Fundsmith investment trust delivers less than half the 23% falls seen in the MSCI index
The Smithson Investment Trust has revealed the stocks in its portfolio that have buoyed performance during the coronavirus sell-off as part of a remote presentation given during its first AGM.
In Q1, shares in the £1.3bn Fundsmith investment trust, on which Terry Smith acts in an advisory role, fell 10.9% compared to 23.1% falls in the MSCI World SMID index, according to FE Analytics.
Smithson lead manager Simon Barnard (pictured), who due to the coronavirus lockdown did not attend the AGM on 30 March and delivered his presentation remotely, named three medical device companies that had benefited from the Covid-19 outbreak: Fisher & Paykel, Massimo, and Ambu.
Respiratory equipment, blood monitors and endoscopes
New Zealand manufacturer Fisher & Paykel makes respiratory equipment, Barnard said. “They’ve seen demand surge over the last few weeks. Management tell us that they are able to meet that demand by ramping up their capacity and so they are starting to benefit from that.”
Masimo, based in California, manufactures blood monitoring equipment that are useful for patients in intensive care. “As we see intensive care beds increase, we also see the demand for their monitors increase,” Barnard says. Before the Covid-19 outbreak, the share price had been buoyed by improving trade relations between the US and Mexico, where a lot of its products are manufactured.
Finally, he highlighted Danish medical device company Ambu, which is the only company that makes disposable endoscopes that have been used to examine pulmonary conditions in Covid-19 patients.
He said it was important to note that most endoscopes are used up to 200 times before they’re disposed but that this was not practical during the pandemic as subsequent patients may become infected with Covid-19 despite the cleaning of equipment.
“Ambu is the only company that are able to make these disposable endoscopes at scale. They have therefore also been benefiting from the current pandemic.”
Smithson believes travel holding has enough strength to survive coronavirus
But the portfolio is not absent of companies highly exposed to the coronavirus.
Barnard highlighted travel booking software business Sabre, which he described as a B2B version of Expedia, as an example. It is the only travel business in the portfolio.
The US business had already suffered a difficult 2019 due to devastating crashes at two of its clients: Lion Air and Ethiopia Airlines. Another client, India airline Jet Airways, went bankrupt.
He said: “These events unfortunately meant that the Sabre share price was quite poor during 2019. However, coming into 2020, and the Covid-19 pandemic things have gotten a lot worse.
“With airlines cutting their capacity by 90% and hotels shutting, this means that the revenue for Sabre during the same period would likely be down a similar amount, in the region of 90%.
“The company does have debt on its balance sheet, but it’s now had all of its debt covenants waived by its lenders and it’s drawn down further loans. So it has over $800m of cash on its balance sheet. That is an amount that is enough, despite all of its costs, and all of its interest payments, for at least the next 12 months, even if it were to receive zero revenue over that period.”
Rightmove’s operating margin holds it in good stead
Smithson is also sticking by Rightmove, despite the UK government shutting down the housing market so that no transactions take place during the period of the lockdown.
The online real estate listings business has already offered its subscribers a 75% reduction in fees for the next four months. Barnard also noted the “real possibility” that some real estate agent clients of Rightmove may go bust during the lockdown.
“However, we’re still confident that Rightmove will perform relatively well, not necessarily in this year but in the years to come. And that is because it is extremely profitable. Rightmove has a 75% operating margin, and it has a lot of cash on its balance sheet.”
He added that the team expected real estate agents that leave the market during Covid-19 would likely return “as soon as the market turns up”.
Simon Barnard observes tonic shortage on the frontline
Barnard also singled out Fevertree, which the team purchased in 2019 and had been one of the biggest detractors to performance for the financial year.
He said this reflected the difficulty of timing the market with a falling stock: the team had purchased the UK drinks maker after 50% declines in its value as growth in its home market fell from 40% in 2018 to close to zero by the end of 2019. It has continued to decline during the Covid-19 outbreak.
“I think because people are very concerned that during a period of lockdown there aren’t going to be many people going to bars and restaurants, which is of course true.
“However, for some days I’ve been trying to get tonic in the supermarket, and I found it simply impossible. Bear in mind, that about 50% of Fevertree sales is done through supermarkets. I think that at least that part of the business should prove to be okay.”
Smithson is on a rare discount as NAV progresses
Overall, Barnard said the team felt the portfolio had held up very well during the outbreak.
But he did note the investment trust had reached discount territory for the first time. During the year to 26 March, the last day Fundsmith had data for on the date of the presentation, the Smithson NAV had fallen 8.4%, while the share price had fallen 14.3%. The MSCI World SMID index was down 20.4% over the period.
The investment trust is currently trading at a 2.86% discount to net asset value, according to Hargreaves Lansdown.
But Barnard compared the share price and net asset value to a dog and its walker crossing field, with the walker representing the NAV making steady progress while the dog runs around back and forth.
“But the walker trudges on,” he said. “Now they might pause or even trip, but because we own good companies, they’ll get back up again, and keep walking. And we know that eventually the dog will run out to meet them.”