Nicknamed the English Warren Buffett, Terry Smith recently published his letter to shareholders for 2024. He looks back on his decisions taken in 2024 and gives us his vision of the markets at the start of 2025.
Its Fundsmith fund achieved a performance (in total return) of 8.9% in 2024, far from its benchmark of 20.9% (the MSCI World index in net total return in pound sterling). Terry Smith had not accustomed us to such a poor performance, at least such a big gap with his benchmark. Indeed, Fundsmith has posted an outperformance of 2.7% per year since its creation in November 2010 (CAGR of 14.8% compared to 12.1% for the MSCI World). This outperformance was achieved with less risk if we look at the Sortino ratio (0.87 versus 0.60 for the index). Despite this poor performance in 2024, the fund ranks 2nd in its category since its creation among a universe of 162 similar funds from the Investment Association Global.
Discover Terry Smith’s investment philosophy
So why this recent underperformance?
First of all, Terry Smith reminds and assumes that Fundsmith’s goal is not to outperform every year. It would be far too presumptuous to say that. He attributes this underperformance of the fund to the concentration of performance in particular in 5 companies (Nvidia, Apple, Meta, Microsoft et Amazon) which provided 45% of the S&P 500 Index returns in 2024. Fundsmith owns Microsoft and Meta Platforms but not the other three (Nvidia, Apple et Amazon), which means that it naturally underweights this batch of companies compared to the S&P 500 index. This concentration of performance on these 5 stocks in 2024 is similar to the concentration of performance in the Magnificent 7 in 2023. A single action (in this case Nvidia) produced more than 20% of the S&P 500’s returns in 2024. This concentration of returns in a few technology companies is not a purely American phenomenon. We note that in Germany, 41% of the return of the DAX index came from the stock SAP whose share price increased by 69%.
Terry Smith is wary of the enthusiasm around AI although he benefits from it through his participations. This subject, already mentioned in his 2023 letter, is also at the heart of his 2024 letter. He quotes Mark Twain (“History does not repeat itself, but it rhymes”) to draw a parallel with today’s market Today and the Dotcom bubble. He notes, however, that today’s technology companies are nothing like those of the TMT bubble (they are very profitable, have healthy balance sheets) and are supported by passive investment (“As money flows out of active funds and into index funds, it boosts the performance of the largest companies. It’s a self-reinforcing feedback loop that will work until it doesn’t anymore“). Terry Smith explains that “Nvidia’s demand is dominated by a handful of so-called hyperscalers building data centers to handle large language models for AI“. Although he has Metahe can’t own all these high growth stocks (explaining why he doesn’t own Nvidia). Indeed, despite the spectacular increase over the last two years, Meta et Nvidia can also be very volatile and display significant drawdowns (-66% for Nvidia in 2022 and -76% for Meta Platforms in 2022).
The main performance destroyers for the fund were L’Oreal, Idexx Laboratories, Nike, Brown-Forman et Novo Nordisk. The main contributors to performance were Meta Platforms, Microsoft, Philip Morris, ADP et Stryker.
-What has Terry Smith done in 2024?
When you look at changes in your portfolio, you see relatively little movement. This is a desire on the part of the English manager in order to limit friction. This is also one of the three basic principles of his investment philosophy: “buy good companies, don’t overpay and do nothing“. This last idea “do nothing” is certainly the hardest because few investors are patient enough to see their securities stagnate for several years and still keep them. Thus, the turnover rate of his portfolio was 3 .2% in 2024. His fund thus spent a total of 0.002% of its average value to pay transaction fees for its voluntary operations. This therefore allows maximum value to be retained for shareholders. Terry Smith still holds 4 companies since then. the creation of funds in 2010, 9 for more than 10 years and 15 for more than 5 years.
Among his moves, Terry Smith notably sold his stakes in Diageo, McCormick et Apple during the year 2024. Diageo showed problems with its new management, illustrated by a lack of information about its Latin American business which produced much worse results than the sector in that region. Additionally, the alcoholic beverage industry is in the early stages of a negative impact from weight-loss medications, he said. Indeed, it seems likely that drugs will ultimately be used to treat alcoholism, such is their effect on consumption. The sale of McCormick is explained by disappointment with the slow response the company has shown in its ability to pass on inflation in input costs, thereby squeezing its margins, as well as its exposure to private label competition which is has intensified as inflation has pushed consumers to switch to cheaper products. The sale ofApple can be explained by the fact that the stock became too expensive for them and that they did not have time to build a sufficient line.
In 2024, Terry Smith began purchasing stakes in Atlas Copco et Texas Instruments. Atlas Copco is a Swedish industrial company that manufactures compressors, vacuum equipment, electric and pneumatic tools and has attractive features (outsourcing much of the manufacturing, making it capital light and improving returns, decentralization with over 600 operating entities that have considerable autonomy to approach their local market, controlling stake held by the Wallenberg family vehicle, which should lead to good long term decision making since they have been in business for 151 years). Texas Instruments is a manufacturer of analog and embedded microprocessors that are used in a wide range of consumer and industrial devices, automobiles and communications equipment. It is investing in anticipation of a likely resumption of the semiconductor cycle although it is now clear that there is not a single cycle (a Nvidia and a STMicroelectronics are not in the same markets and do not have the same business cycles). Texas Instruments has a long history of investing well ahead of surges in demand and producing attractive returns. It is also a beneficiary of the reshoring of semiconductor manufacturing to avoid geopolitical risks from Taiwan and China.
Terry Smith attacks the year 2025 by having in his top 10 of his participations: Meta Platforms, Microsoft, Novo Nordisk, Stryker, L’Oreal, Automatic Data Processing, Visa, Philip Morris, Waters et Alphabet.
