Speaking at the annual general meeting for investors in his top-performing fund, the UK’s largest, Citywire AAA-rated Smith acknowledged the impact the virus would have on the revenues generated in China by companies in the fund.
He added that the fund’s holdings in companies involved in the travel industry, like airline reservation system operator Amadeus (AMA.MC), down 11% over the last week, and Intercontinental Hotels (IHG), 12% lower, would be hit ‘quite substantially, at least in the near-term’.
But he argued that across his fund, ‘there’s plenty of it that actually won’t be affected very much’. ‘At the moment, we’re frankly pretty relaxed,’ he said.
Smith acknowledged the broader economic impact of the virus, which has now caused 2,765 deaths and infected 81,131 people.
‘It’s probably going to have an economic effect, obviously, because we’ve had quite a big shutdown in China which is somewhat the workshop of the world now.’
But he added the proportion of revenues Fundsmith Equity’s companies derived from China was small, at 6.7%.
‘We’ve got a handful of companies that have got quite large exposures in China,’ he said.
‘If you think of our direct China exposure in the portfolio, it’s like one-and-a-half of a holding. Imagine that we had one-and-a-half companies operating in China. Are you worried about that? I’m not worried about that.’
Clorox softens blow
Fundsmith Equity is down 4.7% over the last three days as stock markets have tumbled, having retreated from an all-time high.
One stock that has cushioned the blow as coronavirus fears have gripped investors is Clorox (CLX.N), which Smith started buying in December.
Shares in the cleaning products maker are among the few to have risen amid the heavy stock markets falls as investors bet on strong demand for its disinfectants and bleaches.
The stock is among the best performers in the S&P 500 over the last month, up 4.9%. ‘Better to be lucky than good!’ said Smith.
Questioned over the timing of the next global recession, Smith said he wasn’t capable of predicting when it would happen. ‘I don’t think anybody else is particularly either,’ he said.
‘Historically they mainly occurred as a result of the interest rate cycle – inflation takes hold, the banks put interest rates up, the market and the real estate sector and various bits of industry fall over, there’s a recession and then we go back,’ he said. ‘That’s not always the case, sometimes they are caused by events.’
The fund manager said his fund should prove resilient in a stock market crash, pointing to the ‘defensive’ characteristics of the companies it owns, with products consumers were still likely to buy even during times of economic stress.
‘They are defensive economically in the event of a downturn, which is to say people still brush their teeth and feed the dog, and do all those other fine things that we invest in, during a downturn,’ he said.
Smith also produced modelling of how the shares Fundsmith owns performed during the financial crisis in 2008. They fell 20.3% from their peak to their lowest point, and took 11 months to recover that loss.
The FTSE 100’s peak-to-trough fall was more than twice that, at 47.3%, and it was four years before the index recovered that ground.
‘That gives me some comfort,’ Smith said but added that of more importance was the impact on the businesses, rather than their share prices. Similar modelling showed the companies’ organic growth, which stood at 10% in 2007, fell to just under 2% in 2009, before recovering to over 6% in 2010 and around 7% in 2011.
‘The question we are really, really interested in in the event of a market event and/or an economic event that’s linked to it is not just what happens to the prices, but what happens to the companies?’ he said.
‘Because if we are trying to be very long-term investors… what fundamentally happens to them is really of great importance to us.’