Interactive Investor

Terry Smith buys Alphabet for Fundsmith

2nd February 2022 13:22

Graeme Evans from interactive investor

Soon after telling interactive investor it was not too late to invest in the Apple, Amazon and Alphabet, the star fund manager has added the Google stock to his portfolio. He’s also currently buying two new positions.

A new stake in Alphabet (NASDAQ:GOOGL) brought immediate benefits for star stock-picker Terry Smith after the toughest month for his Fundsmith Equity fund since its launch in 2010.

Smith used January's investor factsheet to disclose the fund's maiden purchase of shares in the Google parent, just a few weeks after getting into fellow tech giant Amazon (NASDAQ:AMZN) for the first time.

The Alphabet interest proved to be well-timed as last night's fourth-quarter results sent the shares 9% higher in trading after Wall Street's closing bell.

Smith will be less pleased at the latest slide in value for PayPal (NASDAQ:PYPL), which is one of the fund's top 10 holdings but fell another 17% yesterday due to a miss on earnings estimates.

PayPal, Microsoft (NASDAQ:MSFT) and QuickBooks owner Intuit (NASDAQ:INTU) were among the chief culprits as Fundsmith fell by 9.5% in January, its worst month to date as a portfolio 25% focused on the technology sector felt Wall Street's jitters over the outlook for higher interest rates.

The £26.1 billion fund still boasts an annualised rate of return of 17.4%, having delivered positive months 70% of the time. There are 30 stocks in the portfolio, with tobacco giant Philip Morris (NYSE:PM), Visa (NYSE:V), cooking sauces and condiments business McCormick (NYSE:MKC.V), the Arm & Hammer baking soda company Church & Dwight (NYSE:CHD) and PepsiCo (NASDAQ:PEP) the top contributors last month.

As well as completing the purchase of shares in Alphabet, the fund has been buying two new positions, which will be disclosed once it has reached the desired weighting.

Neither Alphabet or Amazon feature among Fundsmith's top 10 holdings, a list which includes L'Oreal (EURONEXT:OR), Estee Lauder (NYSE:EL) and Facebook owner Meta Platforms (NASDAQ:FB). Another is diabetes treatment specialist Novo Nordisk (NYSE:NVO), which today rose 4% on Nasdaq Copenhagen after reporting that 2021 operating profits increased 8% on a year earlier.

Fundsmith described its biggest holdings as among the high-quality, resilient, global growth companies that it intends to hold for a long time “and in which we invest our own money”.

The recent reshaping of the portfolio has seen Fundsmith exit positions in InterContinental Hotels (LSE:IHG), payroll and accounting software business Sage Group (LSE:SGE) and testing services firm Intertek (LSE:ITRK).

It's now well known that Fundsmith is also a top shareholder in Unilever (LSE:ULVR) after Smith recently attacked the “near-death” experience of the Marmite and Dove soap maker's £50 billion bid for the consumer healthcare arm of GlaxoSmithKline (LSE:GSK).

Smith has not disclosed the rationale behind his Alphabet purchase, which was disclosed a few months after telling interactive investor that it was probably not too late to invest in the three technology giants of Apple (NASDAQ:AAPL), Amazon and Alphabet.

At the time, he spoke positively about the Amazon Web Services cloud computing division, but was critical of its retail division's profit margins. Smith added Amazon shares to the portfolio around October and has now done the same with Alphabet.

Amazon's results are due on Thursday, with hopes growing after last night's Alphabet results that big tech stocks remain well placed to continue their record of outperformance.

Apple produced better-than-expected record first-quarter sales last week, while Alphabet said demand for its online adverting services remained strong throughout the pandemic. 

Alphabet's core Google Services business, which includes Google Search and YouTube ads, lifted revenues by 32% to $69.4 billion (£51.1 billion) to help overall operating profits to improve 29% to $21.9 billion (£16.1 billion). The smaller Google Cloud operation posted revenues of $5.5 billion (£4 billion) but continues to be loss making.

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