Interactive Investor

Terry Smith: outperformance during value rally tells its own story

11th August 2021 09:39

Kyle Caldwell from interactive investor

In letter to investors, Smith said there are lessons to learn from how Fundsmith has performed.  

Terry Smith has told his investors there are “several lessons to learn” from Fundsmith Equity’s performance in the first half of this year.

In a letter to investors, Smith pointed out that Fundsmith Equity, a member of interactive investor's Super 60, had outperformed the MSCI World Index in the first six months of the year, returning 13.1% versus 11.9%. This, he noted, played out despite the market rotation, which has been a tailwind for value shares.  

He said: “If you have been reading what investment commentators have been saying during this period, you might be rather surprised that our fund has fared so well. You might even be surprised that we are still here.

“Since markets started to sense an end to the economic disruption caused by the lockdowns in the final quarter of 2020, there has been a so-called rotation from quality stocks, of the sort we own, into so-called value stocks and those expected to recover as the lockdowns end. In such a situation, our fund is always likely to underperform for a period, after all the companies we invest in mostly have little or nothing to recover from.”

Smith pointed out that the fund’s performance versus ‘value’ shares and Covid recovery plays tells its own story.

He said: “You could have made some good gains by buying the value or recovery stocks at or close to the bottom, although of course this depends on getting your timing right. But if you ran the value/recovery stocks across the period of the downturn and recovery, they would still have significantly underperformed our portfolio.”

Figures from Fundsmith show the maximum Covid drawdown (maximum decline from peak to trough) for investors in Fundsmith Equity was -21% versus -35% for the FTSE 100 Index and -37% for the S&P 500 Value Index.

Smith adds: “There are several lessons to be learnt from this, not the least of which is that no amount of recovery or low valuation will turn a poor business into a good one and quality is the main determinant of long-term performance.”

Over the six-month period, Fundsmith Equity had net outflows of £130 million. However, Smith pointed out that the outflows “were somewhat dwarfed by the £3 billion rise in the value of the fund”.

The five biggest contributors to performance in the first half of 2021 were PayPal (NASDAQ:PYPL), Microsoft (NASDAQ:MSFT), IDEXX (NASDAQ:IDXX), Facebook (NASDAQ:FB) and Intuit (NASDAQ:INTU).  

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