In the letter, published today (January 10), Smith said the fund had fallen by 13.8% in 2022, compared to a 7.8% drop in the MSCI World index in sterling with dividends reinvested.
“While a period of underperformance against the index is never welcome it is nevertheless inevitable,” the fund manager said in the letter.
“We have consistently warned that no investment strategy will outperform in every reporting period and every type of market condition.”
Smith went on to detail market developments since the 1990s, which he described as a long period of easy money.
He then defended his holdings in what he said could be “loosely” termed as the technology sector, several of which made the largest losses for him in 2022.
The five biggest detractors from the fund’s performance for the year were Meta, PayPal, Microsoft, IDEXX and Amazon.
He said some of these fell because of issues within the businesses and some because of the economic circumstances.
Smith used the opportunity to disagree with commentators who described his fund as a “tech fund” and said he went on a tech-buying “spree”.
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“I am not that keen on relying upon sector classifications to define a business,” he stated.
“Similarly it is worth noting that a number of stocks which are in the MSCI Technology sector and are, or were until seven recently, in our portfolio are not in my view primarily technology companies but rather they use technology to deliver differing service,” he wrote.
Smith views his technology holdings individually, and some of them have been removed or replaced by others over the course of the year, with PayPal exiting and Apple entering the portfolio.
The manager, who prides himself on a low portfolio turnover, said it was higher than usual in the past year, at 7.4%.
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“We sold our stakes in Johnson & Johnson, Starbucks, Kone, Intuit and PayPal and purchased stakes in Mettler-Toledo, Adobe, Otis and Apple,” he said.
“This seems a lot of names for what is not a lot of turnover as in some ten cases the size of the holding sold or bought was small. We have held five of our portfolio companies since inception in 2010.”
Unilever
Last year, Smith used his annual letter to call out Unilever, which was a top holding, for its lack of growth and some of its management decisions.
He returned to the issue in this year’s letter, noting that shortly after activist investor Nelson Peltz of Trian Partners took a stake in the business he was invited to join the board.
“What I find questionable is that companies mouth platitudes about wanting to attract long-term shareholders yet based on our experience, we tend to get ignored, whereas an activist who has held shares for fewer months than we have held in years gets invited to board meetings,” Smith said.
He then presented another example of PayPal and Elliot Management to demonstrate it was not a one-off occurrence.
The manager ended his letter warning investors “there is no guarantee they [portfolio companies] will not become more lowly rated”.
However, he said his focus is on fundamental performance.
Smith finished by quoting Winston Churchill: “If you are going through hell, keep going.
“At Fundsmith we intend to”.
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