Fundsmith founder warns bears tech stocks won’t crash

by Jonathan Adams

After a phenomenal year of gains for tech stocks, many investors and analysts are convinced we’re in a new tech bubble that could rival the dotcom burst when it finally pops. Not so Terry Smith, one of the UK’s best known and respected fund managers and founder of asset manager Fundsmith. He warns the bears that he does not expect a crash for the tech sector.

That will be a relief to hear for investors in the Fundsmith Equity Fund. The £23 billion fund’s biggest sector allocation is tech, with companies including Microsoft and PayPal accounting for 28.9% of its holdings. That’s seen the fund achieve significant returns in recent years, especially over 2020. And Mr Smith is in no hurry for the fund to reduce its exposure to the sector.

Yesterday he calmed investors, telling them in a note:

“Some commentators have attributed our recent outperformance to the performance of technology stocks accompanied by warnings that a ‘bubble’ is building in technology stocks rather like the dotcom bubble and that it may burst with similar ill effects.”

Mr Smith reminded investors that the same market commentators and analysts now warning of a tech sector crash to rival the dotcom bubble told him a few years ago that his investment strategy was over-reliant on exposure to the consumer staples sector. However, that sector, he reassured, is still going strong, still accounts for 27% of asset allocation and has helped grow the fund.

So far, Mr Smith’s instincts have been proven strong, with the Fundsmith Equity fund returning 449.3% since being launched in 2010. That’s equates to average annual compound returns of over 40%. The fund is the second-best performing in the Investment Association’s ‘global sector’. The sector itself has returned 166.6% over the same period, making Mr Smith one of a minority of active fund managers to be able to claim to have consistently outperformed his benchmark. And by some distance.

Mr Smith, however, questions how companies are categorised when it comes to the sector they are put in by such organisations. He thinks the groupings are somewhat arbitrary and not “all that helpful in determining what we are really exposed to”. He offers up Facebook, considered to be in the communications services, not technology, as a prime example.

Technology stocks, says Mr Smith, now cover such a broad spectre of industries they are exposed to that he thinks it’s nonsensical to judge them all by similar factors, explaining:

“This one-size-fits-all label does not help much in evaluating them.”

He personally values ‘technology stocks’ on factors such as brand, intellectual property and know-how. The fact the value of technology companies is largely “distinct from tangible assets such as real estate, machinery and equipment, and vehicles,” makes comparing businesses considered to be ‘tech’ businesses difficult.

“The net result is that for any given level of investment in assets, the profitability of a company building an intangible asset is likely to be depressed versus a company building or buying a tangible asset. This makes a mockery of the comparison of their valuations, which are done by some commentators.”

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
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