Fundsmith Equity Fund

I get that you don’t like the Meta company, but I am a bit surprised when I see this kind of statement:

Is that just a gut feeling, or really based on rational analysis?
Fundsmith’s investment strategy is “Buy good companies, don’t overpay, do nothing.”
Last time I checked, FB was still part of the duopoly with Google for online advertising. And it shows in their financial results:


In the last five years, they multiplied by ten their profits per share. In 2021 alone, profits grew by 33%. Return on capital is an eye-watering 33%. All of this while having to endure major headwinds (who remembers the billion they had to invest in security because of controversies on data privacy and security?).

So:

  • FB is an outstanding business
  • available at a current price of 18 times forward earnings
  • FEF holds this business since a few years and plans to continue to do so.

I fail to see how FEF is deviating from its strategy.

Now it is true that currently FB is getting a lot of flak because the market is not convinced by their investment in the metaverse. But it’s not like the main business is going away. It’s an initiative that may pay off or not, the same way that google and amazon had major failures (who remembers google wave and amazon fire phone) as well as incredible new ventures (youtube and AWS).

I agree that the video is a bit light on FB, they should not have insisted that much on the metaverse (which at this stage is only a bet, nobody knows if it’s going to be successful). But saying that they should ditch it altogether is a bit farfetched. They will do it when the core business will start deteriorating, not before.

It looks like James O’shaughnessy was right: “In markets, prices don’t follow the narrative. Narratives follow prices.” Now that FB stock is down, everybody seems to think that the company will be a failure and that fund managers should ditch it.

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Google and Microsoft are the absolute must haves - maybe also apple. Amazon and Meta are indeed the most questionable at this point. I can totally understand how folks with big index etfs don’t want to buy more Gafa via some expensive active fund.

I should have precised, it’s totally a gut feeling. I never liked FB and will never do no matter how good it performs or not. Thank you for your rational numbers it does reassure me the see that the figures are constantly growing and hence Fundsmith did not deviate from their strategy by buying into Meta.

That is the question:

How safe and future-proof is their core business (arguably advertising). Are the reported 10 billion dollars of lost business due to anti-tracking policies just a minor dent in the road? Or are they the beginning of a sea change in market dynamics?

Here’s the thing: Anyone can sell online ads. It’s a market that does have low barriers to entry - though success of course depends on providing a differentiating factor to customers. For Facebook/Meta, their biggest differentiating factor has, in my view, been their ability to covertly track users across apps and across the internet, even when they’re not using any of Meta’s own platforms. And exactly that has been impacted by Apple’s OS changes, and may be further limited (though probably less severely for Meta) by Android’s upcoming privacy sandbox changes.

I agree with Terry’s remark (in the segment about Amazon - whose online ad business is picking up) that they have an advantage of first-party data - and user interaction. So does have Google with their search engine and other services (e.g. YouTube, Maps).

Facebook on the other hand? Much less so, in my opinion:

  • Facebook’s popularity is waning. I hardly know anyone under 40 who’s regularly interacting with the platform. They’ve only shown me inane cheap prank videos, animal videos, dangerous driving videos and the like lately. It has become largely irrelevant as a social media platform, but is a glorified address book / messenger platform.

  • So is WhatsApp. Though I see as having (had?) some potential, they’ve just largely failed to monetise it. Ads, business catalogues? Where are the business users that have embraced and are actively using WhatsApp to conduct business? Where are and have been food delivery businesses during the recent pandemic? It can’t be that hard, can it? You order in-app, and the delivery driver could contact you through the same proven and reliable instant messaging functionality. If I had to guess the most visible and active business users on WhatsApp, I’d guess it may be prostitutes - though their line of business is notoriously hard to monetise through commissions for US-based exchange-listed companies.

  • Instagram. From my own observation, they’re doing the best job there. But still… is first and foremost a photo-oriented service. It’s not like user would provide them detailed search inputs that may allow for more effective targeting (unlike YouTube that has tons of product review videos etc., or Amazon and Google, even Twitter). And… it doesn’t seem an entrenched platform to me. Social media websites and apps can come and go, pick up or wane in popularity. I can easily imagine it could go the way of MySpace, be replaced by TikTok, Snapchat or another challenger.

That’s the thing: The numbers look good - and the recent share price drop may have been a market overreaction compared to the numbers.

But that’s my argument or doubt about it:

:point_right:t2: It’s an investment that looks good when you’re a fund manager crunching historical numbers and financial statements.

From a perspective of technology and market power, I have my doubts about the business going forward.

Those tech giants have a core product or platform that consumers keep coming to and interact with:

  • Google has a search engine, YouTube and Android
  • Apple has their mobile smartphone OS / hardware and ecosystem
  • Amazon has their sheer online retail market(place) power
  • Microsoft has their Windows desktop OS
  • Facebook/Meta? Arguably the weakest (see above). They were very good at covertly tracking users - but that faces huge headwinds by anti-tracking measures in the name of privacy.

Meta’s content and platforms lack the entrenched quality that the others have. They seem the most vulnerable to me, their products and services can rather easily be copied by others (side note: same is true for Netflix and Spotify: they don’t have the strongest position with regards to media content. Though especially Netflix have acknowledged this long ago and invested heavily - and quite successfully - into original content).

Zuckerberg and Meta probably know and have acknowledged their vulnerability. And that’s: the primary reason and objective of their “Metaverse” push: To create a (new) platform service that has entrenched market power and can not be easily duplicated by others.

But that’s a speculative bet. And one that depends on technological execution. Of new technology - an area that Fundsmith have conceded (IIRC) themselves they aren’t most well-versed or keen to jump in with their investments (“we’re really suspicious of new technology”).

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Regarding Fundsmith owning Meta shares: that’s something we have to live with if we are putting our money into someone else’s hands (active investing). We need to trust the fund managers to do a great job, even if we might not like the decisions they make. The question is: are our personal views correct when it comes to investing for the long-term?

Thank you @Julianek for the great overview and more detailed information. Very much appreciated!

@San_Francisco also thanks for your questions! You mentioned several points which are important (e.g. Facebook mainly being used by people 40+) From my point of view, there’s one point which can be added: FB still has more than 2 billion users world-wide. Plus they own A LOT of background information about every user. I think going forward the business case for FB will be this information.

You might want to look at it as a business owner. E.g. how can I reach my ideal customer online? Not with general google-ads, but really target your customer like a sniper. The ROI on advertising can and will be much better than just doing plain google-ads.

For simplicity: you are selling special toys made out of wood. E.g. trains. You can target your ideal customer way better using FB than any other platform, and your advertising costs might be much lower.

Another thing we have to keep in mind: FB is not only used in the first world. I don’t know how many people in Africa, India or Latin-America are using FB, but those are huge markets as well.

To summarize: from my point of view, FB has a huge advantage when it comes to meta-data (yeah, the other meta :slightly_smiling_face:) I think that’s an area where they will focus going further (selling ads to businesses)

this is much more difficult since the Apple changes in iOS since Meta does not have 1st party data. They said as much in the last earnings call and remember that 70% of internet traffic is on mobile

I agree with everything mentioned by @San_Francisco except the Whatsapp angle. In the certain countries Whatsapp is used for business and is ingrained in the day to day business. Brasil and India are 2 examples but there are many more like Mexico… the point is they have not monetized Whatsapp and the 2 possibilities are not really good: subscription and ads

Meta will keep making money and cash but long term (which is how TS thinks) I am not as bullish. The quesiton I ask myself is would I hold this equity for the next 5-10 years and for Meta I personally would not.

TS likes to say that the avg age of the companies we hold in is +100 years … why Meta then???

I don’t know much about the recent iOS changes (not an Apple fanboy). It might be an issue. Still, you would have to check some more numbers. How much FB data comes from mobile, and how much of this mobile traffic comes from iOS? It might very well be that the amount of iOS data compared to overall FB data is something like 5 or 10% only. I’m just guessing here of course.

Also, FB might start a cooperation with Apple going forward. It’s just a matter of price in the end.
I don’t think that this problem is not solvable. It’s a risk: yes, but I’m sure FB can adapt.

2 billion users worldwide, biggest “CRM” for B2C worldwide

Fair push but let me try to give my point of view

The fundamental point is Meta does not have access to the OS stack (like Apple and Google via Android) nor do they have access to 1st party data (like Amazon).

The comment about iOS is not about being a fanboy but rather that the Apple users are the ones that spend more on a per user basis - this is well documented and it is the reason a lot of developers develop 1st for iOS and then for Android.

FB volumes does come from mobile… something like 70 mobile / 30 desktop

the comment about FB and Apple partnering could happen but highly unlikely… what’s in it for Apple? Unlike Google that pays +$1B/year to Apple for being the default search engine in Safari I don’t see what Meta could offer to Apple since the Apple narrative is privacy so it would not be cheap/possible for Meta to pay for access to this data - it’s a non starter in my opinion

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Thanks for your points. I think they are valid.

It’s just: we are not talking about buying Meta from the perspective of a single investor, but as part of Fundsmith portfolio. We have to either trust that Terry Smith and his team are doing proper DD or we don’t trust his decisions and have to remove our money.

I think Terry Smith and his team have been doing a great job so far, and I don’t think that I’m smarter than him. For me, investing with Fundsmith is a (rather small) bet on active investing. Could it turn out well? Yes. Can it turn out worse than the average market? Absolutely.

So Fundsmith investing in Meta is something I can’t do anything about it, other than not putting my money in active investing in the first place.

Please don’t get me wrong: your points and what @San_Francisco mentioned are very valuable!

I would have liked Fundsmith (FEF) to have shared some kind of analysis on FB’s forward looking ROC in the AGM

FEF strategy includes not to buy tech businesses they don’t understand and to buy businesses that will continue generating returns for a very long time.

What I am not clear about - and my fear - is whether FEF was blinded by FB’s historical ROC and growth and bought a business without understanding the risks about what could happen to those numbers in the future.

FB announced lower growth forecast. The huge investment in metaverse seems at odds with FEF strategy buy “companies who have already won” .

All this said, I think the damage is already done in terms of FEF performance. FB is no longer one of the top 10 FS investments. Personally I do also suspect that FB has been oversold currently - the valuation now seems quite low, I would not sell FB shares right now

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all healthy discussions !! and for what it’s worth I’ve done very well with FS so not knocking the strategy. I love the returns and for sure TS is smarter than I am (in this domain :slight_smile: ) but coming from an IT technology background and working on corporate strategy for a few years now I have an opinion.

I won’t move my money out of FS but like others on this thread feel narrative on the Meta investment is unclear. Hopefully they know something we don’t and the returns continue high

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I agree with the healthy discussions :slightly_smiling_face: Same for me with the IT background. And indeed TS might have invested in something he doesn’t understand well enough.

Crossing fingers here as well

Disclaimer: I have no position in FB, as I am only invested in Smithson and not the main FEF fund.
What follows is just my hypothesis; just an hypothesis, and not my definitive opinion.

As said earlier, FB is with Google a duopoly for online advertising. As of 2021, if you are a small business owner, the platform with the highest return on marketing investment is FB, by far.


(Source)

So the big question is whether FB will continue to be as interesting for small businesses in terms of returns on advertising investment.

So far, the advertising business has been very, very good for FB. So good that Zuck had to go several times in front of congress to testify about FB’s business practices.

I think Zuck’s main concern at the moment is to make sure that regulators don’t split up the company because of its dominant position in online advertising. And i think that’s why he has been very vocal during 2021 about how everybody is introducing measures against FB and how it is bad for them.

Yes, IOS14 is bad news for Facebook and introduces a lot of friction. The release was in April 2021. We will see the full results after one year when FB will publish their financials for Q1 2022. But it looks like so far, even with everybody conspiring against Facebook (according to Zuckerberg) , profits are going to be up 33% compared to last year. If that’s the only impact of IOS14 and it can keep regulators at bay, I think he can live with it.

Of course we will see the long-term impact in the next few years. But as long as FB is the best offer for small businesses in terms of advertising, the company may still have a bright future…

… or maybe i am wrong, the metaverse will be an abject failure and a new social network will completely disrupt FB’s advertising business. But as I don’t have a position, I don’t have to be right on this one :smiley:

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Separately, did anyone see TS say much more about Paypal other than “management took their eye of the ball in 2021 by looking too much at Acquisitions of Pintrest” ? I did not watch the whole 90 min video

Paypal was a FEF bigger holding than FB and unless I am mistaken the share price has declined by higher %

I believe the metaverse is a complete bullcrap without a device that is small and compelling enough for its consumption. The current headsets aren’t those devices… But ultimately, time will tell, and even until then, FB has a lot of cash to burn on what Alphabet called “Other bets”. I just wish they hadn’t changed their name to Meta. Oh well…

I wonder how Terry thinks about Mark’s comments in the latest quarterly call

So over the next several years our goal from a financial perspective is to generate sufficient operating income growth from Family of Apps to fund the growth of investment in Reality Labs while still growing our overall profitability. Unfortunately, that’s not going to happen in 2022 given the revenue headwinds, but longer term that is our goal and our expectation. Of course, our priority remains building for the long term, so while we’re currently building our plans to achieve this, it’s possible that prolonged macroeconomic or business uncertainty could force us to trade off against shorter term financial goals. But we remain confident in our long term opportunities and growth.

so is the metaverse a strategy or a side project that FB has no idea what it really means? :slight_smile:

This thread is more about Fundsmith’s main fund (“Fundsmith Equity Fund”) I believe, however one of their other products (Fundsmith Emerging Equities Trust, or FEET) also has been mentioned a few times in this thread, so I post here, instead of starting a separate FEET thread.

FEET uses the same strategy as the Fundsmith Equity Fund but focussing on companies with majority of their operations in, or revenue derived from, Developing Economies, providing direct exposure to the rise of the consumer classes in those countries.
It nicely also avoids China (I dislike China market as an investment), so I bought some FEET some time ago.

Last week Tuesday (when everything else was red), the price seemed to jump up 10%, strange, but couldn’t find anything about it.

Now I found this, which is quite irritating and also not terribly understable (to me) - FEET will be be placed under voluntary liquidation.

https://www.feetplc.co.uk/news/feet-news/?id=ry5z09w

YTD -12% (in CHF) = one of the better performing holdings for 2022.
EM overall has not seen terribly good performance last 5-10 years, so it hasn’t been an easy sector.
EM of all markets needs the longest to develop positively IMO, and ditching it after 8 years seems premature.

Why the 10% jump, is that the discount to NAV that it was trading at? Yes, I suppose so → “As at 31 Aug 2022, Price 1215.00p NAV 1421.56p Discount -14.5%
Keep until the liquidation proceeds are distributed (November 2022?), or sell now?
And now to figure out whether to re-invest in something like VFEM or simply VT?

Edit: this YTD of -12% (in CHF, as of 18.9.2022) that I quoted is deceptive, since at the liquidation announcement (14.9) it jumped about 11%. So the performance, at pre-announcement, of YTD of about -23% should be used for comparison, for example compare with VWRL & VFEM which are at about -16% at this time.

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Thanks for making me aware.

I have (accidentally) kept a foreign fund through liquidation and IBKR reported it as mixed income in their statement, deducting withholding tax on the full proceeds.

Example: had I bought 100 shares at 80$ each, the share price increased and it were liquidated at 100$/proceeds, IBKR would have withheld 15% WHT on the entire 10‘000$ „mixed income“ proceeds from liquidation (instead of only on the minuscule amount of dividend income received by the fund). Needless to say, I was not amused - am still waiting on the assessment from the tax office.

Now, I suppose there shouldn’t be tax withheld in the case of FEET, since it’s a UK fund. But I don’t want to risk having another „mixed income“ item on my next taxes.

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Thanks as well for raising awareness!

I didn’t see the (tentative) timelines for it in the link you posted - do we know until when we “have time”?

Found the relative answer:

“FEET is expected to be placed into voluntary liquidation by the end of November”