In his annual letter to investors, Fundsmith manager Terry Smith said his £23.7 billion ($30 billion) fund had dropped Estée Lauder while calling its French competitor L’Oréal a “long-term favorite” of the group. 

“We sold our stake in Estée Lauder whose mishandling of the demand/supply situation in China following reopening post-Covid and in the travel retail market revealed serious inadequacies in its supply chain,” Smith—who is estimated to be worth more than $1 billion by Bloomberg’s Billionaire Index—said in his letter.

Estée Lauder was the biggest detractor from Fundmsith’s performance last year, after its stock dropped more than 47% in 2023, continuing its fall from the year before.

Shares in the Fortune 500 beauty company plunged in November after the group slashed its full-year profit outlook on the back of stuttered store reopenings in Asia. 

The group said “slower growth in overall prestige beauty in Asia travel retail and in mainland China” would force it to cut profit expectations by 35%.

It added that the conflict between Israel and Hamas in Gaza would hit earnings to the tune of nearly $80 million. 

Disruption in China

The Chinese market, once a popular and profitable one for major beauty brands, has struggled since the COVID-19 pandemic.

China’s extended lockdown, relative to the rest of the world, put the brakes on spending and carried a hangover into 2023. 

Estée Lauder added last year it was bracing for a dropoff in travel demand under the expectation that Chinese shoppers will return to domestic shopping.

However, that switch isn’t happening as quickly as the group would like.

L’Oréal and Estée Lauder have bet big on the growth of China’s $70 billion cosmetics market, leaving both vulnerable as that market slows down.

Estée Lauder’s sales in Asia/Pacific dropped 6% in the third quarter of 2023, while L’Oréal’s sales in North Asia dipped 4.8% over the same period.

Smith, however, said L’Oréal was now a “long-term favorite” of the fund, arguing its handling of the China market contrasted “sharply” with Estée Lauder’s. 

L’Oréal was one of the top contributors to Fundsmith’s equity fund last year, following European pharma darling Novo Nordisk and tech groups Meta and Microsoft in driving the fund’s double-digit (12.4%) growth.

Investors appear more confident in L’Oréal’s long-term prospects in North Asia, which makes up about a fifth of its sales, than in Estée Lauder’s.

L’Oréal has also enjoyed strong growth in the U.S. and Europe. 

Equities portfolio manager Nick Frelinghuysen of Chilton Trust explained to Fortune last July that L’Oréal was a good investment bet in a downturn thanks to its breadth of offerings, high repurchase rate, and brand loyalty. 

The group increased in value by more than 30% last year and enjoyed a strong rally at the end of 2023 just as Estée Lauder’s stock faced its biggest challenges.

A representative for Estée Lauder didn’t immediately respond to Fortune’s request for comment. 

Smith pushes back on AI craze

It hasn’t been a rosy year in business for Smith himself, who sought to head off disquiet among investors who feel they may have missed out on a once-in-a-generation opportunity in AI by sticking with Fundsmith.

Fundsmith’s Equity Fund underperformed its benchmark MSCI World Index for the third year in a row, growing by 12.4% last year compared with the index’s 16.8% growth.

However, Smith’s fund has outperformed the benchmark on an annualized basis since its inception in 2010. 

Fundsmith’s underperformance might have resulted from its hesitation to jump on the AI bandwagon last year.

The boom in popularity around the technology saw piles of fresh liquidity pour into U.S. tech last year, helping the Nasdaq add 24% in value last year.

But Smith has gained a reputation for picking a selection of stocks intended to succeed over the long term, with a good track record of providing a return on capital.

This has left him vulnerable to missing out on hype-driven jumps in growth stocks.

While he invests in a few of the “Magnificent Seven” stocks, Smith said he “would not be willing to take the risk” of owning them all, “even if all of them fitted our investment criteria.” 

In that same light, Smith also questioned the rise of Nvidia, which tripled in value by 2023 as investors swarmed to cash in on demand for its generative AI-powering semiconductors. 

Smith instead asked investors to consider early leaders in previous technological booms, like Myspace with social media or Yahoo with search engines. His comments echo financial advisor Nigel Green, CEO of DeVere Group, who warned in August that hype around AI stocks was reaching “fever pitch.”