Terry Smith has said the coronavirus sell-off has validated his scepticism about value investors’ ability to protect on the downside as his Fundsmith Equity fund sustains significantly lower losses.
In a letter to investors, Smith (pictured) noted his £16.5bn Fundsmith Equity fund has fallen 7.9% year-to-date compared with the MSCI World index which has sustained double the losses at 15.7%.
“Our fund’s performance has been as we would have expected, hoped and predicted,” he wrote. “I would even say it is satisfactory if you accept that some fall in valuation is inevitable in a bear market.”
The Fundsmith founder said his holdings had performed even more favourably compared with stocks owned by value investors. The MSCI World Value Index has fallen 22.0% since the start of the year, 14.1% worse than Fundsmith Equity.
Value investors have not proven they can deliver in difficult times
Smith said he has always been “immensely sceptical” that value investors would be able to hold their ground in an unstable market environment.
“I have never been a believer in the philosophy that so-called ‘value’ investments would perform well or protect your investment in an economic and market downturn,” he wrote.
“Shares in companies that are lowly rated are so mostly for good reasons. Because their businesses are heavily cyclical, highly leveraged, they have poor returns on capital and/or they face other structural or management issues.
“It doesn’t sound like a combination likely to protect the business and your investment in difficult times, and so it has proven thus far.”
Smith reveals holdings in the coronavirus firing line
While Smith said he had a number of stocks that were susceptible to knock-on effects in travel retail and supply chain disruptions, he guessed around a third of his holdings could see increased revenues this year, including Microsoft, Clorox and Reckitt Benckiser.
His holdings that are “most in the firing line” during the pandemic are Amadeus and Intercontinental Hotels. But Smith said that both companies had been sensibly cost cutting and conserving cash and had enough liquidity so they could “hold their breath for 18 months or so with no revenues”.
Travel IT group Amadeus has seen its shares fall 42% to €41.42 a share since the sell-off ramped up on 20 February, while Intercontinental Hotels shares have plunged 38% to £31.30 a pop.
“If our equity in both is vaporised, we will lose about 5% of our current portfolio,” Smith admitted. “Whilst I would not be pleased with that, if that’s the worst thing that happens, I would suggest we can live with it.”
Smith added that he had purchased two new mystery holdings during the sell-off which he had been tracking for some time and “have been hard hit in this market because of China exposure and a classic ‘glitch’.”
