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Terry Smith sells star stock with 'regret and trepidation'
Terry Smith has sold his star stock Domino's Pizza, having made around six times his initial investment.
by Daniel Grote on Jan 20, 2016 at 12:25
Citywire AAA-rated manager Terry Smith has sold his star stock Domino's Pizza (DPZ.N) after making around six times his money on the company, fearing its surging growth levels cannot be sustained.
Domino's Pizza was a longstanding holding for Smith. Although his Fundsmith Equity fund did not disclose any of its holdings at launch in November 2010, it was a feature of the fund's top 10 holdings revealed four months later, and has at times been the fund's biggest stock.
When Fundsmith Equity launched, shares in Domino's Pizza were trading at around $15, and by the end of October last year, when the stock was sold, it was trading at around $105, a gain of approximately 600%.
Smith revealed the reasons behind the sale in his annual update to investors. 'We sold our holding in Domino's Pizza during the year since it had reached a valuation which we felt was only justifiable if the current rapid rate of growth is justifiable, which we would doubt,' he said.
'However, we sold it with some regret and trepidation. Regret since it is undoubtedly a fine business and had been our best performing share since the inception of or fund. Trepidation since selling shares in good companies is something we are justifiably reluctant to do.'
The US stock is not to be confused with FTSE 250-listed Domino's Pizza (DOM), which operates in the UK and Ireland.
The move was one of few changes Smith (pictured) made to the fund last year. The manager prides himself on a long-term buy-and-hold approach, and keeping transaction costs low. Smith said that last year, the £4.6 billion fund spent £496,507 on 'voluntary' dealing costs not associated with fund subscriptions and redemptions.
Other sales included that of Choice Hotels (CHH.N), as the company embarked on the development of a third party reservations system called SkyTouch.
'As we do not do much trading to reallocate the fund's capital between our holdings we are reliant on the management of our investee companies to make decisions to reinvest part of their companies' cash flows for us,' he said.
'When they do things which are different, exciting and outside their core are of competence we become worried.'
Smith also removed eBay (EBAY.O) from the fund, after its split from payment company PayPal (PYPL.O), which it has retained.
He bought three companies over the year: Waters Corporation (WAT.N), a US maker of laboratory instruments and thermal imaging equipment, another testing company and a consumer staples company 'both of which will be revealed in due course'.
The fund returned 15.7% over 2015, well ahead of the 4.9% return from the MSCI World Index, taking returns since launch to 131.4%, double that of the index.
Smith also took another swipe at critics who argue the sort of companies he likes, companies with relatively predictable revenues and dividends dubbed 'bond proxies', would come unstuck as interest rate rise.
'During the period that these commentators have been sounding this warning, these stocks and our fund have continued to outperform the market significantly,' he said.
'Secondly, what would these commentators have you do about this possible adverse impact on so-called "bond proxies"?
'The most common suggestion, it seems, is that you should consider switching into more cyclical stocks because they are more lowly rated and their returns are too volatile to be considered as bond proxies. Switching into cyclical stocks in anticipation of a rise in interest rates, what could possibly go wrong?'
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