Terry Smith Portfolio: Stocks This Investing Genius is Betting On

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Jacob Wolinsky
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Terry Smith, the Brittain’s Warren Buffett is a notable person in the investing world. He is the founder and CIO of Fundsmith. His value-investing approach resulted in major gains. Since he founded the fund in 2010 it has generated returns of 478% to its investors. Terry Smith’s portfolio currently has 38 holdings valued at nearly $25 billion.

The single largest holding in his portfolio is Microsoft, followed by Meta. From that, we can see his focus on the tech sector. His other preferred sector is healthcare and he holds significant shares in Idexx Laboratories and Stryker Corp.

He is known as an investor who prefers investing in fundamentally good companies, just like his role model Warren Buffett. Smith knows the value of understanding the company’s fundamentals and prefers to take the long road to positive returns. He is also an avid author, and his books “Investing For Growth” and “Accounting For Growth” are considered fundamental in the investment and business sectors.

Terry Smith Recent Portfolio Holdings

During Q4 2023 Fundsmith was quiet, but in Q3 they trimmed and increased several of their holdings. The biggest recent holding buildups are:

  • Marriott International, Inc Class A (NASDAQ:MAR). During 2023 Smith increased this position by buying 4.21 million shares in Q3. The average price of stocks was $198.65. Since then the price of stocks has risen to the current $237.10
  • Fortinet Inc. (NASDAQ:FTNT). In Q3 Smith increased his stock in this company by acquiring additional 2.61 million shares. The average closing price was $52.11. He currently owns 4.92 million shares valued at $317 million. Since the last purchase, the stock price has risen to $64.41
  • Church and Dwight Co. (NYSE:CHD). Smith trimmed this holding by 1.78 million shares in Q2 2023, selling at $94.45. Later in Q3, he stacked up another 606 thousand shares at $95.76. The investment into this holding is valued at $638, while it brought a 13% gain. The current stock value is $99.51
  • McDonald’s (NYSE:MCD). Terry sold the last of his stake in McDonald’s back in Q3 2018. He restarted this holding with 92.3 thousand shares he bought in Q3 2023. The price of the shares was $285.21 while their current value is standing at $300.05.

During 2023 Smith did a lot of portfolio trimming and the most important sales were:

  • Estee Lauder Cos. Inc. Class A (NYSE:LE). This company has been a part of Smith’s portfolio since 2016, but during 2023 he completely sold all of its stocks. He piled up most of their stock between 2016 and 2019 while the price moved between $93.31 and $194.24. He sold the batch of 5.42 million stocks at $166.73
  • Meta Platforms Class A. Smith sold 647 thousand shares in Q3 which is 11.4% of this holding. The average closing price was $301.30
  • Microsoft Corporation. This holding received a lot of attention in the last year. Smith bought a thousand shares at the beginning of the year, but he sold 382 thousand stocks twice. He sold the stocks at the price of $330.44
  • Masimo Corp (NASDAQ:MASI). Terry Smith incorporated Masimo stocks into his portfolio in 2018. Back then the price per stock was at $111.51. For the next four years, stock prices continued to rise to a maximum of $293.34. The slight fall began in 2022. Smith decided to close this holding and sell the remaining 730 thousand stocks in Q3 2023 for $116.39.

Key Holdings

  • Microsoft Corporation (NASDAQ:MSFT) with 14% of the portfolio

Since Q4 2021 Smith has been slowly reducing this position. He currently owns 8.65 million shares which are valued at $3.45 billion. His investment into Microsoft is at reported $1.08 billion, which means that this holding netted a gain of 218%.

  • Meta Platforms Class A (NASDAQ:META) with 7.85% of the portfolio

Terry Smith owns 5 million Meta shares valued at $1.93 billion. The share price has skyrocketed from $170.30 to $385.20 since Q1 and his last purchase. His total investment into this holding is $932 million, and Smith netted a total gain of 107% so far.

  • Stryker Corp. (NYSE:SYK) with 7% of the portfolio

This company has been a part of Smith’s portfolio since Q 2013. He always managed to keep Stryker between 4% and 7% of his portfolio due to Smith’s trust in the long-term performance of the stocks. During 2023 the stock prices rose from $244.49 to $299.46, and the price is still rising. Smith currently owns 5.52 million shares valued at $1.72 billion. His investment in this holding was $706 million, resulting in a gain of 144% so far.

  • IDEXX Laboratories Inc. (NASDAQ:IDXX) with 6.42% of the portfolio

Smith owns 2.96 million shares of a giant in veterinary care IDEXX. During 2023 he trimmed this position for about 500 thousand shares which he sold for $478.56. The shares are currently valued at $531.52, and the current value of this position is $1.58 billion. Since Smith invested $413 million into it, the gain is about 282%.

  • Visa Inc. Class A (NYSE:V) with 6.36% of the portfolio

Smith used 2023 to stack up this holding with an additional 145 thousand shares that he bought at $228.87. He now owns 5.76 million shares valued at $1.56 billion. His total investment into Visa is $586 million, resulting in a gain of 168%. During 2023 Visa stock value had surged from $207.76 to $260.35.

  • Philip Morris International (NYSE:PM) with 5.63% of the portfolio

At the beginning of 2023, Smith piled up this holding with about 16 million stocks. He used the last year to trim the holding for about 1.5 million stocks. He is the biggest owner of Philip Morris stocks and his share is valued at $1.4 billion. Smith invested in Philip Morris $1.33 billion resulting in a gain of 4.1%.

  • Automatic Data Processing Inc. (NASDAQ:ADP) with 5.4% of the portfolio

Smith owns 5.52 million shares of this global provider of business outsourcing solutions. The current value of this holding is estimated at $1.33 billion. His latest larger trade of this holding was the selling of 1.53 million shares in Q1 2022, and since then there haven’t been any major trades. Smith invested a total of $600 million, which means that this holding netted a gain of 121% for the investors.

Sector Focus

In the process of choosing companies to invest in, Smith doesn’t focus on fixed sector allocation. He rarely takes a glimpse at the sector weightings at any time. But, his fund invests only in specific sectors. What are the criteria for companies so Smith would invest in them?

Smith aims to find companies that are providing and generating goods and services that are consumed in small quantities in regular and short intervals. What comes as easy examples are online and payment services, and consumer goods.

He avoids at all costs companies that come from cyclical sectors like car manufacturers, luxury goods makers, airlines, and hotels. These are overly influenced by movements in the economy and tend to generate lumpy revenues.

His current sector allocation is heavily focused on three industries and complemented by two smaller inputs. Those are:

  1. Technology sector with 43.5% of the portfolio valued at $10.7 billion
  2. Consumer staples with 23.1% of the portfolio valued at $5.68 billion
  3. Healthcare sector with 21.5% of the portfolio valued at $5.28 billion
  4. Consumer discretionary with 7.2% of the portfolio valued at $1.78 billion
  5. Industrial sector with 4.1% of the portfolio valued at $1 billion.

Fundsmith’s Investment Approach

From Terry Smith’s books, interviews, and long-term approach we can identify these rules that he keeps to when investing:

  • Aim for the long-term investment horizon. The goal is to find stocks that will rise in the long run and bring compound returns. He takes wisdom from Warren Buffett who compares the investor’s career with a punch card with 20 punches available for the lifetime. If you have these conditions you will think long and hard before you invest.
  • Choosing companies that can deliver high returns in cash. Focusing on high-quality companies that sell many small items regularly, and avoiding companies selling in cycles. The former can generate consistent returns and are not under heavy impact from market conditions. Companies that are a good example are those that sell directly to customers and that have a consistent demand. Other good examples are companies focused on business services and capital goods that demand consistency. A good example is Visa.
  • Companies whose assets are hard to duplicate. If a company’s most prized assets are physical, that is usually not a good option. Finding companies that have something unique to deliver like patents, major market share, and distribution markets, are just to number a few. These are considered to be competitor advantages
  • Investing in reasonably priced companies. Fundsmith avoids investing in companies in which over time other investors are willing to offer much higher prices. They focus on finding companies that have a good business model and reasonably priced stocks.
  • Avoid companies that need leverage to max out potential. Smith highly values companies that can earn high levels of unleveraged returns. If they can reinvest some of the earnings back into the business with good rates of returns is a bonus. This is where compound returns come into action. Over time the shareholders will earn extra returns because the company can generate more than one pound on a pound that is reinvested.
  • Focusing on developed brands with well-known timeless products and services. These companies already have something that most of the competition doesn’t have. This makes them more resilient over time, to both market downturns, and competition. Also, Smith avoids investing in companies whose industry sectors are prone to frequent major changes. His philosophy is that highly innovative businesses don’t always generate constant and solid returns. That is why he prefers investing in companies that are recognized on the market.
  • Avoid overpaying, even if the company is very good. To avoid underperforming you must pay a reasonable price for the stocks. When evaluating companies, Fundsmith checks the free cash flow of the company, but after tax and interest and before dividends. On top, they add discretionary capital expenditure which is not essential for business growth. Smith invests only when free cash flow per share is high concerning long-term interest rates, and when compared to other potential investments.
  • Avoid trying to time the market. Even the best investors usually fail at this. If you try and fail, the consequences can be devastating.
  • Do not pay too much attention to short-term benchmark results. Comparing the stock prices and other comparable values in a year or shorter doesn’t help. It is necessary to look at all the outputs from the long-term perspective, to fully understand how the company works and handles the market fluctuation.
  • Do not limit yourself to one market. This means that you should look into markets all over the world. It is not only the diversification but also the chance to find hidden gems that no one else is looking for. You can use this practice to compare growth rates across the globe.
  • Avoid over-diversification. Smith has strict criteria for his investment targets. That is the first factor that keeps him from over-diversification. Another is that Smith likes to keep all his investments under close watch. If the portfolio has dozens of companies it is hard to keep track. His winning formula is keeping the portfolio between 20 and 40 holdings. He also says that investors who are always looking for a way to further diversification usually do not know what they are doing.
  • Analyze the company’s numbers, not the management team. Fundsmith prefers analyzing financial results over meeting the managers. They know that it is difficult to evaluate human nature, and on the other hand, numbers are clear indicators.
  • Focus on investing in liquid assets. Funsmith is an open-ended fund which means that they need to have enough liquid assets available at all times. This also dictates Fundsmith’s strategy putting a focus on owning major blocks of stocks that are easy to trade.

Take A Look At Terry Smith: How I Invest:

Terry Smith Portfolio Performance Analysis

Fundsmith, despite recent underperformance, managed to overperform the MSCI World Index. If we look at the period since the fund started working, then achieved an annual return of 18.4%. In the same time frame, the MSCI World Index achieved annual returns of 9.6%.

The worst year was 2022 when the fund had a loss of 13.8%, but in 2023 it bounced back to achieve 12.4% returns. This is the third year in a row when it underperformed the MSCI Index, but in the long run, it still beats it. Some attributed lower returns to Smith’s reluctance to invest in the rest of the Magnificent 7 stocks.

Risk Management

Terry Smith is essentially a value investor, but due to some distinctions from this approach, he called it value investing with a twist.

His biggest influence is Warren Buffett, and from there we can already make a glimpse of his investment philosophy. His risk management starts while he is identifying companies that have an investment potential.

He is looking for companies that have the potential for constant cash flow with minimum input of leverage. By doing so he is already minimizing often a big burden that leverage can take on returns.

Although he is a value investor he prefers investing in established companies. The twist is that he is looking for a way to save up on stocks of companies that already have a reputation. Unlike other major value investors, he is not looking just for cheap companies with potential, but companies that already have something to offer.

By focusing on companies with products and services that are widely accepted, he is avoiding buying companies that have a high probability of failing. He doesn’t allow the hype to be built about young companies that have a good idea. Often those companies turn out to produce massive losses. He is sticking with well-known companies that still have a lot to offer.

From his portfolio, we can see this. All the biggest holdings are big players for a long time.

Also, an important factor that Smith often points to – invest in companies that you understand. By doing so you are already making informed investment decisions, and you lowered the risk of losses.

Notable Successes

Smith’s largest holding, Microsoft, is maybe his biggest win in recent years. He is the 4th largest stock owner with 8.65 million shares. His total investment into the company multiplied. From $1.08 billion he made $3.45 million.

Another major success was a trade made late in 2015 when Smith sold his rockstar stock Domino’s Pizza Inc (NYSE:DPZ). Smith bought the majority of stocks when they were valued at $15, and he sold his stake at $105 with a gain of 600%.

One of the more recent wins was with MercadoLibre Inc (NASDAQ:MELI). Although his stock share was not big, the returns were massive. During 2018 and 2019 Smith bought 35.5 thousand shares three times at $324.05, $556.56, and $553.43. He sold most of the stocks in late 2020, during 2021 and 2022. The price of stocks skyrocketed to $1,410.19, $1,696.72, and $890.25.

Notable Failures

Smith’s mistimed exit from Amazon was one of the biggest mistakes in his investment career. Amazon started pumping money into the grocery sector which Smith saw as a bad allocation of funds. Although Smith prefers to hold onto stocks, he sold his share in Amazon after just 19 months. In the end, he lost 25% of the investment. But, from today’s perspective, he lost a lot more due to the potential of the company.

One of the blunders during 2023 was the Estee Lauder holding. It lost about 50% of its value during the year due to bad handling of logistics during the reopening of stores in China. A lot of customers attempted to buy their products online, but couldn’t get them because the supply chain was weak in several spots. That triggered Smith to completely sell this holding, and opt for Estee Lauder’s direct competitor L’Oréal.

What can also be seen as a failure is the recent exits from Nvidia and Adobe. Smith commented that their stocks were overvalued. He probably exited from these holdings fearing potential market correction. These were not losses per se, but a missed opportunity. These companies are on the rise, with strong market positions, and potential. Waiting out on them could yield results.

FAQs

What Are Fundsmith Major Holdings?

Fundsmith’s major holdings are:

  • Microsoft Corporation with 14% of the portfolio
  • Meta Platforms Class A with 7.85% of the portfolio
  •  Stryker Corp. with 7% of the portfolio
  • IDEXX Laboratories Inc. with 6.42% of the portfolio
  • Visa Inc. Class A with 6.36% of the portfolio
  • Philip Morris International with 5.63% of the portfolio
  • Automatic Data Processing Inc. with 5.4% of the portfolio.

Why Is Fundsmith Dropping?

Fundsmith did have three bad years when it underperformed when compared to the MSCI World Index. Last year it delivered a return of 12.4% which is still lower than the MSCI world index which was up 16.8%. But, it is a sign of better times, because the fund generated positive returns when compared to 2022 when it had a loss of 13.8%.

He attributed these recent losses to the development of AI and the boom of tech stocks.

What Does Fundsmith Invest In?

Fundsmiths do not limit themselves to a specific industry. They prefer to invest in companies that deliver products or services that have a constant demand. Fundsmith avoids investing in cyclical companies and is sticking with strong companies with solid backgrounds.

Companies that are currently in Fundsmith’s sector are mostly from the tech sector, but there are also companies from other sectors, like healthcare, and consumer staples.

Final Thoughts

Every investor has a lot to learn from Terry Smith. His fund has almost always outperformed the benchmarks, and delivered constant results. But, we should also take into account his sometimes badly timed exits. The best examples are Domino’s Pizza, Amazon, and Adobe. In some cases like Amazon, he ended up with losses, and in others, he lost the opportunity to maximize returns.

His current portfolio has some top performers in it, like Microsoft, Meta, Visa, and Stryker. From the recent developments, we can say that Fundsmith is back on track to success.

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Jacob Wolinsky is the founder of HedgeFundAlpha (formerly ValueWalk Premium), a popular value investing and hedge fund focused intelligence service. Prior to founding the company, Jacob worked as an equity analyst focused on small caps. Jacob lives with his wife and five kids in Passaic NJ. - Email: jacob(at)hedgefundalpha.com FD: I do not purchase any equities to avoid conflict of interest and any insider information. I only purchase broad-based ETFs and mutual funds.