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The ‘English Warren Buffett’ says alcoholic beverage makers like Diageo (NYSE: DEO) could face nasty hangover

by
Nathan Crooks
Quantfury Team
beverages

Terry Smith manages the largest investment fund in the UK, where he’s known as the “English Warren Buffett” because of his long-term, buy-and-hold strategy that’s based on the simple refrain of “buy good companies, don’t overpay, and do nothing.” That’s why it’s notable when he does do something, and he just dumped alcoholic beverage company Diageo (NYSE: DEO) after holding it for nearly 15 years.

Citing what he said were indications of problems with new management at Diageo—known for a number of big brands including Johnnie Walker Scotch, Tanqueray gin and Guinness beer—Smith told investors in an annual letter that the entire booze sector is beginning to see headwinds from weight loss drugs like Novo Nordisk’s (NYSE: NVO) Wegovy and Eli Lilly’s (NYSE: ELI) Zepbound. People on the treatments can’t consume as much alcohol as they might usually because of nausea and reduced appetite, and there are growing signs that the medicines might have a much broader impact on demand.  

“It seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption,” he wrote. 

Healthier lifestyles

It’s not just the weight loss drugs that could be bad news for brewers, meanwhile, with growing evidence that younger generations are eschewing alcohol altogether amid a focus on healthier lifestyles. Shares of big brewers like Anheuser-Busch InBev (CBOE: ABI) have declined over the past month, especially after the US Surgeon General said alcoholic beverages should carry warnings about the cancers they can cause. Diageo stock has gotten off to a rocky start this year, falling 6.3%. It’s down more than 45% from an all-time high in 2021, when many drowned their pandemic woes at home, in the bottle. 

Smith is not teetotaling on the entire sector, however, and he’s known to hold onto companies he believes in, even through the downturns. That’s why he said his flagship Fundsmith Equity Fund is keeping its shares in Brown-Forman (NYSE: BF)—the maker of Jack Daniel’s whiskey—despite it being one of its worst performers this year after falling nearly 40%. 

“Retaining Brown-Forman keeps a foothold in what has long been a sector with good business characteristics and which has the potential benefits of family control, which can promote good long-term decision-making, and a larger bias towards premium spirits than Diageo,” he wrote. “It is a company which survived Prohibition so we hope there is literally something in the DNA to help with these adverse circumstances.”

Longer-term perspective

The Fundsmith Equity Fund—which has $28 billion of assets—just saw its fourth consecutive year of underperformance, rising a paltry 8.9% compared to a gain of 20.8% across the broader MSCI World Index. Smith urged investors to take a longer-term perspective and said they shouldn’t expect outperformance in any given year. He noted that the fund had returned 607% since its inception in 2010 compared to a gain of 403% for the broader market.

In other moves this year, Smith said the fund sold spice maker McCormick (NYSE: MKC) on inflation concerns and tech giant Apple (NASDAQ: AAPL) after a solid run-up from its first purchases at $156 a share. It started buying Swedish industrial company Atlas Copco (STOCKHOLM: ATCO) and chipmaker Texas Instruments (NASDAQ: TXN). 

“What we are seeking to achieve with the Fundsmith Equity Fund … is to produce a high likelihood of a satisfactory return rather than the chance of a spectacular return which could be spectacularly good or spectacularly bad,” Smith continued. When it comes to alcohol, that means a flight to quality; even if people end up drinking less, they may turn to more premium offerings when they do choose to imbibe. That’s solid advice any investor can say cheers to.