Fundsmith Equity – the UK’s most popular investment fund – has had a poor run recently. Between the start of 2022 and the end of July, the fund returned -11.8% (versus -4.5% for the MSCI World index). Meanwhile, over the last year, the fund has returned about -8%.

I’m an investor in Fundsmith myself and it’s quite a large holding for me, relative to my overall investment portfolio. So, should I be worried about the recent poor performance here? Or is this just a short-term issue that’s likely to blow over?

Why has Fundsmith delivered negative returns in 2022?

It’s not hard to see why Fundsmith has gone backwards recently.

For starters, the fund has a high weighting to US stocks (74% at 29 July) and the US market has performed quite poorly this year (after a very strong run over the last decade). For the first half of 2022, the S&P 500 index delivered its worst performance since 1970, falling 20.6%. This weakness from US equities will have a big impact on Fundsmith’s returns.

Secondly, a number of holdings in the portfolio have underperformed in 2022. FinTech company PayPal is a good example. Year to date, it’s down about 50%.

The issue here is that portfolio manager Terry Smith runs a concentrated portfolio. Typically, Fundsmith only holds around 25 to 30 stocks at any one time. This means that the returns from individual portfolio holdings can have quite a large impact on overall returns.

One other issue that’s worth pointing out is that Terry Smith doesn’t like to invest in oil stocks. He doesn’t like their cyclical nature. This explains why the fund has underperformed the MSCI World index in 2022. This year, oil stocks have been some of the best performing stocks on the market.

Time to worry?

Am I concerned about the fund’s poor performance lately? Not at all.

While Fundsmith has an excellent long-term track record (£10,000 invested at inception in late 2010 would now be worth about £60,000), I always knew that it was susceptible to a period of weakness at some stage. No fund manager, or investment style, does well all the time.

Looking ahead, I expect the fund’s performance to improve as global stock markets recover from the pullbacks they’ve experienced in 2022. This might not happen overnight. But in the medium-to-long term, I think the fund should do well.

One reason I’m confident here is that the fund invests in high-quality companies (Microsoft is a good example). And high-quality companies tend to produce strong returns for investors over time.

My move now

Having said all that, I don’t see Fundsmith as a one-stop shop. As I said earlier, this fund only holds around 30 stocks. So, I think it doesn’t offer me a high enough level of diversification. And Terry Smith has a very specific investment approach, which isn’t going to perform well all of the time.

So, while I will be holding Fundsmith (and adding to it on stock market weakness) I will also be investing in other funds and individual stocks I’m bullish on. Doing this will help me create a more balanced investment portfolio, and give me a better chance of generating strong returns over the long run.

The post Fundsmith isn’t performing. Should I be worried? appeared first on The Twelfth Magpie.

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Edward Sheldon has positions in Microsoft, PayPal Holdings and Fundsmith Equity. The Motley Fool UK has recommended Microsoft and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

1. Great businesses rarely go bad overnight

Despite its popularity, Fundsmith Equity’s recent performance hasn’t been particularly great. Based on its most recent factsheet, Terry Smith’s flagship fund fell 13.2% in the first two months of the year. That’s a lot worse than its benchmark (the MSCI World Index) which fell ‘just’ 6.8%.

Does this concern me? Not really. As a committed Fool, I’m far more interested in returns over the long term. Here, Fundsmith has excelled. It’s returned 482% from inception (2010) to the end of February.

Smith continues to attribute these gains to owning the right companies. To drive the point home, he reflected this week that he and colleagues were ‘business-pickers’ rather than stockpickers.

The reason for this, Smith said, is that “returns are persistent“. Great companies — those that have barriers to entry — tend to stay great, even if they cost more to acquire. Therefore, he sees little point in getting involved in the rotation to lower-quality ‘value’ stocks we’ve seen in 2022 so far.

As a quality growth investor myself, I can’t help but agree.

2. Buy the dip

At a human level, the current situation in Ukraine is clearly appalling. Seen purely from an investment perspective, however, Terry Smith believes we should look at the situation “historically“. Smith used the annual meeting to point out that the past shows that buying shares during times of military conflict usually pays off.

As evidence, Smith picked out a number of examples, including the Gulf War. In August 1990, the S&P 500 hit a low not long afterward before recovering strongly. The same thing happened earlier in the century during the Six Day War in 1967 and also during the Korean War. In Smith’s words, “The sweep of history suggests to us that buying on the cannon is the right thing [to do]“. 

There are exceptions, of course. Smith’s noted the similarities between the Ukraine/Russia conflict and the Yom Kippur war in the 1970s. The latter happened at a time of inflation and soaring oil prices. Stocks went down and continued falling. Clearly, no one knows if that may happen again. However, I’ll certainly bear it in mind. 

Speaking of rising costs…

3. Own stocks that have pricing power

Inflation in the UK hit its highest level in 30 years back in February. That’s enough to rattle the most sanguine of investors. For Terry Smith, however, there’s a way of tackling rising prices. It involves owning businesses that have high gross margins.

Gross margin is simply the difference between how much it costs to make something compared to how much it gets sold for. So, if a product costs 50p to produce and it’s sold for £1, the gross margin is 50%. 

As Smith succinctly puts it, gross margin is “the single biggest defence” against inflation. It won’t come as a surprise then that the Fundsmith portfolio owns companies with higher than average gross margins.

Knowing this, I’m satisfied that Terry Smith is probably doing a good job of protecting my capital. I have no issue remaining invested.  

The post 3 takeaways from Fundsmith’s annual shareholders meeting appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here, I’m going to highlight three top stocks in Terry’s Smith Fundsmith Equity fund I’d buy today. All of these companies are leaders in their industries and appear to have considerable long-term growth potential.

Microsoft

Let’s start with Microsoft (NASDAQ: MSFT), which is one of Fundsmith’s biggest holdings. It’s one of the largest technology companies in the world.

To my mind, MSFT has all the right ingredients to be a ‘core’ long-term holding. For starters, it has attractive long-term growth prospects. In the years ahead, it should benefit from the growth of the number of industries, including the cloud computing, remote work, and gaming industries. 

Yet at the same time, it’s a relatively ‘defensive’ company. People aren’t going to suddenly stop using Microsoft products like Office and Azure if there’s an economic slowdown. Meanwhile, the group has a strong balance sheet and generates an enormous amount of cash. 

Of course, MSFT is not risk-free. If we see further weakness across the tech sector, MSFT could underperform. With the stock now trading at 28 times next year’s earnings however, I think it’s a good time to be buying for my portfolio.

Estée Lauder

Next up is Estée Lauder (NYSE: EL). It’s one of the world’s largest skincare and make-up companies.

One reason I like this Fundsmith stock is that its brands provide a strong competitive advantage. When it comes to beauty products, people tend to buy the same brands over and over again.

Another reason I see appeal here is that the company looks set for growth both in the short term and the long term. In the short term, it could benefit as the world continues to reopen and people socialise more. Meanwhile, in the long run, the company looks set to benefit from the ‘premiumisation’ trend – where consumers are happy to pay more for premium products.

It’s worth pointing out that EL does have a relatively high valuation (the forward-looking P/E ratio is about 34). If future growth is disappointing, the stock could fall.

However, it has recently had a near-20% pullback. So I think it’s a good time to start building a position.

Intuit

Finally, I also like the look of Intuit (NASDAQ: INTU) right now. It’s a leading provider of accounting solutions, and the owner of QuickBooks.

There’s a lot to like about Intuit from an investment point of view, to my mind. One key attribute here is that its products are ‘sticky’. Once businesses sign up for an accounting product, they’re unlikely to switch to a competitor, due to the time and costs involved in switching. This means revenues are quite predictable.

Secondly, the company has a strong growth track record, and is very profitable. Over the last three years, revenue has climbed 60% and return on capital employed (ROCE) has averaged more than 30%.

Like MSFT, Intuit could underperform if sentiment towards tech stocks continues to deteriorate. In the short term, this is definitely a risk.

All things considered however, I see a lot of appeal here. After a recent pullback, the stock now trades at 35 times next fiscal year’s forecast earnings, which I think is a very fair valuation.

The post 3 Fundsmith stocks I’d buy today appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Intuit and Microsoft. The Motley Fool UK has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here are three take-home messages I’ve spotlighted from his latest letter to shareholders. 

Running winners

The real Warren Buffett once quipped that his ideal holding period was ‘forever‘. While Smith hasn’t gone this far, he has frequently made it very clear that part of Fundsmith’s strategy is not to trade very often and run its winning picks.

He made this point again last month:” Someone once said that no one ever got poor by taking profits. This may be true but I doubt they got very rich by this approach either.“

As an illustration of his commitment to not jumping in and out of stocks on a whim, Smith still holds seven companies that were originally bought when the fund kicked off in 2010. That might not seem like many. However, his fund is highly-concentrated, only holding between 20 and 30 shares at any one time.

A quick check reveals that I’m a lot worse at running profits than Smith. Positively, I am getting better, having held Somero Enterprises, IG Group and Greggs for a few years now. I’ve no intention of selling up either!

Buy quality

Buffett famously bought into very cheap stocks early in his career and made a killing. That said, his investment strategy would later change to buying only the highest-quality companies he could find. These had some kind of ‘moat’, or competitive advantage, over rivals. This may take the form of a very strong brand or enormous marketing budget or control over distribution. Think Coca-Cola. 

Smith adopts a similar approach, name-checking Buffett in January’s letter. In his view, “the biggest problem with any investment in low-quality businesses is that on the whole, the return characteristics of businesses persist.” 

This is why Fundsmith’s leader vehemently refuses to temporarily invest in stocks that may benefit the most from the post-pandemic recovery in economic activity. So no IAG or easyJet for Smith.

Having owned one, two or seven real stinkers in my time, I’m now a fully signed-up member of ‘Team Quality’. In addition to my stake in Fundsmith Equity, I’ve been topping up my holding of Smithson — the small/mid-cap-focused investment trust that also adopts Smith’s strategy.  

Don’t obsess over price

Having highlighted the importance of buying good businesses, Smith then turns his attention to the issue of valuation. In his view, “highly rated does not equate to expensive any more than lowly rated equates to cheap.“

For me, this has links to Buffett’s suggestion that it is better to buy a great company at a reasonable price than the other way around. 

Not obsessing over the price I’m required to pay for a stock has taken me years of practice. I’ve lost count of the number of times I’ve waited for the prices of great stocks to ‘correct’ only for this to never happen. More often than not, a top growth company’s valuation has remained fairly constant while its share price has soared. 

However, I do think that I’m steadily getting better at it. In fact, there’s one FTSE 100 stock that I’d be very happy to buy right now, despite still being very highly rated. 

The post I’m listening to ‘Britain’s Warren Buffett’ and buying these stocks appeared first on The Twelfth Magpie.

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• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity, Smithson Investment Trust, Greggs, IG Group and Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As scary as such drops can be, I’ve been taking the opportunity to load up on a fund whose performance prior to the start of 2022 had been excellent.

Solid gains

Managed by Stephen Yiu, LF Blue Whale Growth returned 20.8% in 2021, according to its most recent fact sheet.  That’s a better return than its benchmark. The IA Global Sector average was 18%. All told, the fund has more than doubled investors’ money in a little over four years.

One reason for this stellar performance is the number of tech-related stocks owned by Blue Whale. These include Microsoft, Adobe and Alphabet. Another relates to just how concentrated the fund is.

Blue Whale’s portfolio is made up of just 27 holdings, almost 73% of which are US-listed firms. You probably don’t need me to tell you any strategy that embraced being overweight in stocks from across the pond paid off handsomely in 2021.

Unfortunately, the first month of 2022 has taken a rather large chunk out of last year’s gains. So the question to ask is whether the current market crash is a great opportunity to buy more. 

New bear market?

On the one hand, the recent rout in tech stocks could continue if the Federal Reserve keeps giving out signs that it’s ready to shift its monetary policy. That’s potentially problematic for Blue Whale’s portfolio, given how concentrated (and potentially more volatile) it is.

Regardless of what the Fed does, it’s possible traders will move more of their money into value stocks hit most by the pandemic anyway. Rising tensions in between Ukraine and Russia, while seemingly not all that relevant to the performance of a US-focused fund, could also push investors to the exit as a cautionary measure.

Is this the dawn of a new bear market? It’s entirely possible.

Back quality

Of course, there are reasons to stay bullish too. One argument is that all this will prove transitory. With so many US stocks now at least in correction territory, the worst could already be over.  And when we get big sell-offs, the recovery can be just as swift. Thanks to inflation, staying in cash is hardly appealing. 

Perhaps the biggest motivation for feeding my money into Blue Whale specifically is its attitude to stock selection. Like rival Fundsmith Equity, Yiu looks for high-quality shares. He also avoids those “at the mercy of cyclical economic gravity“. The fund has a strict approach to valuation too. This means investors don’t need to worry about owning unprofitable story stocks.

Another potential tailwind is Blue Whale’s size. As a relatively young fund with ‘just’ £1bn in assets, Yiu has considerable flexibility in what he is able to buy. I’d be amazed if he hasn’t put some money to work in recent days.

Long-term focus

The reversal in the fund’s fortunes is a reminder of how quickly sentiment can change. So long as I adopt a long-term mentality (not dissimilar to Yiu) while also maintaining a degree of diversification, I’m confident that increasing my investment here will pay off. I’m still backing Blue Whale.

The post 1 fund I’ve been buying during the market crash appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Paul Summers owns shares in LF Blue Whale Growth and Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’ve been invested in Fundsmith for a number of years now and I’ve always viewed the fund as a core holding in my portfolio. Currently, it’s one of my largest fund positions. But is Fundsmith still one of the best funds for me (a long-term, growth-oriented investor) to invest in going forward? Let’s take a look. Here’s my view for 2022.

What type of fund is Fundsmith?

Let’s start with a basic review of what Fundsmith Equity is and what it invests in. It is a global equity fund, meaning it invests in companies all over the world and not just those listed in the UK. As a concentrated fund (it holds just 20-30 stocks), it only invests in companies that meet its strict investment criteria.

Specifically, Fundsmith seeks to invest in high-quality companies that:

• Can sustain a high return on operating capital (they are consistently very profitable).

• Have advantages that are difficult to replicate.

• Are financially strong.

• Have a good chance of generating growth.

• Are resilient to change and technological innovation.

• Have attractive valuations.

It then aims to invest for the long term.

Overall, I really like this approach to investing. Since the fund’s inception, this approach has managed to generate strong returns, outperforming its benchmark comfortably while, at the same time, minimising downside during periods of volatility.

Having said that, there are likely to be periods where this style of investing underperforms the market. I’ll discuss this later in the performance and risks section of this review.

Which companies are in Fundsmith?

Looking under the bonnet (its the latest factsheet), we can see that as of 31 December 2021, the top 10 holdings in the fund were:

• Big Tech giant Microsoft

• Pet diagnostics firm Idexx

• Diabetes specialist Novo Nordisk

• Beauty group L’Oréal

• Beauty group Estée Lauder

• Payments firm PayPal

• Big Tech company Meta Platforms (Facebook)

• Accounting software specialist Intuit

• Tobacco giant Philip Morris

• Medical technology company Stryker

My own research tells me that other stocks in the portfolio  include Nike, Visa, PepsiCo, Starbucks, Unilever, Diageo, and Amazon.

Is this a good mix of companies? I think it is. There are a couple of companies I’m not the biggest fan of for ethical reasons, such as Philip Morris (cigarettes) and Meta Platforms (referred to as the ‘new cigarettes’). However, in general, I do like Fundsmith’s portfolio holdings. I’m very comfortable owning these kinds of companies in my portfolio in 2022.

Performance

In terms of performance, this has been excellent over the long run. As we can see from the table below, the fund returned more than 20% in four out of the last six years. That’s an impressive achievement.

Source: Fundsmith

It’s worth noting however that last year, the fund did underperform its benchmark slightly. For 2021, the return was 22.1% versus 22.9% for the MSCI World. This did was largely down to the fact that 2021 was very much a recovery year and Fundsmith’s companies – which tend to be highly resilient – didn’t have much to recover from.

It’s also worth pointing out that on Hargreaves Lansdown there are a number of global equity funds that have delivered superior returns over a five-year timeframe. Baillie Gifford Global Stewardship and Rathbone Global Opportunities are two examples. However, Fundsmith’s returns tend to be more consistent than some of these other top performing funds. For example, some rivals actually generated negative returns last year.

Overall, I’m very happy with the performance here.

Risks in 2022

In terms of the risks as we start 2022, I see a few. One is that Fundsmith tends to avoid highly cyclical areas of the market, such as oil companies and banks. Most of the fund is invested in three main sectors – consumer staples, technology, and healthcare. Looking at the current economic environment, I think there’s a decent chance cyclical stocks could lead the market in 2022. So I have to be prepared for some underperformance from Fundsmith in the short term.

Another risk is the concentrated nature of the fund. Given that it only holds around 20-30 stocks, stock-specific risk is quite high, relative to more diversified funds. To give an example here, PayPal has been around 7-8% of the fund in the recent past. However, this stock has fallen more than 30% over the last six months. This will have impacted fund performance significantly.

Some investors also believe the fund’s size (£29bn at 31 December) is a risk. They worry that this could limit investment opportunities. Personally, I’m not too concerned about this risk, given the fact that companies like Microsoft and Amazon are worth several trillion dollars.

Is Fundsmith worth the fee?

Finally, let’s take a look at fees. Personally, I pay an annual fee of 0.96% to invest in Fundsmith through Hargreaves Lansdown. I also pay Hargreaves Lansdown’s fund charges (0.45% per year).

These fees are relatively high. They’re significantly higher than the fees I’d be paying if I was invested in cheap index tracker funds.

However, I think the excellent long-term performance here justifies the higher fee.

Is Fundsmith a good investment for 2022?

Putting this all together, I’m convinced Fundsmith remains a great choice for my investment portfolio in 2022. The long-term track record is excellent and I’m very comfortable with the fund’s holdings.

There is a chance the fund could underperform the market in 2022 if cyclical stocks have a great run. However, I’m comfortable with any short-term underperformance. As a long-term investor, I’m more concerned about what this fund does over the next five-to-10 years. And I’m confident it can continue to generate strong returns for me.

The post Fundsmith Equity review: is it a good investment for 2022? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Amazon, Diageo, Hargreaves Lansdown, Idexx Laboratories, Microsoft, PayPal Holdings, Unilever, and Visa and has a position in Fundsmith. The Motley Fool UK has recommended Amazon, Diageo, Hargreaves Lansdown, Idexx Laboratories, Microsoft, Nike, PayPal Holdings, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Having delivered an annual return of over 18% since Fundsmith Equity was launched in 2010, Terry Smith is widely regarded as one of the UK’s finest fund managers.  I think I can benefit from his approach, especially if I have a limited amount of cash at my disposal.

Buy quality

£1,000 is a great sum to begin investing. That said, any mistakes I make can have a far more significant impact than if I had a larger amount at my disposal to buy a greater number of stocks. For this reason, I’d be tempted to prioritise parking my cash with established businesses of the sort favoured by Fundsmith’s manager.

First and foremost, Terry Smith looks for quality. For this reason, he steers clear of what may be regarded as ‘value’ stocks. In Smith’s view, the vast majority of lowly-priced companies tend to be cheap for a reason. Instead, he looks for blue-chip companies that will “shoot the lights out” by generating high returns on the money they invest in themselves. They also tend to have a competitive advantage of some kind and are resilient to change. Think tech titan Microsoft and payments firm Paypal.

By adopting this approach, Smith has generated a return of 534% in 11 years according to Fundsmith’s latest factsheet. Put another way, my £1,000 will have turned into a little over £6,000. This shows that I don’t need to take outrageous risks to outperform the market.

No trading

Terry Smith is about as far removed from a trader as you can get, describing Fundsmith’s transaction frequency as a ‘black armband’ day for the brokerage industry. In other words, Smith buys and sells very irregularly. Theoretically, this should mean a better return for holders because Fundsmith pays out less in fees.

Of course, this approach isn’t new. US investing legend Warren Buffett has adopted the same ‘buy and hold’ mentality for decades. Armed with £1,000 to invest, I’d try to do the same.

In addition to not ramping up costs unnecessarily, I’d also consider actively saving money where I can. This could involve taking advantage of regular investment plans offered by brokers. These invest a proportion of my cash at a fixed date every month at a far lower cost than I’d pay for buying on the fly. Depending on the provider, there might not be any fees at all! 

No market timing

A final thing that Terry Smith has taught me is the folly of trying to time the markets. The fact is, nobody knows what will happen in the world next. Anyone waiting for a crash in arguably-overvalued US tech stocks in 2021, for example, will have been disappointed. Bar the odd wobble, their value has only increased.

Smith encourages investors to recognise that, over time, “it’s what the companies do that matters, not what you do“. Accordingly, he urges us to focus more on the potential long-term returns of staying invested in great businesses rather than speculating about the exact moment to buy or sell them.

This is not to say that he doesn’t take advantage of opportunities when they do appear. No investor wants to pay more than they have to. But staying on the sidelines for too long is dangerous, especially if inflation is galloping upwards. It’s better to get started than never start at all.

The post What can Fundsmith’s Terry Smith teach an investor with £1,000? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares of Fundsmith Equity. The Motley Fool UK has recommended Microsoft and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I didn’t start investing until my late 20s. What followed was a steep learning curve, albeit helped by following the thoughts and dealings of some of the best money managers in the business. One in particular — Fundsmith Equity‘s Terry Smith — has probably served a bigger role in my education than any other.

Terry Smith on quality

Terry Smith looks for winners. In practice, this means surveying the market for companies that already possess a strong/leading share of their market and can be depended on to protect it. This is why many of the stocks that make up the Fundsmith Equity portfolio have been around for many decades. Past performance might not be a guide to future returns but it can help when looking for resilient businesses that have consistently managed to grow revenue and profit.

These days, I’ve a penchant for smaller companies flying under the radar. That said, I’m still applying a quality criterion like Terry Smith. Aside from the characteristics already mentioned, I’m on the hunt for businesses generating high returns on capital and big margins. This means I now steer clear of capital-intensive businesses like airlines (which Smith labels “machines for losing money“). 

Like Smith, it also means I’m very selective about what makes it into my ISA portfolio these days. Only 29 holdings make up Fundsmith Equity right now. So long as I’ve picked well, operating a concentrated portfolio can turbocharge my returns. Of course, the opposite is also possible! 

Price matters…to a point

‘Buy low, sell high’: that’s the rule that every investor tacitly learns on entering the market.

Terry Smith doesn’t go against the grain here. However, the UK fund manager has frequently pointed out that focusing too much on valuation can prove detrimental to returns. For Smith, a stock’s price is of secondary importance to how good a company is (see above). A cheap stock can always stay cheap while a more expensive stock can go on increasing in value. In other words, contrarians/value hunters don’t always prosper. This is why Smith picked up stocks like Nike and Starbucks in the 2020 market crash rather than buying ‘bargain’ travel stocks. 

As an investor, I’ve come around to the idea that simply trying not to overpay is preferable to buying what’s cheap. This is also why I’m wary of unprofitable, flavour-of-the-month companies such as cybersecurity firm Darktrace even when its prospects look undoubtedly solid. So long as I’m paying a not unreasonable price, I know the risk/reward should theoretically be (more) in my favour.

No gimmicks

A final thing I like about Smith is his no-nonsense approach. He picks stocks that he expects to generate a better return for holders than the market. He doesn’t short (bet against) any companies. Nor does he use derivatives or get involved in any creative financial practices like some managers might.

Most importantly, Smith has taught me that investing is as much about what you don’t do as what you do. In practice, this means buying stocks with the intention of holding for years rather than attempting to ‘time the market’.

Not only is predicting the short-term movement of a share price very difficult, it only guarantees fees. As Smith frequently highlights, Fundsmith has very low turnover, meaning that investors ultimately get to keep more of the profits made.

The post No savings at 30? Here’s how I’m using Terry Smith’s strategy to build wealth appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fundsmith’s latest factsheet reveals that, in October, Smith made two key moves for his portfolio. Here’s a look at a stock he sold, and one he bought.

Terry Smith just sold this FTSE 100 stock

The factsheet reveals that last month, Smith sold his position in FTSE 100 stock InterContinental Hotels Group (LSE: IHG). The hospitality giant owns a range of hotel brands including Holiday Inn, Regent, and Kimpton.

I’m not particularly surprised by this move. IHG is a great business with a very profitable business model. However, to my mind, the recent share price gains here and valuation don’t really match the fundamentals.

You see, IHG’s share price has had a huge bounce since its Covid-19 lows and, currently, it’s not that far off its all-time highs. That doesn’t really make a lot of sense, to my mind, given that travel is still well below 2019 levels. In 2019, IHG posted revenue of $4.6bn. However, this year and next, analysts forecast revenue of $1.5bn and $1.8bn respectively.

As for the valuation, IHG currently trades at 57 times this year’s estimated earnings and 28 times next year’s forecast earnings. These valuations are quite high, given that the travel industry isn’t likely to be firing on all cylinders for several years.

So it looks as if Smith has simply taken advantage of the recent share price rise here. With the stock not far off it’s all-time highs, I imagine he sees better opportunities.

If I owned IHG stock in my portfolio and was sitting on a decent gains, I’d consider taking some profits off the table right now as well.

Fundsmith just bought Amazon stock

And the stock Smith bought during October? That was Amazon (NASDAQ: AMZN), a stock he’s had his eye on for a while and bought for his own portfolio a few months ago. Now however, he’s purchased a position for his flagship fund.

This is very much a classic Smith move. We know he likes high-quality businesses that have strong competitive advantages. However, he also likes to buy these companies when they’re experiencing short-term difficulties because this allows him to pick them up cheaper. “You rarely get to purchase high-quality businesses at cheap prices unless there is a ‘glitch’ which provides an opportunity to do so,” wrote Smith in his 2020 annual letter to investors.

Amazon is one of the world’s most dominant companies. And in the years ahead, it’s likely to get much bigger as the e-commerce and cloud computing industries grow. However, right now, it’s experiencing a bit of a glitch in that higher costs are hitting profits in its e-commerce division. And this has hit the share price.

Clearly, Smith is looking beyond these short-term challenges and focusing on the long-term growth story. I think that’s the right move as I don’t expect the higher costs to last forever (automation will help ease costs in the long run).

I’ll point out that I’ve actually been buying Amazon stock for my own portfolio in recent months. I believe the growth potential here is significant.

The post ‘Britain’s Warren Buffett’ just made these two moves appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Amazon and has a position in Fundsmith. The Motley Fool UK has recommended Amazon and InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m not surprised by this purchase (despite the fact Smith has been critical of Amazon’s business model in the past). In my view, Amazon is a ‘must-own’ stock and I’ve been buying the stock too in recent months. As a result, it’s now one of my largest holdings.

Here’s a look at three reasons I’m buying Amazon shares.

Why I’m buying Amazon shares

The first reason I’m bullish on the stock is that I believe the group’s e-commerce division has a huge growth runway ahead of it. While the online shopping industry has experienced strong growth in recent years, I think there’s plenty of growth to come. According to Vision Research, the global e-commerce market is expected to grow from $3.7trn in 2020 to $8.7trn by 2030. Amazon should benefit from this growth.

What strikes me about Amazon is that its market share in the UK and Europe is still quite low (well below what it is in the US). Given Amazon’s dominance and economies of scale, I think it will be able to capture significant market share in these regions in the years ahead.

High growth potential

The second reason I’m excited about Amazon is the potential growth in the company’s cloud computing division, AWS. The cloud computing market looks set to experience strong growth in the years ahead as businesses go digital.

Between now and 2030, the market’s expected to grow by nearly 20% per year. Currently, Amazon has a 40%+ market share of the cloud industry, so I expect its related revenues to rise significantly going forward. Recent Q2 results showed 37% growth in this division.

Attractive share price set-up

Finally, I think the share price set up and the valuation are attractive. After a big run last year, Amazon shares have been consolidating this year. I see this as very healthy as the shares have now built a solid base around the $3,000-$3,500 level from which they can move higher in the long run.

As for Amazon’s valuation, it’s high (forward-looking P/E of 65). However, I don’t think it’s outrageous given the company’s dominance in two high-growth industries.

Risks

Of course, there are risks to the investment case. One thing to consider with Amazon is that it can be a very volatile stock at times. In the past, it’s regularly had pullbacks of 20%+. It could easily fall 20-30% again if we see a high level of stock market volatility.

Another issue is regulatory uncertainty. Given Amazon’s dominance, regulators are keeping a close eye on the company. Recently, the company has been investigated by the UK’s Competition and Markets Authority.

I’m bullish on Amazon shares

Overall however, I see the long-term risk/reward proposition here as attractive at the current share price. I’m bullish on the shares and I think it’s very encouraging that Fundsmith has been buying recently.

The post Fundsmith has been buying Amazon shares… and so have I appeared first on The Twelfth Magpie.

More reading

• SpaceX vs Amazon stock: here’s where I’ve got my money
• 3 reasons I’m still bullish on out-of-favour Amazon stock
• If this Dow Jones stock were valued like SpaceX, here’s how much it would be worth…
• 3 exciting space stocks to consider buying that aren’t SpaceX
• Amazon stock falls while SpaceX soars – is this a buying opportunity?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Amazon and has a position in Fundsmith Equity. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.