Fundsmith Annual general meeting 2023
Terry Smith: The UK Buffett or Charlie Munger?
Below is my personal summary of the 2024 Fundsmith AGM. There are a lot of interesting questions that are being asked and I will try my best to keep the details. If not, you are welcome to watch the AGM as per above. Thanks for subscribing to my blog.
As usual, Fundsmith always start with its performance. It has been underperformed since 2021 but still outperformed the index (MSCI) since inception. His justification for underperformance has been due to not owning the Magnificent 7 (contributed to 67.8% of Nasdaq performance) and if you didn’t own most of it, you are likely to underperform the market.
Then he proceeded to share his best performers and losers. The best company continue to perform. That is why i like the quote by Peter Lynch: “Don’t Cut Your Flowers and Water Your Weeds”.
The following is an interesting slides on good and bad businesses.
Lastly, it is his portfolio companies performance against the market. I think this is a good way to keep track of our portfolio performance. The ROCE is almost 2x higher than the market.
Q&A Session
Impact of Potential 2nd Trump Term
They don’t think that trump being re-elected will affect the market since the market continue to perform during his term at 12.5% CAGR.
Fundsmith’s Investable Universe
“Many managers will be flipping around from Japan to Value to Quality to growth depending on what's is their style but we our focus is on on identifying good companies.”
They started at 53 and slowly expanded to 85 currently. They are looking at newly IPO or spinoff due to their high threshold.
Is Being Fully-Invested a Drag on Returns?
Timing the market might not be the best if you were to miss the best days, your return can easily being half or even negative. It is best to stay fully invested and avoid market timing.
U.K. Stocks that Fundsmith Likes
They like the consumer staples and healthcare but no obvious candidates fit their investment criteria. They do like RELX.
Are U.K. Stocks Undervalued?
The market is cheap for a reason as the return on capital is simply not as impressive as compare to other countries. Besides, the FTSE 100 has a distorted FCF yield by a few companies.
Why Terry Smith Dislikes U.K. Banks’ ROTE (return on tangible assets)
The problem on ROTE is that the banks are massively geared and it is not a proper metric to look at. The better metric for evaluating a bank is Return on equity.
On Standard Chartered’s “low” P/E
They think that the market is right on the standard chartered valuation as their ROCE is about 5.7% and with an estimated 10% cost of capital and price/book value of 0.5, it is about right. The bank is valued at half of its book.
What Went Wrong in Sale Decisions (Paypal, adobe and Amazon)
Andy Farrell, the Irish coach who said “You got to be able to deal with the highs and lows of the game that is the game it's not about perfection it's about how you react to things”
Investing is never easy and they admit that they could have done better. The biggest lesson for them is when there is an enormous tailwind, ie: the AI trend, they should wait it out before rushing to sell it just because the company no longer looks attractive to them.
What is Fundsmith’s Comfort Zone?
They have learned to accept that they will never get to know everything about the company and use the example of surfactant, most people know it works but will never be able to explain the chemical reaction of it. The key is understanding the figures and the people behind it.
A Bank that Terry Smith Likes
It is the first time hearing Terry smith that he likes a bank and he quote Charlie Munger: “sometimes, a man must rise above his principle.“ However, he didn’t disclose it and we might actually see a bank holding in the future in his portfolio.
Selling Your favorite company
They said that it is hard to sell a company when you are too attached to the stocks like knowing the CEOs, their kids name, etc but they think for investment, it is better to displace old ideas but the only place to stick with the old ideas are marriage as per Charlie Munger.
They mentioned that they have been avoiding the issues by keeping the relationship professional and engaged in a certain rotation. There is only 5 stocks remaining in their portfolio since its first inception. The biggest change for the funds are transition away from consumer staples companies. (started at 50% of their portfolio to around 20%)
They said that they are looking at something that they will never invest in the past such as drug companies as they don’t like the drug discoveries process. However, they invested in Novo Nordisk. The legendary investors always learn and improve.
Fundsmith’s Views on AI
They think that there might be no “winner” in the AI space and draw parallelism to the dotcom bust in the early 2000s. Most of the early tech leaders lost their dominant positions. They also point out that alot of companies have no proper business model in making money from it.
It is also great to think about “losers” which are certainly there will be some. I think it is easier to avoid the big AI losers than picking an AI winner.
On not selling Unilever
They still believe that Unilever is a strong business (strong brands, distribution, high penetration in emerging market) but with poor managements and they believe that the new management is able to turnaround the business.
Private Labels Threat to Consumer Staples
The market share of private label varies by products but certain products have low penetration such as products that you consume on a daily basis except frozen vegetables. (anyone knows why?)
These charts show that private label remains strong only in certain areas.
Fundsmith Holdings with Most Upside Potential
They think that Unilever and Mettler Toledo have the most potential due to them being unloved by the market but still have a very strong underlying business.
Why Fundsmith Ended Up Not Buying Adyen
They buy when there is a “glitch”. They define it as when a stock price has fall significantly but the underlying of the business has not changed. However, they believe that there is something has changed for Adyen when the stock price went down by alot (77%) in a few days. (Disclosure: I owned it) Ie: they believe that the friction is low for the merchant acquiring business until they could figure it out how Adyen can defend it, they will continue to stay at sideline.
Who’s Fundsmith’s Charlie Munger?
The picture is pretty obvious. Lol!!!
Conclusion
It is a must watch for me personally and it is like a treasure trove. An investor has to keep learning and the best is to learn from someone you admire. I will admit that he is bias in someway on justifying his underperformance but I do think that he is someone that will continue to share valuable insights and I will be able to learn a lot more from him going forward.
Disclosure: I might own stocks that mentioned by them and so please do your own due diligence. It is merely for education purpose and my curiosity to the world. Cheers!!!