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Terry Smith buys Facebook as fund tilts to technology

Citywire AAA-rated Terry Smith builds his flagship fund's technology exposure with a top 10 position in social media giant.

 
Terry Smith buys Facebook as fund tilts to technology
 

Citywire AAA-rated Terry Smith has bought into US social media giant Facebook (FB.O), quickly building a top 10 position in his flagship £13.8 billion Fundsmith Equity fund.

Fundsmith revealed the new buy in the February factsheet for the fund, which was highlighted by members of the Citywire Money Forums, but declined to comment further.

Smith's acquisition of Facebook is his first since last year's new position in US business software provider Intuit (INTU.O) and is a relative rarity given his emphasis on minimising portfolio turnover by backing companies for the long-term.

Smith describes his three-step investment process as 'buy good companies; don't overpay; do nothing'. While he has kept portfolio turnover at low levels, he has typically bought or sold at least two companies every year since launching the fund in 2010.

His Facebook buy comes as the shares trade near all-time highs of $177 per share, up more than 360% since their flotation in 2012.

But strong earnings from the US social media giant and healthy estimates mean the shares are trading close to their 'cheapest' levels since floating. 

The $177 share price places the company on a trailing price-earnings (PE) ratio of 28.7 times, while strong forecasts for next year's earnings place them on a forward PE of 22.9 times, a low they haven't reached since the tech sell-off following Donald Trump's election as US president at the end of 2016. It also contrasts with a rating of more than 50 times in early 2014.

That places the shares at a discount to the wider IT services and consulting sector in the US, which is trading at around 28 times forward earnings. Amazon (AMZN.O) trades on nearly 150 times forward earnings, and Twitter (TWTR.N) nearly 50 times, according to Reuters estimates.

Smith's Facebook buy has also bolstered his fund's strong weighting to the technology sector, now accounting for more than a third of its portfolio. Consumer staples, the area of the market with which Smith's investment philosophy is most commonly associated, is now only the third largest sector weighting, at just under a quarter of the fund.

Smith's Facebook friends

Smith (pictured) joins James Anderson and Tom Slater, managers of the Scottish Mortgage (SMT ) investment trust, as high-profile UK fund manager backers of Facebook. 

The managers have backed Facebook since flotation and at the end of September held 4.7% of their £6.3 billion FTSE 100-listed trust in the stock, although the company has since fallen out of their top 10 holdings.

The UK fund managers with the highest conviction holding in the stock are those running technology-focused funds. Jeremy Gleeson holds 7.8% of his £445 million AXA Framlingon Global Technology fund in Facebook, while Citywire A-rated Ben Rogoff holds 6.1% of his Polar Capital Technology (PCT ) investment trust, and 4.6% of his Global Technology open-ended fund, in the stock.

Other managers with a broader remit are also strong backers, however. Kristian Heugh, Citywire AAA-rated manager of the Morgan Stanley Global Opportunity fund, the only global fund open to UK investors to have beaten Fundsmith over five years, has a 6.1% stake, according to Thomson Reuters data.

Smith has meanwhile sold his position in Dr Pepper Snapple (DPS.N), a position he has held since launching his flagship fund, after Keurig Green Mountain agreed to buy the soft drinks maker for €18.7 billion. 

Since launching the fund in November 2010, shares in Dr Pepper Snapple have climbed more than 210%, even before the currently 2%-yielding shares' dividends are taken into account.

6 comments so far. Why not have your say?

Pensioner

Mar 07, 2018 at 21:54

As supporter of Fundsmith. I hope he as made a successful investment. I will watch.

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Ed the 5th

Mar 20, 2018 at 19:12

'buy good companies; don't overpay; do nothing'.

Good companies ??

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Concerned investor via mobile

Mar 20, 2018 at 19:14

I’m somewhat concerned.

In a few occasions Terry himself confessed, even with a bit of a smug face, that he doesn’t understand technology, nor does he care to.

Does he know what he’s doing then?

I remember him frowning upon the various Yahoos that look invincible until they fade into oblivion when they go out of fashion in favour of the next hipster fad.

Maybe Facebook will turn out to be different, I don’t know. For starters, even considering Smith’s relaxed attitude towards sub-optimal entry points (it’s a long-term investment), his timing was pretty unlucky. Of course, he didn’t see this “data breach” pseudo-scandal coming, which was really just a matter of time, given the company’s opaque and sloppy attitude towards customer privacy and hostile powers meddling into Western elections. And we’re probably in for a long sequence of similar micro- and macro-scandals: this won’t fade away in a few weeks.

I very much hope I’m wrong, or I’m right but none this affects long-term performance.

report this

Concerned investor via mobile

Mar 20, 2018 at 19:16

I’m somewhat concerned.

In a few occasions Terry himself confessed, even with a bit of a smug face, that he doesn’t understand technology, nor does he care to.

Does he know what he’s doing then?

I remember him frowning upon the various Yahoos that look invincible until they fade into oblivion when they go out of fashion in favour of the next hipster fad.

Maybe Facebook will turn out to be different, I don’t know. For starters, even considering Smith’s relaxed attitude towards sub-optimal entry points (it’s a long-term investment), his timing was pretty unlucky. Of course, he didn’t see this “data breach” pseudo-scandal coming, which was really just a matter of time, given the company’s opaque and sloppy attitude towards customer privacy and hostile powers meddling into Western elections. And we’re probably in for a long sequence of similar micro- and macro-scandals: this won’t fade away in a few weeks.

I very much hope I’m wrong, or I’m right but none this affects long-term performance.

report this

LouisV-W4

Mar 24, 2018 at 11:16

A good decision, just extremely unfortunate timing! But, I believe FB will recover, because marketing is now all about maximum targeted reach, in minimal time, with minimal effort, and minimal cost. That means social media. and no other company except FB can offer this. I don't see any advertisers on FB jumping ship!

A great personal data compliance wake-up call for FB and everyone else, especially with GDPR just around the corner.

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halfinchnut

Mar 30, 2018 at 09:29

I'm concerned that his success has left him with so much cash inflow that he's finding it hard to put that money into good use, I hope this buy in isn't the case, and hopefully, he has applied the good practices that have made him such a great manager. I have topped up yesterday on recent weakness.

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