Fundsmith doesn’t want to own the stocks that are going up – Fundsmith Emerging Equities has reported results covering 2017. The net asset value per share total return for the year was +21.2% (2016: +12.0%) and the share price total return was +24.5% (2016: +10.5%). The MSCI Emerging and Frontier Markets Index, measured on a net sterling adjusted basis, rose by 25.3% over the same period (2016: +32.4%). The company made a revenue profit but that this was not large enough to reverse the revenue losses from previous years. As such, the board has not declared or recommended a dividend this year.
The chairman said “We are pleased with the overall good performance of the company over the year and that the relative underperformance against the benchmark index is lower than in previous years.” [QD comment: is less underperformance something to be pleased about?].
Fundsmith doesn’t want to own the stocks that are going up
The manager points out that 40% of the MSCI Emerging and Frontier Markets Index total return came from just four stocks: Tencent (and Naspers which owns a stake in Tencent), Alibaba, Samsung and Taiwan Semiconductor, none of which they own or wish to own. 70% of the 2017 return came from China (incl. Hong Kong), Korea and Taiwan – they are underweight in China and do not have any holdings in Korea or Taiwan (and would dispute whether their economies would qualify as emerging markets – they think they have long since emerged economically – just the nature of their stock markets keeps them classified in the Index); and 70% of the 2017 return came from the IT and Financials sectors, which they also do not own or wish to own (mostly in the case of IT).
The five largest contributors/detractors from performance were:
Eastern Tobacco, Egypt +3.6 Famous Brands, South Africa -0.7
Vietnam Dairy Products, Vietnam +1.9 Magnit, Russia -0.4
Godrej Consumer Products, India +1.7 Biotoscana, Brazil -0.4
Britannia Industries, India +1.6 Dr Lal Pathlabs, India -0.4
Foshan Haitian Flavouring, China +1.4 Nestle Lanka, Sri Lanka -0.1
The manager says ” Biotoscana, the Uruguay based drug delivery company has performed poorly since its IPO. This often presents an investment opportunity as failed IPOs can become over-sold as those shareholders who subscribed in the hope of a quick profit exit. We wait to see if Biotoscana is such an opportunity. Prodia Widyahusada which we started buying in Indonesia is also a stock which has performed poorly since its IPO. Dr Lal Pathlabs, the Indian diagnostic labs business which we already held in the FEET portfolio, has suffered from the influx of private equity into its sector, attracted by the returns and growth available. However, we remain convinced that an exposure to healthcare spend in Emerging Markets should prove positive.
Famous Brands caught the disease which a number of companies in Emerging Markets contract and which leads them to buy businesses in the developed world with its slower growth and frequently more competitive markets. In the case of Famous Brands it bought Gourmet Burger Kitchen in the UK which has duly started to produce losses. The Peter, Paul and Mary song from the 60s (“When Will They Ever Learn”) springs to mind when we see companies in the developing world doing this. In the case of Magnit it was difficult to foresee a recovery in its trading and NestlÈ Lanka appears to have become a bit of a backwater of the NestlÈ empire. We sold all these positions (Famous Brands early in 2018) as we thought we could reallocate the capital released to more promising investments.”
FEET : Fundsmith doesn’t want to own the stocks that are going up