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When I first started reading about Terry Smith during covid era, his Fundsmith Equity Fund had comfortably outperformed the benchmark (in this case, the MSCI World Index) over the decade after inception on 1st Nov 2010. But post covid in the last few years, it has underperformed and practically surrendered back most of the earlier outperformance.
FundSmith Equity Fund's outperformance over benchmark (annualized and net of fees):
*End 2018: 6.8% per annum
*Mid 2021: 6.2% per annum
*End 2023: 3.8% per annum
*End 2024: 2.7% per annum
*Mid 2026: 0.6% per annum
Back in 2018, his annualized returns were in the high teens (17-18%) but it has dropped to low teens (13-14%) by 2025/1H26. At the same time, the benchmark MSCI world index's annualized return improved ~200bp from ~10-11% to ~12-13%. So it seems that his drop in returns have contributed a bigger portion than the benchmark's improvement to this "mean reversion".
But to Terry Smith's credit, he has tried to do some explaining in 2025 although his sceptics might like to regard them as "excuses". And to further add to it (his credit), his team has made large changes to their portfolio in 2026 YTD (50% turnover) - (a) disposing off a big number of companies (probably driven by redemption pressures as well), (b) adding exposure to "AI themes" (infrastructure layer) and © special situations investing (eg. turnarounds, temporarily mispricings).
I think Terry Smith has walked his own talk of "Everyone makes mistakes. The question is what are you going to do about it." I will be looking forward to see whether this evolution is effective or not down the road.
Semi Annual Letter to Shareholders 2026
This half yearly letter is lengthier than usual as I am using it to inform you about some changes in the way we manage Fundsmith Equity Fund (‘Fund’).
We run open-ended funds, and you can and increasingly have been taking money out, we suspect mostly to join the exodus from active to passive, or possibly to invest in managers who profess that they understand quality better than we do. They may be right, or they may just be closet momentum investors, which will be fine until it isn’t. However, there will be little point being proved right about the dangers of passive or momentum investment after our Fund
has closed.
It is against this background that we are implementing some adaption in our fund management process.
Our investment mantra is to seek to:
1. Buy good companies
2. Don’t overpay
3. Do nothing
We have no intention of investing in anything other than good businesses whose characteristics are such that they should compound in value over time better than the market average and at reasonable valuations as well as providing some fundamental support for the value of our investment in the event of a market dislocation.
However, it seems clear that the third leg of our strategy which probably needs the most change and our portfolio turnover hit a high of 51% in the first half of this year as we made significant changes in the portfolio. However, you should not expect that level of turnover to become the norm.
1H26 communication: https://www.fundsmith.co.uk/media/lfhpxi...rs-web.pdf
FundSmith Equity Fund's outperformance over benchmark (annualized and net of fees):
*End 2018: 6.8% per annum
*Mid 2021: 6.2% per annum
*End 2023: 3.8% per annum
*End 2024: 2.7% per annum
*Mid 2026: 0.6% per annum
Back in 2018, his annualized returns were in the high teens (17-18%) but it has dropped to low teens (13-14%) by 2025/1H26. At the same time, the benchmark MSCI world index's annualized return improved ~200bp from ~10-11% to ~12-13%. So it seems that his drop in returns have contributed a bigger portion than the benchmark's improvement to this "mean reversion".
But to Terry Smith's credit, he has tried to do some explaining in 2025 although his sceptics might like to regard them as "excuses". And to further add to it (his credit), his team has made large changes to their portfolio in 2026 YTD (50% turnover) - (a) disposing off a big number of companies (probably driven by redemption pressures as well), (b) adding exposure to "AI themes" (infrastructure layer) and © special situations investing (eg. turnarounds, temporarily mispricings).
I think Terry Smith has walked his own talk of "Everyone makes mistakes. The question is what are you going to do about it." I will be looking forward to see whether this evolution is effective or not down the road.
Semi Annual Letter to Shareholders 2026
This half yearly letter is lengthier than usual as I am using it to inform you about some changes in the way we manage Fundsmith Equity Fund (‘Fund’).
We run open-ended funds, and you can and increasingly have been taking money out, we suspect mostly to join the exodus from active to passive, or possibly to invest in managers who profess that they understand quality better than we do. They may be right, or they may just be closet momentum investors, which will be fine until it isn’t. However, there will be little point being proved right about the dangers of passive or momentum investment after our Fund
has closed.
It is against this background that we are implementing some adaption in our fund management process.
Our investment mantra is to seek to:
1. Buy good companies
2. Don’t overpay
3. Do nothing
We have no intention of investing in anything other than good businesses whose characteristics are such that they should compound in value over time better than the market average and at reasonable valuations as well as providing some fundamental support for the value of our investment in the event of a market dislocation.
However, it seems clear that the third leg of our strategy which probably needs the most change and our portfolio turnover hit a high of 51% in the first half of this year as we made significant changes in the portfolio. However, you should not expect that level of turnover to become the norm.
1H26 communication: https://www.fundsmith.co.uk/media/lfhpxi...rs-web.pdf
I am not a certified financial advisor and so nothing of what I say should be construed as financial advice. Please consult a certified financial advisor for advice instead.
