Fundsmith....

aroominyork

There's a Money piece in The Times today about Fundsmith which is generating comments about how it did well in a low interest environment but would do less well in a high interest environment. Since the fund prefers companies with low levels of debt, why is this? Clearly I am missing something, but I would have thought that it would outperform when other firms are saddled with increasing interest costs. 

masonic

Higher rates are also associated with more difficulty attracting capital for growth, or at least that seems to be the case now/recently. Investors once again have some choice about taking risk with their capital.

There are of course other reasons why his holdings may not do as well now as in the past.

aroominyork

masonic said:

Higher rates are also associated with more difficulty attracting capital for growth, or at least that seems to be the case now/recently. Investors once again have some choice about taking risk with their capital.

But these are (meant to be) companies with strong flows of income which don't need to attract outside capital. I thought, other factors aside, they should have a competitive advantage compared to companies with debt on their books now that money isn't dirt cheap.

masonic

Top 3 holdings are Microsoft, Novo Nordisk, and Meta. Two of those being magnificent 7 companies. My understanding is that despite their financial resources they still require significant inward investment due to the tech race they are currently in to get an edge in the field of AI (plus Meta's massive investment in XR). While Novo Nordisk is in a sector where R&D has a notoriously high risk of failure, therefore investors tend to demand a more significant risk premium. When the risk-free rate is higher this would have a tendency to drive its valuation down to a lower earnings multiple.

All to be taken with a large pinch of salt of course. One can make arguments to support all sorts of conclusions about the stockmarket, and most of the time your predictions will be wrong. That's why I tend to ignore such commentary. The above being provided for purely illustrative purposes.

aroominyork

Nuff said then.

dcs34

Because when there was a low interest environment the fund performed very well.

Now there is a  high interest environment and the fund is not performing so well.

Correlation not necessarily equalling causation. One could argue the significant growth of the size of the fund has been a dominant factor leading to the weakening of the quality of the fund's performance.

aroominyork

dcs34 said:

Because when there was a low interest environment the fund performed very well.

Now there is a  high interest environment and the fund is not performing so well.

Correlation not necessarily equalling causation. One could argue the significant growth of the size of the fund has been a dominant factor leading to the weakening of the quality of the fund's performance.

Then with the net outflows over the last year or two it should bounce right back! Anyway, I hold Fundsmith Sustainable which has a couple of top ten holdings with market cap $20-25bn which I expect would not be held by the flagship fund, so that is a partial way to mitigate the 'too big a fund' issue. Of course, I missed out on the recent rises by Meta and Philip Morris, but over time the two funds have performed similarly (Sustainable slightly ahead over three years, the flagship slightly ahead over five years.)

@Prism, if you are reading this - are you keeping the faith?

Hoenir

aroominyork said:

 about Fundsmith which is generating comments about how it did well in a low interest environment but would do less well in a high interest environment. Since the fund prefers companies with low levels of debt, why is this? 

Some investors don't comprehend balance sheets and cash flow statements. For all his fauts. Terry Smith is probably one of the best in this regard.  . 

itwasntme001

Less relative to what though?  If a global market cap weight tracker, then it has under-perfomred already the last few years but that can be explained by not having as much of the Mag7 particularly Nvidia.

All else equal, higher interest rate environment would reduce valuations and Fundmsith typically has higher multiple stocks on average than a tracker.  But all else is never equal so things like gross margins, growth rates and low debt for example will mean it could still do well relative to a tracker.

aroominyork

Hoenir said:

aroominyork said:

 about Fundsmith which is generating comments about how it did well in a low interest environment but would do less well in a high interest environment. Since the fund prefers companies with low levels of debt, why is this? 

Some investors don't comprehend balance sheets and cash flow statements. For all his fauts. Terry Smith is probably one of the best in this regard.  . 

His faults being...?

SouthLondonUser

The article is: https://archive.is/qlFkC

Stockpickers can outperform the market for certain periods but rarely for too long

There is also the issue of succession: the guy is old, lives in some tropical island away from the City or Wall Street, when is he retiring and what's the succession plan?