Top investor Terry Smith has revealed that he ditched his fund’s stake in Amazon due to concerns with the company’s grocery business.
In a letter to investors, released yesterday, Smith revealed that the primary catalyst behind Fundsmith’s decision to drop its holding in Amazon last month was due to a “concern over potential capital misallocation”.
The British fund initially invested in Amazon after the company’s boss Andy Jassy outlined a set of principles, which he felt provided “some comfort”. The principles emphasised that investment projects should deliver good returns, serve new areas of the market, have innovative approaches and execute the investment effectively.
But in the letter, Smith said Amazon’s grocery venture “ran counter to all these principles”.
“Where companies choose to invest outside a powerful core franchise in which they already have expertise we believe they are likely to destroy value, and especially so where they are entering a sector which already has poor returns,” Smith explained.
He added that Amazon had already “stubbed its toe” in the grocery retail industry after buying Whole Foods for $13.7bn (£10.6bn) in 2017, which marked the tech giant’s initial steps into the physical retail space.
It is estimated that Smith lost approximately 25 per cent on this particular investment, according to The Times.
The move to offload Amazon shares surprised some investors, after Fundsmith, which is valued at £23.8bn, invested in the firm less than two years ago.
Laith Khalaf, head of investment analysis at AJ Bell, said the very quick sell-out was “an unexpected volte-face, especially in light of the fund’s well-established philosophy of holding companies for the long term.”
“While the quick Amazon sale is undoubtedly a departure from Fundsmith’s core investment philosophy of holding stocks for the very long term, it’s a rare exception, and also shows the manager is willing to be pragmatic rather than dogmatic,” Khalaf said.
Amazon is also rumoured to be eyeing a takeover of Ocado’s grocery technology business, which sent its share price up some 40 per cent at the time.