Terry Smith lashed out at the outsized performances of Nvidia and Microsoft after his near-£24 billion Fundsmith Equity fund underperformed for the third year in a row.
However, the UK's most popular fund returned to growth in 2023 with a 12.4% gain after a negative 2022, but was below its MSCI World benchmark again.
In his annual letter to investors, Smith pointed to two principal events which he said marked the year: the rise of artificial intelligence (AI) as one of the driving forces behind the rise of most of the 'Magnificent Seven' and especially Nvidia.
The second, he said, was that the stock market "has decided at the outset that it can identify winners in AI in the form of Nvidia designing the chips on which the generative AI models will run and Microsoft as a provider of an AI model.
"If it can do so at this stage it would seem to me to be a break with tradition," he wrily added, pointing to the early leaders of some of the major technology developments of the past half century such as Intel for microchips, AOL (NYSE:AOL) for internet service providers, Nokia for mobile phones, Yahoo for search engines, Blackberry (TSX:BB) for smartphones and Myspace for social media.
"Does this experience suggest that we can predict a winner in the area of AI at the outset?" he wondered. "The adoption of AI may lead to a situation where everyone has it, so no one has any advantage."
While the Fundsmith portfolio did not contain Nvidia, it does own Apple, Meta and Microsoft, of which the latter two were the top contributors to the fund’s performance, at 4.5% and 3.9% respectively.
They were followed by Novo Nordisk (NYSE:NVO) at 3.6%, a company that the fund has held and celebrated for each of the past three years, having first bought in 2016 - four years after its semaglutide weight-loss drug first was in clinical trials and seven years before its massive breakthrough into widespread public and investor consciousness this year.
L’Oréal and IDEXX Laboratories were the other two of the top contributors last year.
The biggest detractors from the fund's performance were Estée Lauder, McCormick, Diageo, Mettler-Toledo and Brown Forman, of which only Estee Lauder has since been sold.
As Mauritius-based Smith put it in his introduction to this year's letter: "It requires not only a grasp of investment analysis but also an iron constitution to ignore the periodic shenanigans of the stock market and reap the rewards of long-term equity investment."
Adobe and Amazon were two tech names that Smith and his team exited, the second not a great surprise after the criticism he fired in the Seattle company's direction a year ago when he hoped that "some of the tech companies we invest in [would] stop behaving as though money is free and halt some of the less promising projects outside their core business".
New purchases were made of consumer goods giant Procter & Gamble (NYSE:PG), hotel chain Marriott International (NYSE:MAR) and cybersecurity group Fortinet