Technology themed image showing fluorescent lights coming off an image of Earth
Fund manager Terry Smith gives his thoughts on the stocks inside the fund’s portfolio / Image source: Adobe
  • Fund underperforms benchmark in first half of 2023
  • Amazon holding sold due to retailer’s potential misallocation of capital into grocery
  • Portfolio companies face tougher backdrop but focus remains on fundamentals

Fundsmith Equity Fund (B41YBW7) underperformed during the first half of 2023 albeit it was a close call with the fund up 8.5% compared with 8.9% for the MSCI World Index.

With manager Terry Smith having held his nerve a year ago on Meta Platforms (META:NASDAQ), saying it was either a value-trap or cheap on a free cash yield of 8.7%, the fund has clearly benefited from the subsequent 70% rally in the share price. Meta was the biggest contributor to first-half performance, adding 3.1%.

Free cash flow is the cash generated from operations less maintenance capital expenditure, which is the amount needed to keep the business competitive. The yield is free cash flow as a percentage of market capitalisation.

The fact that Meta’s share price has been more volatile than its underlying fundamentals provides little comfort to investors as it adds more underlying volatility to the fund.

Terry Smith’s Fundsmith Equity most sold fund second month in a row

The biggest detractor to performance was specialty measurement company to the healthcare market, Waters (WAT:NYSE) which knocked 1.2% off the fund during the half-year period.

A slowdown in laboratory expenditures after the pandemic has negatively affected the shares but Smith says he isn’t ‘bothered’ and ‘in fact, we hope it presents an opportunity for us to buy more’.

Beauty products company Estee Lauder (EL:NYSE) which detracted 1.2% from the fund does worry Smith though. Inventory built up ahead of the resumption of travel in China had to be written-off which revealed some ‘severe’ supply chain weaknesses, according to Smith.


After initiating a position in online retail giant Amazon (AMZN:NASDAQ) in July 2021 the fund recently sold its stake over concerns over potential misallocation of capital.

Amazon’s $13.7 billion purchase of Whole Foods in 2017 and continued investment to reach scale runs foul of the investment principles laid out by relatively new CEO Andrew Jassy, according to Smith.  

He notes large technology companies have become victims of their own success. After delivering strong growth over the last decade, they have become a bigger part of the economies in which they operate and therefore more cyclical than in the past.

Consequently, a slowing economy will have a bigger impact on the sales growth of Microsoft (MSFT:NASDAQ), Apple (APPL:NASDAQ) and Alphabet (GOOG:NASDAQ), although Smith expects a ‘decent bounce back’ in 2024.


Head of investment analysis at AJ Bell Laith Khalaf commented: ‘Like many other global growth funds, the Fundsmith portfolio has benefited from falling inflation in the US this year, which has dampened the need for further interest rate rises.

‘Growth managers had an uncharacteristically tough year in 2022 and will collectively be relatively happy that the rapid change to a higher interest rate environment has not been more damaging to their portfolios. Not yet, in any case.

‘Terry Smith says that companies in his portfolio are facing tougher conditions, namely slower revenue growth and higher input costs, both of which can be largely laid at the door of the inflationary environment.

‘But the fund continues to focus on company fundamentals rather than the macro-economic picture, which is highly uncertain in its course and its effect on markets. This should give investors confidence that Fundsmith is sticking to the core investment philosophy which has served them so well for so long.’

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (Daniel Coatsworth) own shares in AJ Bell. Daniel Coatsworth also owns units in Fundsmith Equity Fund.


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Issue Date: 11 Jul 2023