Terry Smith finally buys Amazon stock for Fundsmith Equity! Here’s why

Having avoided the company for so long, star UK fund manager Terry Smith has finally added Amazon (NASDAQ: AMZN) stock to the portfolio of one of the UK’s most popular funds — Fundsmith Equity. What’s changed his mind?

Why buy Amazon stock now?

In many ways, the purchase of Amazon can be seen as an example of Smith sticking to his knitting. His £27bn-cap, highly-concentrated fund is founded on a clear strategy of buying quality stocks trading at reasonable prices, and then doing nothing.

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Instead of looking for blue-sky shares, Smith buys established ‘winners’ such as market leaders Microsoft, L’Oréal and Philip Morris.

Investors might argue that Amazon’s dominance of online shopping earns it a place at Smith’s table. I’m not so sure. Actually, he’s never been a fan of its sprawling, barely profitable e-commerce division. That said, he has long admired the US giant’s far-more-lucrative Web Services arm.

And now that the latter brings in more revenue than the former, it would seem Smith is more inclined to get involved.

The celebrated stock-picker clearly regards Amazon as also being reasonably valued for the growth on offer. What we do know for sure is that its performance has not been as stellar as other tech-related mega shares in the past 12 months. A 10% rise since last November is dwarfed by Alphabet‘s 77% climb. Tesla is now up 200% over the same time period.

Threat of regulation

The addition of Amazon stock to Fundsmith’s portfolio should not be taken as an indication that the company is now a slam-dunk investment. In fact, I can think of a few reasons why this is actually a brave call by Smith.

One thing that Amazon and other tech titans are wary of is the potential for increased regulation. Recent headlines surrounding Facebook (now Meta Platforms) have only served to fan the flames that the US tech giants wield far too much power. There’s also a possibility that galloping inflation could push consumers and clients to tighten their belts for a while.

Another thing worth pondering is Fundsmith Equity’s sector split. Amazon isn’t currently a top 10 holding. Even so, Smith’s purchase now means that technology shares take up almost 29% of the portfolio.

Potentially even more concerning is the fact that almost three-quarters of holdings are based across the pond. According to the often-cited ‘Shiller ratio’, US stocks have only been more expensive on one occasion in history. This was just prior to the dotcom crash at the turn of the millenium.

I’ve gradually learned to expect corrections and crashes as an inevitable drawback of growing my wealth. This is the Foolish way, after all. That said, I’m not sure I’d be dramatically increasing my US exposure right now, even if Smith is no fan of market timing himself.

Great track record

It remains to be seen whether Amazon stock will do the business for Fundsmith Equity holders like me. However, it’s hard to criticise Smith’s track record to date. Since launching 11 years ago, the fund has delivered annualised gains of 18.3%.

Regardless of whether I agree with his every selection, that sort of performance makes paying up for Smith’s skills and experience worth the risk, in my opinion. I’m happy to continue holding.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Paul Summers owns shares in Fundmsith Equity.The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., Microsoft, and Tesla. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.