Proactive Investors - Terry Smith’s Fundsmith Equity, the UK's most popular fund, has been downgraded by Morningstar due to questions over the manager’s recent portfolio moves.
Fresh from the fund having underperformed its benchmark for a third successive year, Morningstar reduced its rating to Silver from Gold, although analysts said the portfolio remains "very high quality and different from the benchmark".
However, Smith and his team have "disappointed slightly" with some recent exits, where the manager admitted to timing all four recent exits badly.
The fund manager said at the recent annual general meeting that the sales of Adobe (NASDAQ:ADBE) last March and Amazon (NASDAQ:AMZN, ETR:AMZ) last May were "not my finest hour".
The Morningstar analysts, noting that Adobe and Amazon both saw their share prices rise significantly after the sales, said Smith "now thinks he acted too soon despite feeling his fundamental analysis stacked up at the time".
"He waited too long to make full sales of Estee Lauder (NYSE:EL) and Paypal, and this hurt performance. For a high-conviction fund of 20-30 stocks that trades infrequently, this is a number of missteps," the analysts said.
Last year, Fundsmith's performance returned to growth with a 12.4% gain after a negative performance a year earlier.
Morningstar said the fund’s largest holdings, Novo Nordisk (CSE:NOVOb) and Microsoft (NASDAQ:MSFT) are currently at the maximum 10% permitted under UCITS rules.
"This is at odds with the fund’s earlier years, with a maximum of around 6%, and 8% more recently," the analysts said.
"Smith says this increased weighting is the result of 'running his winners'. However, we note an inconsistency in that these same companies are held in the 6-7% range for the related and much smaller Fundsmith Sustainable Equity fund, which he also manages."
But the analysts said the portfolio "remains very high quality and different from the benchmark, even if there has been a slight reduction in active share in recent years. The enduring sector concentration remains, and many holdings have featured in the portfolio for 10-plus years. It continues to offer high and more durable returns on capital".