Terry Smith vows to keep ‘going through hell’ to fix flagship fund

Terry Smith has vowed to ‘keep going through hell’ to flip his flagship fund after it fell in value for the first time in more than a decade.

In his annual letter to investors, the 69-year-old star stock picker struck a defiant tone after his flagship Fundsmith Equity fund suffered a 13.8 percent decline in 2022 during a rocky year for global markets.

He launched a devastating attack on central banks for a prolonged period of ‘easy money’, warning that they now risked pushing the global economy into recession as interest rates rise to tackle skyrocketing inflation.

Smith signed the message saying, “I’ll leave you this year with a quote from Winston Churchill, “If you’re going through hell, keep going.” That’s what we intend to do at Fundsmith.”

The fall in value of the fund – which is still worth £22.5bn and is one of the most popular savers in the UK – was worse than the 7.8 per cent drop for the MSCI World Index.

But Smith – who is based in Mauritius – pointed out to his army of followers that the fund is still up 478.2 percent since its inception in 2010.

The top ten include Microsoft, Novo Nordisk, Philip Morris, L’Oréal, Estée Lauder and LVMH, while other well-known investments include Amazon, Facebook owner Meta and consumer goods giant Unilever.

“While a period of underperformance relative to the index is never welcome, it is nonetheless inevitable,” he said, adding that even good companies have fallen into turmoil.

“To quote an old saying, ‘If the police raid the bawdy house, even the nice girls get arrested,'” he said.

“But it’s much more reassuring to own companies that fundamentally perform well when stock prices fall than to play Greater Fool Theory in a company’s stock with no cash flows, profits, or even earnings.”

Smith destroyed central bank policies, and in particular the era of “easy money” created by ultra-low interest rates and so-called quantitative easing (QE) or money printing that is now coming to an end.

He argued that recent years’ attempts to quell volatility by making easy money had failed.

Putting together the dotcom meltdown in 2000, the credit crunch of 2008-2009 and the current situation, Smith said, “We’ve had three economic and financial crises now this century and it’s still in the first quarter.

“This seems to illustrate that efforts to eliminate volatility from the financial system actually have the opposite effect.”

Smith said investors were now caught out as central banks scale back QE and raise rates as inflation rages in the wake of the Covid pandemic and Russia’s invasion of Ukraine.

But the inevitable end to easy money came only after “one last hurray” during the pandemic, when central banks cut rates again and resorted to QE again, he wrote.

“This latest round of easy money after the pandemic led to all the usual bad investments people make when they assume money is endlessly available and costs nothing to borrow or raise,” Smith said.

“We see the disappearance of this in the collapse of FTX and the collapse of the share prices of those technology companies with no profit, cash flow or even revenue.”

He warned that higher interest rates were now straining economies to the point that they could slide into recession.

But the fund’s performance hasn’t stopped Smith from making millions. It emerged over the weekend that he could have made as much as £190 million last year as his £36.5 million salary was supplemented by other fees.