A fund manager who dislikes Nvidia stocks

“Fat and complacent” fund management industry.

Terry Smith said that line when launching his new mutual fund in 2010.

He wanted to give them a “bloody nose”.

Terry believed the mutual funds in the UK were charging high fees and not giving good returns.

And he wanted to change that.

Terry Smith launched Fundsmith Equity Fund in 2010.

His aim: make it the “best fund ever”.

A few news outlets covered him. Some called him ‘the next Warren Buffett’.

2017

But those are just words.

The question remained: would he be able to deliver on his promise?

Within a few years, the results started to show.

7 years later, things were clearer – Terry Smith was a fantastic investor.

Fundsmith Equity Fund had given a return of 22% per annum.

Much higher than UK and US index funds that gave between 10% and 12%.

Terry had delivered on his promise.

Till 2017, his mutual fund was doing as he promised.

How?

How did Terry do this?

Terry is well-known for his investment philosophies.

Management fees:

Mutual funds take a management fee – to run the mutual fund (also called the expense ratio).

High fees was one of the reasons Terry called the UK’s fund management industry “fat and complacent”.

Terry’s mutual fund’s fees are below 2% – lower than others.

Simple and Understandable:

Like Warren Buffet, Terry does not like investing in companies he does not understand. He also does not like complex businesses.

“Buy shares in a business that can be run by an idiot”.

In 2011, Warren Buffett started buying shares of IBM.

Terry was studying IBM around the same time too.

Warren Buffett ended up buying shares of IBM. Terry rejected IBM.

While reading about IBM’s plan for the future, Terry found the words ‘road map’ instead of ‘plan’.

This made Terry uncomfortable.

Why use complicated words to describe something simple?

He researched further and did not understand the company well.

A few years later, it turned out that Terry was indeed right. The IBM stock did not do well.

Warren Buffett sold his IBM shares in 2017 for a loss.

Quality:

Terry Smith puts ultra importance on buying high-quality companies.

Like Warren Buffett, he pays more attention to the quality of a business than its valuation.

Good-quality businesses command a premium price.

This also means that he does not like engaging in the ‘Greater Fool Theory’.

Many times, a company’s stock is shooting up because of hype. And everyone knows that is not justified.

But people still buy the share hoping to sell at a slightly higher price.

Essentially, they know it is a bad investment. But they buy the shares hoping to sell it to someone else who is a bigger fool.

Is this why Terry stayed away from Nvidia?

(More on this later).

2024

Terry Smith was managing ￡28 billion in Dec 2021.

About two years later, this was down to ￡23 billion.

Investors were withdrawing their money from Fundsmith Equity Fund.

Since 2020, his mutual fund has given returns lower than its benchmark (the MSCI World Index).

What does that mean?

Say you had invested in an MSCI World Index fund in 2020. You would get higher returns compared to Terry's mutual fund.

But that is the case if you invested in 2020.

This mutual fund has been running since 2010.

Since then, it has given returns much better than the index (~15% per annum).

In a letter recently, Terry Smith explained to investors why this was happening.

Turns out that most US stocks have not risen in recent years. Only about 5 stocks have gone up majorly.

Even among those, one stock has gone up considerably – Nvidia.

(Nvidia is a silicon chip-making company. It is in great demand because of the artificial intelligence wave).

Terry Smith’s mutual fund does not own any Nvidia stock.

Nvidia is the world’s most valuable company right now. It rose to the number 1 position only in the last few years.

So if you did not invest in Nvidia, your total investment returns would be low.

Fundsmith Equity Fund is giving lower returns than the index mainly because of this.

This is probably why money is flowing out of the mutual fund. Investors might be thinking they will earn better returns by investing in the index fund.

In his letter to investors, he says he has bought some shares of another semiconductor company – Texas Instruments.

But Terry Smith is not buying Nvidia.

In a podcast, he said it was too early to comment on the impact of artificial intelligence.

He further explains that early companies in the tech space have performed poorly in the last 30 years.

Terry even gives some examples.

Yahoo! – completely replaced by Google. MySpace – completely replaced by Facebook. Blackberry & Nokia – completely replaced by Apple and Android (Google).

A few more.

He was asked why his mutual fund had not given better returns than the index fund.

Terry has clarified that he thinks investors should not expect good returns every single year; and that their outlook should be long-term only.

He believes no investor or strategy can give great returns in all kinds of markets.

Next Warren Buffett?

Terry Smith was born in 1953. His father was a bus driver.

He started working at Barclays Bank. It was here that his interest in stocks was born.

In the 1980s, Terry was a top analyst in the UK.

Later, he joined UBS – but was fired from that company.

Why?

Because he wrote a book – Accounting for Growth.

In this book, he covered how companies used accounting tricks to show growth. He felt these tricks covered up the real health of the companies.

The book created an uproar in London’s financial industry.

But Terry Smith continued to preach to investors to seek the truth.

He held a few more positions from then on until 2010.

In 2010, he started Fundsmith.

This was when he famously called the mutual fund industry in the UK “fat and complacent”.

Terry is known for offending people in the industry.

He has attacked others’ investment strategies, high fees, choice of companies, etc.

To show how serious he is about transparency, he invested a significant amount of his own money in the Fundsmith Equity Fund.

All that aside, he can still make mistakes. Anybody can.

Is he really the next Warren Buffett?

Since 2020, his mutual fund’s returns have been lower. But that’s barely 4 years.

In the long run, his mutual fund’s long-term returns are doing exactly what he promised – better returns than the index.

Of course, that is not a guarantee of future returns.

Terry Smith is definitely an investor to watch out for.

The images above were generated using AI tools.