The reckoning may finally be here for Fundsmith, where the fund underperforms the markets, with two of their top 10 holdings each plunging more than 25% within a single day - on consecutive days:
Facebook (now Meta Platforms): -26% today.
PayPal: -25% yesterday.
Perhaps less surprisingly, these are both technology/internet stocks. While I do own some of their top 10 stocks individually, I never gave a thought about buying Facebook. Fundsmith initiated their position in February 2018. It’s still up about 33% as I’m typing this but that pales compared to other “consumer tech” stocks (think Google, Apple). It even did before today.
Now, hindsight is, of course, 20/20. Facebook, I believe though, failed several of their own criteria:
- businesses whose advantages are difficult to replicate
- businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return
- businesses that are resilient to change, particularly technological innovation
The truth is, social networks are quite a fashionable business. Despite its global reach and user base (difficult to replicate), user interaction on Facebook must have been declining or have had low growth for at least some years. The truth is I don’t know anybody below the age of 45 who has used Facebook regularly the last couple of years. Instagram doesn’t seem a platform that can’t be easily replicated, and certainly not resilient to technological innovation. And the company can’t just snap up every up-and-coming competitor (as they did with buying WhatsApp and Instagram) when they’re controlled by a company from China (Tiktok). It was therefore the top 10 stock of theirs that I’d been least comfortable with.
I think I remember Terry Smith conceding at times that they were somewhat hesitant about investing in technology stocks, as they were somewhat out of their core area of expertise or familiarity. And this may have been one of the cases where the business’s financials may have looked nice on paper - but the writing was kind of one the wall, if you’re familiar and in touch with the user base.
Somewhat ironically, Fundsmith’s activity on their own Facebook page seems to have markedly declined after 2018, with currently no new posts after July 2020.