Why Terry Smith Changed His Investment Strategy

During their recent episode, Jake Taylor and Tobias Carlisle discussed Why Terry Smith Changed His Investment Strategy. Here’s an excerpt from the episode:

[Tobias] Yeah, I’ve got some quotes here. Yeah, he (Smith) talks about most value investors, quality investors want to stay put, but he says there’s little point being proved right about the dangers of passive or momentum investment after our fund is closed. And so they’re making some changes.

He’s taking account of momentum now in buying these stocks. And the result of that is he’s exited a list of these fairly well-known quality companies. I don’t, Esselor, Luxottica, Intuit, Louis Vuitton, Magnum Ice Cream, Mettler, Toledo, Nike, Novo Nordisk, Otis, Unilever.

And he’s bought stakes in Atlovan, Mastercard, Netflix, TSMC, Uber, Yum Brands, a few of these sort of names. I think that he’s explicitly taking into account fund flows, which I sort of think sometimes is a little bit, that’s, I don’t know if you’re allowed to do that. I don’t know if you’re allowed to talk about that as a manager.

[Jake] Yeah. What do you think? I mean, listen, his point about like, sure, I was all philosophically correct, but none of my clients stuck around.

So what did it matter? That’s a real thing. And that’s why I often think that professional investing is harder than not being a professional because you not only do you have to manage your own psychology, but you often have to be matching or manager your LP or client basis psychology as well.

And that can be really hard. So I mean, maybe he’s practically doing the right thing for his business, even though it feels a little like capitulation to me.

[Tobias] I’d rather lose half my clients than half my clients’ money.

[Jake] Yeah, he’d rather not lose half his clients and potentially lose half their money. Maybe I’m being unkind there, but it does feel that way, doesn’t it?

[Tobias] We need to be careful discussing another manager because I have a great deal of respect for Terry Smith. He’s been doing it for a very long period of time. He’s been very successful.

I think that he knows what he’s doing. He’s a good investor. I think that there’s been a lot of pain in value and quality, and you can argue about how much quality and how much value, but he’s somewhere in that continuum.

Not that they’re not distinct at all. They’re together. He’s more quality than value.

I think I’m more value than quality, but we’re on the same continuum. I probably flatter myself by saying that. That’s what I think.

And value’s been underperforming for a long time, so I’m inured to it a little bit. Quality has been pretty handy until lately, and so on that, I had another tweet that I saw.