Terry Smith smashed the FTSE 100 in 2020. Here’s how he reacts to the stock market crash


the Fundsmith Equity Fund has significantly outperformed major UK indices since its launch in 2010. Despite this, critics of manager Terry Smith have often pointed out that his portfolio had not been tested during a major downturn. Not anymore.

Between the beginning of 2020 and the end of March, Fundsmith’s shares lost 7.9% in value. Normally, we consider this result to be very bad. Related to FTSE 100however, it is superb. The number one British company fell 23.8% over the same period.

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While no one knows what the future will bring, such a performance suggests that Smith deserves to be listened to, now more than ever.

Three points stand out from my last communication to investors.

Value (always) is not the solution

What is perceived as “cheap” will always attract investors. Terry Smith, however, remains against value investing. As he says, ” Actions in poorly rated companies are mostly rated for good reason“.

These reasons – including high debt levels – also mean that inexpensive companies can further lower their prices during a crisis. As has certainly been the case in the past month, the belief that they offer better protection against more expensive stocks is wrong, Smith thinks.

On this basis, I think it is fair to say that the current Fundsmith holders do not have to worry about the drift of the strategy for the foreseeable future.

He also suggests that the FTSE 100, which contains both a large and not-so-large companies will continue to underperform Fundsmith. The latter has always focused on finding quality stocks, even if that means paying more for them.

Prepare for the worst

The return of Fundsmith against the indexes during the coronavirus outbreak so far does not mean that Smith is sure that every business he owns will survive. Two farms – Hilton-owner Intercontinental Hotels and airline reservation provider Amadeus – have already been hit hard by the pandemic.

Although the two significantly reduce costs, the fund manager believes that their failure would reduce the value of Fundsmith’s portfolio by 5%. His opinion on this subject is however striking. ” While I don’t like it, if it’s the worst thing that happens, I suggest we can live with it.

I think that kind of unadorned thinking is vital right now and highlights two things.

First, the fact that even Smith is considering the disappearance of the shares he owns is further proof that no one is able to choose only the winners.

Second, a certain degree of diversification is still essential, even if your portfolio is more concentrated than most.

Control what you can

Anyone and their dog can and will speculate on the upside or downside of the markets here. They will also wonder whether the eventual recovery will be sudden or more gradual. On this point, Smith’s attitude is what I think all fools should adopt. ” I try to spend very little time considering subjects that I can neither predict nor control and I focus rather on those that I can affect. “

I couldn’t agree more. This is why I make a shopping list of companies to buy if / when they become available at prices that I consider reasonable.

Tellingly, Smith has already added new stocks to the Fundsmith portfolio (although he remains discreet about their identity). I may start to do the same soon.

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Paul Summers owns shares of Fundsmith Equity Fund. The Motley Fool UK recommended InterContinental Hotels Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that taking into account a diverse range of ideas makes us better investors.


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