Terry Smith suffers big losses in 2022 tech sell-off

Star UK stockpicker Terry Smith has stumbled out of the gate in 2022, as the sell-off in technology stocks triggered sharp losses across his portfolio and tested the patience of his army of retail investor acolytes.

Smith’s flagship £ 26.1bn Fundsmith Equity Fund has tumbled around 15 per cent since the start of the year, according to Morningstar data. Notably two of Fundsmith’s top-10 holdings – US payments group PayPal and Facebook owner Meta Platforms – have experienced particularly sharp knocks. PayPal is down 66 percent from its high last summer, while Meta has slumped 45 percent from its recent peak in the fall.

The brutal start to the year for Fundsmith, one of the most popular funds among UK retail investors, highlights long standing concerns from some analysts that British fund buyers are too attached to star managers whose performance can swiftly deteriorate. For example last year Nick Train, one of the UK’s best known fund managers, said he had suffered “arguably the worst period of relative investment performance” in two decades.

Smith, Fundsmith’s chief executive, defended this year’s underperformance. “It is not a fund which aims for short term gains and it does not try to outperform in every reporting period or every type of market condition,” he told the Financial Times.

Bar chart of% change from high * showing Fundsmith Equity Fund's top holdings slump from recent peaks

“We are focused on delivering strong returns to our investors over the long-term,” he added. Fundsmith “is for long term investors who want their investment to compound in value over the long term. I said ‘long term’ twice in that sentence deliberately ”.

Smith added that the fund is up more than 500 per cent since its November 2010 inception, or 17.4 per cent on an annualized basis, net of fees. While the fund narrowly trailed its benchmark MSCI World Index in 2021, its longer-term record remains strong.

One of the City of London’s most prominent financiers, Smith relocated to the island of Mauritius in 2014 after stepping down as chief executive of interdealer broker Tullett Prebon. He has sometimes been described as the British Warren Buffett.

Smith defines his three-step investment strategy as “buy good companies, do not overpay, do nothing” – referring to minimizing portfolio turnover to keep down costs. He tends to focus more on faster-growing companies, even if they are often more expensive than the bargains that Berkshire Hathaway’s chair has made his signature.

So far Smith’s vast retail following has stuck with him despite the short-term losses. In January Fundsmith retained its top spot as the most popular fund among retail investors on Interactive Investor, the UK’s second-largest investment platform. It also held the most-bought spot among savers choosing funds for their Isas on the AJ Bell platform, and a top-10 spot among buyers on Hargreaves Lansdown, in the first month of the year.

Laith Khalaf, head of investment analysis at AJ Bell, said “investors clearly were not put off” by the fall in January.

Of course, performance should not be judged over such a short period, and the exceptional record of the manager. . . means they have an awful lot of credit in the bank, which explains why investors are looking through a temporary dip in form and continuing to back them for the long term, ”he said.

The losses for Smith come during a tough period for growth investors, as the US Federal Reserve starts to scale back support. Tech stocks, whose high prices are predicated on the potential for bumper future earnings, are seen as especially susceptible to rising interest rates. Cathie Wood’s Ark Invest has also suffered big losses.

Ian Aylward, head of fund selection at Barclays, said Smith’s focus on so-called “quality growth” companies has been “unwavering”.

“This has been the most profitable space in the stock market to invest over the past decade or so, but there are periods when being exposed to such names is relatively painful and the year so far has been one of those times,” he said.

The turbulent start to the year for global markets, unsettled by the crisis in Ukraine and central bank interest rate rises, has left many other well-known managers nursing losses, including William Danoff’s $ 131bn Fidelity Contrafund and Baillie Gifford’s £ 15bn Scottish Mortgage Investment Trust , another UK retail investor favorite.

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