Fundsmith buys semiconductor firm – that’s got nothing to do with AI
Terry Smith reveals a new position as his giant strategy seeks to come back from three years of underperformance.
7th May 2024 10:04
by Sam Benstead from interactive investor
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Terry Smith has revealed the name of a new stock in his £25.5 billion Fundsmith Equity fund.
The “small holding” is in Texas Instruments, a semiconductor company that focuses on more simple “analogue” chips used in electronic devices. Smith also said that he has begun building another new position but will not disclose it until it has reached the desired size.
Texas Instruments has been left behind by the artificial intelligence (AI) boom. Shares are up 50% in the past five years, which compares unfavourably with the likes of Nvidia, ASML and TSMC, up 2,083%, up 383% and up 213%.
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In contrast to these names, Texas Instruments’ products are not used in AI functions, such as training models, and instead are core components in everyday electronics, such as radios or calculators.
On the other hand, Nvidia sells the chips needed for AI functions, TSMC builds them, and ASML provides the critical equipment needed to etch the semiconductors.
But this may be what appeals to Smith. He is famous for picking “boring” but profitable businesses that can keep making money way out into the future, no matter what the economy does. A nearly 3% dividend on Texas Instruments, combined with a high operating profit margin of around 40%, will tick some boxes for Smith’s focus on quality business at attractive valuations.
Fundsmith Equity is undergoing a relatively difficult period for performance. While it is ahead of its MCSI World benchmark this year, returning 7.1% compared with 6.7%, it underperformed in 2023, 2022 and 2021.
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Speaking to investors at his recent annual general meeting in London, Smith blamed his recent underperformance versus the benchmark index on the very strong returns of the “Magnificent Seven” stocks, which include strong performers last year such as Nvidia, Tesla Inc (NASDAQ:TSLA) and Apple Inc (NASDAQ:AAPL).
Smith warned that strong returns from a select group of companies, accompanied by stock market hype around them, could be a sign of a period of pain ahead and it will therefore prove to be a wise investment move to not own all of them or believe the hype around this group of companies.
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Smith does own Apple, Microsoft Corp (NASDAQ:MSFT), Meta Platforms and Alphabet Inc Class A (NASDAQ:GOOGL) from the group, but Apple and Alphabet are relatively small positions for the fund manager. Microsoft and Meta are in his top 10 most-held shares. He says he will never own Tesla.
Smith said: “Brokers who want to get you to do things have wonderful ways of inventing names for things...the BRICS, Magnificent Seven, the FANGs. The Nasdaq delivered a 43.4% return last year. These seven stocks accounted for 67.8% of that return. If you didn’t own all or most of these stocks, it was close to impossible to outperform.”
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