Investment star Terry Smith attacks Unilever for 'ludicrous' focus on social and environmental issues
One of Britain's best known investors has attacked Unilever for its "ludicrous" focus on sustainability, in a sign of growing City frustration at blue chip companies championing fashionable causes.
Terry Smith, manager of the £29bn Fundsmith Equity fund, said that the consumer goods behemoth has become "obsessed" with its public image and mocked its efforts to imbue brands such as Hellman's mayonnaise with a higher purpose.
He said this overzealous focus on environmental and social issues has proved a distraction at a time when the £101bn maker of products from Vaseline to Marmite is struggling with a falling share price.
In a letter to investors in his fund, Mr Smith said: “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).”
Mr Smith said “the most obvious manifestation” of this was how Unilever-owned Ben & Jerry’s ice cream refused to supply the West Bank.
In July last year, Ben & Jerry’s said it was inconsistent with its values for the product to be sold in the "Occupied Palestinian Territory", sparking a backlash from the Israeli government.
Environmental, social and governance – ESG – considerations are now a key part of the investment agenda, with fund managers falling over themselves to launch sustainable strategies and companies keen to promote their ethical credentials.
Unilever in particular has long seen itself as a leader in this field.
In 2019, its chief executive Alan Jope vowed that “in the future, every Unilever brand will be a brand with purpose” and said he would offload those that “are not able to stand for something more important than just making your hair shiny, your skin soft, your clothes whiter or your food tastier”.
Mr Smith is not the only investor concerned about financial performance at a time when management attention might appear to be elsewhere
In the past year, shares have fallen 9pc when the UK market has risen 11pc, while pre-tax profits have fallen for two consecutive years from €12.4bn (£10.3bn) in 2018 to €8bn in 2020.
Profits were 4pc lower in the first half of 2021 than a year earlier, with the company blaming the drop on higher raw material costs and increased marketing spend. It said overall profit margins in 2021 would be similar to the previous year's.
Unilever sold its PG Tips and Lipton tea brands, excluding its businesses in India, Nepal and Indonesia, for €4.5bn last year to private equity buyers. Sales of tea had been declining in recent years as consumers increasingly opted for coffee.
Mr Smith - the son of an East End lorry driver who rose to become one of the country's best-known stock-pickers - still owns Unilever shares, despite underwhelming returns.
He said: “Although Unilever had by far the worst performance of our consumer staples stocks during the pandemic, we continue to hold the shares because we think that its strong brands and distribution will triumph in the end.”
Unilever is also owned by Nick Train, another star fund manager known for backing companies with strong brands in reliably growing industries.
Writing to investors in November, he also declared his disappointment in performance but said he continued to support the company.
Mr Train said: “Unilever comprises a collection of some great, some very strong and, yes, some mediocre consumer brands – all sold across a truly global footprint with a uniquely high exposure to emerging markets.
"This combination is not in favour currently and understandably so.”
He added that Unilever was a good company to own for income seekers. Shares currently yield around 4pc.
Mr Train said Unilever could yet surprise investors with growth from new business lines because it is partnering with hundreds of technology firms exploring areas such as plant-based proteins and biotechnology for cleaning.
He said: “Who is to say this company won’t be able to sustain that rate of underlying cash return growth to shareholders, with these and other initiatives? It has done so for over half a century.”
Mr Smith, who is based in Mauritius, has sold out of three British companies in the past 12 months - Sage, Intertek and InterContinental Hotels - and now has just 4.7pc invested in UK-listed shares.
His largest investments are in American technology stocks, such as Microsoft, Meta Platforms (formerly Facebook), and PayPal.
He added Amazon to his portfolio for the first time last year, defending a decision to buy the stock after previously declining to do so by saying “'better late than never', or at least it will be if our purchase delivers the performance we expect”.
The fund manager also dismissed criticism of his fund's charges of more than 1pc as "twaddle" and said investors should instead focus on his performance
His flagship strategy returned 22pc in 2021 compared with 23pc for global stock markets, but is up 571pc since its launch in 2010 compared to a 287pc rise in shares.
Accounts filed in December showed that Mr Smith was in line for an annual payout of up to £150m.
Unilever declined to comment.
