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Last week a letter came out from the Fund Smith fund, managed by Terry Smith, an investor we have talked about many times on this channel, in which they told us that they were rotating practically half of their fund and that they were changing their investment strategy. In today's video, we're going to look at the highlights of this letter, why they're making this change in strategy, and we'll see both the sales they're making—they've sold a lot of shares—and the new companies they 've added to the fund.
Some of the companies they've been buying are interesting, in my opinion, while others, perhaps from a valuation point of view, aren't so much . So, as you can see, Fund Smith has recorded a record-breaking portfolio turnover of almost 52% in the first half of the year, a historically high figure that breaks with its traditional low- activity philosophy.
This manager's philosophy was to buy good businesses at good valuations and simply do nothing; he followed the buy and hold strategy, which he is now saying is unsustainable in the current irrational market environment and does not work. Therefore, they are adapting a new strategy. This decision to change strategy must also be taken into account because it is being made at a time when things are not going well for him.
In recent quarters we have been saying that this fund was not performing so well, and in fact in the first half of the year, in the first half of 2026, the fund has fallen by 2.9% compared to the +11.2% of its MSCI World benchmark, so it is performing much worse. Well, as Terry Smith explains, the current global market is heavily distorted by the rise of artificial intelligence and by massive flows of capital into passive index funds.
This dynamic has caused stock market valuations to respond to factors of pure impulse or technical momentum, which is the new strategy that would be adopted, ignoring things like the fundamentals of companies in the short term, such as the real profitability of the businesses or the return on capital.
Therefore, in order to protect the fund's viability , management will adopt a more dynamic approach and incorporate momentum analysis into its business decisions. They will continue to invest in high-quality stocks, such as the additions they have been making to the fund, but they will pay particular attention to the issue of momentum and will buy stocks that have been performing well and not those that are falling apart.
Momentum, which I've briefly explained here , along with a graph they shared in the letter itself (which I encourage you to read carefully), is an investment strategy based on the premise that stocks that have recently performed well will continue to do so in the short term, while those that have underperformed will continue to fall, driven by market inertia and capital flows.
In this new phase, Fundsmith will not become a purely speculative fund, but will adopt momentum analysis at both the price and business fundamental levels to fine-tune the entry and exit points of its investments. This means they will stop buying stocks that suffer prolonged declines, thus avoiding the famous saying of catching falling knives, and will prioritize companies that, in addition to meeting their quality criteria, show a clear upward trend and strong support in their current cash flows .
And here you can see how the momentum factor has been performing much better than other types of strategies lately; it's in a really good place right now. But also remember that no strategy is perfect in all market cycles, and all of them have seasons in which they work better and seasons in which they work worse.
Well, the deep restructuring has led to the complete or partial sale of emblematic positions due to losses of fundamental momentum, excessive valuations or direct management errors. They have already sold many positions in their portfolio. Here I have included a screenshot of their letter, and we are going to focus on the small comments they have made on some of the most important points.
But they have sold, for example, Atlas Copco, EssilorLuxottica, Intuit, Louis Vuitton, Magnum Ice Cream, Mettler Toledo, Nike, Novo Nordisk, Zoetis too, which is another of their classic holdings, Unilever. Well, they've sold a lot of stakes in quality companies, among which the one that caught my attention was Unilever's exit after harsh criticism of its leadership for giving in to the demands of short-term activist investors and fragmenting the corporation.
They have also liquidated Novo Nordisk, the pharmaceutical company, which was rated as having poor investment management despite owning a leading drug. They have also sold other stakes, for example, in companies like Louis Vuitton, which has certainly had some bad quarters, as has the entire luxury sector, because things are not entirely well in China and until consumption in China recovers, it will be difficult for them to gain traction.
It is true that perhaps not all these companies have the best momentum at the moment, which is what they are starting to apply. And they have also left Nike because of the excessive slowness in its corporate restructuring process. I've also been struck by the sales figures for Zoetis, which we've discussed in a previous video.
They say it was liquidated due to its inability to compete with new generic products from other companies that threaten its main franchises, coupled with a lack of clarity from executives when communicating with investors. They have also sold the software company Intuit, which has fallen a lot in recent months.
In this case, the sale is said to be a quick correction after realizing that the board continues to suffer the consequences of the disastrous Mailchimp purchase, in which they overpaid. Smith was alarmed that they presented results excluding this subsidiary. And well, here I have put for you to quickly review the valuations of these companies that have been selling, at least the main ones of them.
We've seen that Unilever has been selling it off, a defensive consumer goods company. They are selling it at a point where the valuation is significantly lower than how it usually trades. These types of defensive companies usually trade at around 20 times earnings, and some of higher quality companies, such as Coca-Cola, can trade at even higher valuations.
And they are selling it at a time when the valuation is historically low, at about 16-17 times earnings. They are also selling Novo Nordisk at a historically low valuation of about 16 times earnings, when its average valuation has been about 24 times. Louis Vuitton is more of the same, trading at around 21 times earnings compared to its average valuation of almost 25 times.
However, it's true that in Louis Vuitton and all these companies, as I said, until they present some quarters where we see that China is starting to pick up, it's true that it could be difficult for them to recover, right? We hope to see all these companies valued again at multiples like the historical average.
That's why with these sales you see happening, all these shares at valuation multiples below their historical average, what they're focusing on, or what they're really giving weight to, is that momentum and not so much the valuation. We'll also see it with the purchases they've been making, where we see that valuation is n't the most important factor.
In fact, some of the properties they've been buying are at historically high valuations, but this is the new approach they've decided to take in this case. Then there's Nike, which we've already mentioned is still undergoing restructuring and therefore has some problems. It would sometimes be profitable, below its historical average.
And Zoetis, which is also going through problems and is said to be unable to compete, would be around 10 times earnings, which would be the lowest valuation in the last 10 years. And then we have Intuit too, a software company, so you can imagine that it has also been falling like a knife, just like practically the entire software sector.
It would also be around 10 times earnings, whereas historically it has traded at much higher rates . So, this would be a summary of the most important sales they have been making, and you can see the valuations at which all these companies are. And now we're going to move on to the next part of the video to review what purchases they've been making.
Well, just like before, I've taken a screenshot of the letter, which I recommend you read carefully, as it provides a brief explanation of each of these purchases and sales. You can find that at the very bottom, in the appendix. And well, you can see that they've started taking positions in AppLovin, GE Vernova, Mastercard, for example, Netflix, Taiwan Semiconductor, Uber, or Yum!
Brands, for example. And well, here I've put a short comment on some of them. I did n't include them all because the video would be too long. Fundsmith, in this case, avoids inflated software firms and, according to them, prefers critical assets that physically support the technological revolution. GE Vernova secures long- term revenue through turbine maintenance contracts and says it benefits from the opportunity to build AI data centers and modular nuclear reactors.
They then acquired Next Power, which provides optimized solar tracking systems for neighboring technology installations. And they have also bought the famous chip company Taiwan Semiconductor, which consolidates the portfolio by monopolizing the manufacture of 90% of the world's advanced chips . It is, as you know, the largest foundry in the world.
In addition to this, they are also buying shares that are indeed of high quality. I think they're very good businesses and they're buying, for example, Netflix in this case, which for me is one of the ones they've been buying that I think has better ratings, along with Uber and also Mastercard. Well, Netflix, after the streaming war, remains the undisputed leader, capitalizing on its existing scale through advertising and live sports.
Uber, which is boosting its operating cash flow after the disappearance of local rivals and is positioning itself as the mandatory distribution network for future autonomous vehicles, is a company we 've also talked about in other videos and is also very interesting; Bill Ackman holds it in his portfolio as one of his main positions.
And well, we 've also talked a lot about Mastercard, and together with Visa, it 's an oligopoly. So now, just like we did with the sales, let's review the valuations at which these stocks have been bought. We have G Bernova, which is trading at almost 60 times earnings. Then we have Next Power, which is around 23 times earnings.
The average valuation is around 20 times, so they're buying it above its historical average valuation. Then we also have Taiwan Semiconductor. All these companies have been performing well in recent months, and they 're buying it at a valuation of about 22 times. But it's true that if we only look at the valuation, obviously, it could have been bought at lower valuations, but it is a stock that has momentum, right?
and that it would be in a clearly upward trend. We are now seeing, when we look at some of the ratings they are buying from, that yes, they are also buying from quality companies , but they no longer give as much priority to the rating. In fact, some of the companies they have been buying are at valuations above their historical average valuation.
Then we saw that they bought Netflix, which in this case, since I pay a lot of attention to valuation, I think it's one of the most interesting purchases they're making. They're buying it at 22 times earnings after it has corrected from its peak by around 40%, I think it has already fallen, it's trading well below its historical average of 34 times earnings and it 's a company from which good growth rates are expected.
It has also bought Uber at around 21 times earnings, which I also find interesting and is one of the lowest valuation multiples in recent years, trading below its historical average of 26 times earnings. And lastly, of those I have compiled here, it has also bought Mastercard, which we talked about recently, and Visa because they were interesting and we have talked about them many times already, right?
You're probably tired of me talking about these companies so much on the channel for many years now. And well, I don't know exactly when they bought it either, I suppose it must have been during the second quarter, so it's not that they bought it at the valuation it has exactly today, but they were able to buy it at about 24 or 25 times earnings, which is a good valuation for this company.
In recent months, both Visa and Mastercard have provided good entry points. And well, that's how the portfolio would look in summary if we look at some metrics; it's still a very high-quality portfolio with average friction of 31% , with gross margins above the market average of 62% or operating margins of 29%, but the change they are going to make, or are actually making, is the one we just discussed: they will no longer prioritize the company's valuation so much, right?
As such, they do look at actions like the purchases they've been making that are still of quality, but they give considerably more weight to that momentum factor. So, what do you think of what Terry Smith is doing ? Are they really changing their strategy a bit haphazardly towards what has been working well in recent months because the fees they charge for managing their funds have started to fall?
Because there have been capital outflows, because it hasn't been doing so well in recent quarters, and so it's a change of course they've made to try to turn this situation around. Do you think what he's doing is the right thing and makes more sense than the previous strategy given the current situation and how the markets have been moving in recent years?
Well, you can leave your opinion below in the comments, but without a doubt, I found it very striking and I think we had to dedicate a video to it, because we have talked a lot about this investor and I think it is a fundamental change in his way of investing. So anyway, I hope you found this summary interesting.
I've also tried to leave the letter down here so you can read it at your leisure. I'm also leaving you the latest videos I've been uploading in case you have n't seen them yet, and without taking up any more of your time, I'll say goodbye and see you soon with new content. All the best.
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