In this article, we examined Terry Smith’s investment philosophy and portfolio management strategy. We also reviewed Smith’s $40 billion hedge fund’s top 10 stock picks. You can skip our detailed discussion about Terry Smith’s investment philosophy and portfolio management strategy and jump directly to This $40 Billion Hedge Fund Loves These 5 Stocks.
Founded in 2010 by Terry Smith, Fundsmith LLP is a London-based $40 billion investment management firm. Terry Smith’s Fundsmith Equity Fund returned 570% since its inception to the end of December 2021. Smith attributes the strong performance to his fund’s unique investment approach of finding great businesses with solid fundamentals, attractive valuations, and competitive positions. The fund uses a bottom-up approach when selecting any stock. However, the London-based hedge fund underperformed in 2021, returning 22.1% when compared to gains of 22.9% for the MSCI World Index. The underperformance in 2021 was addressed by Smith in the annual investor letter. He stated that periods of lower performance compared to the benchmark are never welcomed but nonetheless inevitable. He added:
“No investment strategy will outperform in every reporting period and every type of market condition. So as much as we may not like it, we can expect some periods of underperformance.”
Terry Smith stated in the investor letter that the current downtrend in stocks presents a great buying opportunity and historical trends favor buying on dips. In support of his claim, he pointed out that after the Gulf War, the S&P 500 fell to its lowest point, but recovered strongly thereafter. He added that during the Korean War and the 1967 Six-Day War, the market reacted the same way.
New Zealand Government, Office of the Governor-General, CC BY 4.0 <https://creativecommons.org/licenses/by/4.0>, via Wikimedia Commons
Terry Smith, who is considered as the English Warren Buffett due to his investing style, has been working on a three-step portfolio management strategy: buy good companies, don’t overpay, and do nothing. As of December, Fundsmith’s 13F securities portfolio was valued at around $40 billion with the top 10 stock picks accounting for 59% of the entire holdings. The firm’s top 10 stock picks include PepsiCo, Inc. (NASDAQ:PEP), McCormick & Company, Incorporated (NYSE:MKC), Stryker Corporation (NYSE:SKY), Philip Morris International Inc. (NYSE:PM), and Meta Platforms, Inc. (NASDAQ:FB).
Microsoft Corporation (NASDAQ:MSFT) and PayPal Holdings, Inc. (NASDAQ:PYPL) rank among the hedge fund’s top five stocks. The firm lifted its stake in Microsoft Corporation (NASDAQ:MSFT) and PayPal Holdings, Inc. (NASDAQ:PYPL) during the December quarter. In 2021, Microsoft Corporation (NASDAQ:MSFT) was the top contributor to the fund’s performance, while PayPal Holdings, Inc. (NASDAQ:PYPL) was among the laggards. In his annual investor letter, Terry Smith said the following about PayPal Holdings, Inc. (NASDAQ:PYPL):
“PayPal’s performance last year was a clear exception to the benefits of running winners. The shares performed poorly amid concerns that its ambitions to construct a ‘super app’ to drive users to its payment systems might involve some value destruction, brought home by its apparent interest in acquiring social media operator Pinterest. We may be wrong but we would prefer if PayPal stuck to its knitting”
Our Methodology:
We made use of Fundsmith’s 13F portfolio as of December 2021 for this analysis.
10. PepsiCo, Inc. (NASDAQ:PEP)
Fundsmith’s stake value: $1.8 billion
Percentage of Fundsmith’s portfolio: 4.41%
Number of hedge fund holders: 60
Terry Smith’s hedge fund has long held a position in PepsiCo, Inc. (NASDAQ:PEP). The investment began in 2016. As of December, Fundsmith owns 10.41 million shares of PepsiCo, Inc. (NASDAQ:PEP) according to Insider Monkey data. Unlike growth stocks such as Microsoft Corporation (NASDAQ:MSFT) and PayPal Holdings, Inc. (NASDAQ:PYPL), PepsiCo, Inc. (NASDAQ:PEP) is a favorite stock among defensive investors. PepsiCo, Inc. (NASDAQ:PEP) is one of the most dependable companies because of its strong business model, extensive global presence, and high brand recognition. Over the past five years, its stock price increased by 54%. PepsiCo, Inc. (NASDAQ:PEP) also offers dividends to shareholders. It lifted its dividends in the past 49 straight years. The company’s ability to generate sustainable growth in financial numbers is backing its cash returns.
In the fourth quarter investor letter, Saturna Capital, an investment management firm, mentioned a few stocks including PepsiCo, Inc. (NASDAQ:PEP). Here is what Saturna Capital stated:
“Given the likelihood of rising inflation and interest rates ahead, we anticipate adjustments to the portfolio to reduce exposure to highly valued stocks dependent on low interest rates to support terminal year valuations, while seeking investments in companies more correlated with a return to economic normalcy. We sold our positions in Pepsi. We believe Pepsi to be a well-run firm, but its products are not in keeping with an ESG mandate. Additionally, it has entered a joint venture to produce and distribute alcoholic beverages, making it ineligible for the portfolio.”
9. McCormick & Company, Incorporated (NYSE:MKC)
Fundsmith’s stake value: $1.82 billion
Percentage of Fundsmith’s portfolio: 4.45%
Number of hedge fund holders: 25
Fundsmith has steadily increased its stake in McCormick & Company, Incorporated (NYSE:MKC) over the years. McCormick & Company, Incorporated (NYSE:MKC) is also a dependable stock due to its business model, share price appreciation, and dividend growth history. Over the past 35 consecutive years, McCormick & Company, Incorporated (NYSE:MKC) has raised its dividend. Furthermore, the company’s outlook for fiscal 2022 appears strong enough to support shareholders’ returns. McCormick & Company, Incorporated (NYSE:MKC) expects to generate mid-single-digit revenue growth for 2022 while operating earnings are forecasted to grow at a double-digit rate.
Of the 924 elite funds tracked by Insider Monkey, McCormick & Company, Incorporated (NYSE:MKC) was in 25 portfolios as of December. Terry Smith’s Fundsmith was the leading stakeholder in the company.
8. Stryker Corporation (NYSE:SKY)
Fundsmith’s stake value: $1.93 billion
Percentage of Fundsmith’s portfolio: 4.73%
Number of hedge fund holders: 39
Terry Smith’s hedge fund owns a long-term stake in Stryker Corporation (NYSE:SKY). The firm first initiated a position in Stryker Corporation (NYSE:SKY) in the final quarter of 2015. Fundsmith owned 7.25 million shares of Stryker Corporation (NYSE:SKY) as of December 2021. Fundsmith appears to have benefited from its stake in Stryker Corporation (NYSE:SKY). The reason behind this is that shares of Stryker Corporation (NYSE:SKY) have soared 100% in the last five years. In addition, the dividend factor also makes Stryker Corporation (NYSE:SKY) a good stock to hold for the long term.
Stryker Corporation (NYSE:SKY) was in 39 hedge fund portfolios as of December compared to 46 positions in the previous quarter. Stryker Corporation (NYSE:SKY) is less popular than Fundsmith’s top holdings such as Microsoft Corporation (NASDAQ:MSFT) and PayPal Holdings, Inc. (NASDAQ:PYPL). As of December, Microsoft Corporation (NASDAQ:MSFT) was in 262 elite funds’ portfolios while PayPal Holdings, Inc. (NASDAQ:PYPL) was in 110 portfolios.
7. Philip Morris International Inc. (NYSE:PM)
Fundsmith’s stake value: $1.94 billion
Percentage of Fundsmith’s portfolio: 4.73%
Number of hedge fund holders: 47
Philip Morris International Inc. (NYSE:PM) is also long-running stock holding of Fundsmith’s portfolio. Although the share price of Philip Morris International Inc. (NYSE:PM) underperformed in the past five years, the Swiss-American multinational cigarette and tobacco manufacturing company continue to pay increasing dividends to shareholders. Philip Morris International Inc. (NYSE:PM) offers a dividend yield of around 5% and its quarterly dividend is standing at $0.70 per share.
Philip Morris International Inc. (NYSE:PM) appears financially sound to support its cash returns. In the latest quarter, Philip Morris International Inc. (NYSE:PM) topped revenue and earnings expectations. Its annual 2021 net revenues grew by 9.4% year over year while earnings per share jumped 13%.
The number of bullish positions remained flat in the fourth quarter when compared to the previous quarter. As of December, Philip Morris International Inc. (NYSE:PM) was in 47 hedge funds’ portfolios. Terry Smith’s hedge fund was the leading stakeholder in the company.
6. Meta Platforms, Inc. (NASDAQ:FB)
Fundsmith’s stake value: $2.28 billion
Percentage of Fundsmith’s portfolio: 5.58%
Number of hedge fund holders: 224
Fundsmith has lifted its stake in Meta Platforms, Inc. (NASDAQ:FB) by 6% during the December quarter to 6.8 million shares. Unlike Microsoft Corporation (NASDAQ:MSFT) and PayPal Holdings, Inc. (NASDAQ:PYPL), Meta Platforms, Inc. (NASDAQ:FB) does not offer dividends to shareholders. Meta Platforms, Inc. (NASDAQ:FB) is also a long-term stock holding of Fundsmith. The company’s stock price remained under pressure over the past two quarters. Despite that, shares of Meta Platforms, Inc. (NASDAQ:FB) are up 58% in the past five years.
In the fourth quarter investor letter, Davis Funds, an investment management firm, mentioned a few stocks including Meta Platforms, Inc. (NASDAQ:FB). Here is what Davis Funds stated about Meta Platforms, Inc. (NASDAQ:FB):
“Within the traditional growth category, growing euphoria has led to bubble prices for many companies, most especially those with new and unproven business models such as those discussed above. In contrast, our research focuses on a select handful of proven growth stalwarts whose shares still trade at reasonable valuations. For example, because of concerns about future litigation and regulation, several dominant internet businesses, including Meta (formerly Facebook), trade at steep discounts to many unproven and unprofitable growth darlings that, in our view, trade at euphoric prices. While we expect a continued barrage of negative headlines around the company, as well as increased regulation in the years ahead, we do not expect a significant decline in its long-term profitability.”
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Disclosure: The article This $40 Billion Hedge Fund Loves These 10 Stocks is originally published on Insider Monkey.
