AI summary and analysis
The 2022 annual letter puts Fundsmith's pullback into the context of inflation, rising interest rates, the end of easy money, and the revaluation of highly valued growth stocks.
Key points
- Smith acknowledged that Fundsmith fell and underperformed in 2022, with one reason being compression of long-dated equity valuations following the end of the low-rate era.
- He criticized long-term easy money for causing misallocation of capital, believing that rising inflation and interest rates had exposed the fragility of many previously highly valued assets.
- The letter discusses drags on Meta, PayPal, Microsoft, Amazon, etc., distinguishing between business issues and valuation issues.
- He still emphasizes the combination of company fundamentals and free cash flow quality, and does not switch to low-quality cyclical assets just because of a one-year retracement.
- This letter is suitable for explaining Fundsmith's stress-resilience framework: the real test is whether the company can continue to generate cash despite high interest rates and recessionary pressures.