Terry Smith says Unilever PLC has “lost the plot” while PayPal should

Star fund manager Terry Smith has explained his recent purchase of shares in Amazon.com, while blaming Unilever PLC for having “lost the plot” and said PayPal might want to “stick to its knitting” as partial reasons for his Fundsmith Equity fund’s underperformance in 2021.

The near £30bn open-ended fund, which is the UK’s largest retail fund, underperformed global markets in 2021, with a 22.1% return compared to 22.9% for the MSCI World index in sterling terms.

Unilever was one of the top five downward weights on performance, according to the annual letter from Smith to investors.

“Unilever seems to be labouring under the weight of a management that is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business,” he said, pointing to the FTSE 100 company’s decision to stop selling Ben & Jerry’s ice cream in the West Bank last year and saying there were also other “far more ludicrous examples” to illustrate the issue.

He wrote: “A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert – salads and sandwiches).”

Unilever shares were a 7% millstone around the fund’s neck last year, even with dividends reinvested.

The Mauritius-based said the fund plans to continue to keep holding the company, as it has done since 2011, as its strong brands and distribution will “triumph in the end”.

Similarly, PayPal (NASDAQ:PYPL), which detracted 0.7% to the fund, performed poorly “amid concerns that its ambitions to construct a ‘super app’ to drive users to its payment systems might involve some value destruction, brought home by its apparent interest in acquiring social media operator Pinterest.

“We may be wrong but we would prefer if PayPal stuck to its knitting,” Smith said.

Sales during the year included FTSE names such as Intertek, The Sage Group and Intercontinental Hotels Group PLC (LSE:IHG), a notable purchase was Amazon.com Inc in October, after Smith had ignored its dubious charms for a decade.

“I don’t intend to go into the reasoning on every sale and purchase transaction but the purchase of Amazon has attracted a lot of attention as we had previously declined to purchase its shares,” Smith said.

“Rather than give a lengthy rationale I would rather summarise it with a quote from the economist (and successful fund manager) John Maynard Keynes who said, ‘When the facts change, I change my mind.’ Although it could be explained by the simpler aphorism ‘Better late than never’ or at least it will be if our purchase delivers the performance we expect.”

The fund manager also mounted a defence of the fund’s ongoing charges of above 1%.

“We would again caution against becoming obsessed with charges to such an extent that you lose focus on the performance…