We are big fans of Terry Smith’s investment approach, but Fundsmith Equity (B41YBW7) has now underperformed for five years running.
Despite ‘buying good companies, not overpaying and doing nothing’, the global equity fund returned just 0.8% in 2025.
That is less than the 4.2% return on cash and considerably less than the 12.8% gain for MSCI World.
As the table below shows, it also brings Fundsmith’s record of underperformance to five years in a row.
Fundsmith performance 201-2025
| Fundsmith | MSCI World | |
| 2025 | +0.8% | +12.8% |
| 2024 | +8.9% | +20.8% |
| 2022 | +12.4% | +16.8% |
| 2023 | -13.8% | -7.8% |
| 2021 | +22.1% | +22.9% |
Source: Fundsmith Equity
WHY IS THE FUND BEHIND?
Terry Smith explains the underperformance of the fund as being due to three factors.
The first is index concentration, and the second is the rise in ‘passive’ investing which as he rightly says is anything but passive.
Regarding concentration, the top 10 stocks in the S&P 500 accounted for 39% of the index’s value and 50% of its performance in 2025.
The same 10 stocks make up the top 10 holdings in the MSCI World index, accounting for 27% of its value.
MSCI World top 10 stocks
| Nividia | 5.5% |
| Apple | 4.9% |
| Microsoft | 4.1% |
| Amazon.com | 2.7% |
| Alphabet A | 2.2% |
| Broadcom | 1.9% |
| Alphabet C | 1.8% |
| Meta Platforms | 1.7% |
| Tesla | 1.5% |
| JPMorgan Chase | 1.1% |
| TOTAL | 27.4% |
Source: MSCI, data correct as of 31 December 2025
Therefore, unless you owned the same stocks in the same proportions you could not match either index.
To his second point, over 50% of US stocks are now owned by index funds and ETFs (exchange-traded funds).
These buy stocks which are winning and sell those which are losing, making them ‘momentum traders’.
According to a recent academic study, the impact of this buying and selling is much bigger than previously reckoned.
Consequently, as markets continue to rise so they create a ‘scarcity’ of stock which drives prices higher still.
The final factor affecting performance was the weak dollar, which impacted the sterling value of the fund’s holdings.
WHAT IS THE SOLUTION?
Investors who expect Fundsmith to change strategy and pile into large, momentum-driven stocks are missing the point.
Momentum strategies and index funds are ten a penny and come with lower fees.
The way in which Fundsmith analyses companies, however, is set to change, with a greater focus on management.
As Terry Smith says, the range of businesses which can be run by an idiot is actually quite limited.
We cannot argue with the fund’s three-step strategy or the quality of the companies it owns.
We are also reassured by the strong repeat performance of long-term holdings such as Microsoft (MSFT) and Philip Morris (PM).
As Smith says, the strong fundamentals of the businesses in the portfolio will shine when shocks arrive or the current ‘extraordinary’ market conditions end.
The ROCE (return on capital employed) of the portfolio is consistently around 30% against 17% for the S&P 500.
Similarly, the gross margin of its holdings is consistently over 60% against 45% for the index.
The same is true of financial strength, with a portfolio interest cover of 29 times versus 9 times.
These are companies which will perform well over market and business cycles, which in the long run is what matters.
Read the latest Fundsmith shareholder letter here: https://www.fundsmith.co.uk/documents/
Disclaimer: This content is for information only and is not investment advice. Always do your own research before investing. Click here to see full disclaimer.
