 5 more in the downturn than low-rated or so-called value stocks.
“This effect can be seen in the bottom five detractors of fund performance in 2022:”
Fundsmith Equity Portfolio Breakdown by Sector
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