Fundsmith Equity is the UK’s most popular fund worth more than £24bn, but as it underperforms again is it finally time for me to sell?
Following the disgrace of Neil Woodford, Fundsmith manager Terry Smith is now the undisputed number one UK star fund manager. Yet he’s struggling.
Smith was ahead of the game when launching Fundsmith Equity in 2011, offering a simple philosophy rather than blinding investors with science: “Buy good companies, don’t overpay, then do nothing.” He also shunned fund management bad habits, such as high upfront fees, performance charges, market timing, hugging and index too closely and complex short-term trading strategies that all too often backfire.
Smith has slipped
Early performance was fantastic. Since launch in 2011, Fundsmith has delivered an annualised return of 15.1%. That compares to 11.5% on its benchmark index, MSCI World. Over the period, that’s the difference between 549.7% and 316.7%.
Following publication of Smith’s annual shareholder letter yesterday (9 January), Laith Khalaf, head of investment analysis at AJ Bell, examined the recent Fundsmith performance and wasn’t impressed.
In 2023, the fund returned 12.3%. That isn’t bad, but its benchmark delivered 16.8%. Fundsmith has now underperformed in one, three and five years. Past performance isn’t everything. Yet Smith has lived by his stellar performance figures, now he may die by them. I’m talking metaphorically, of course.
| 2023 | Three years | Five years | 10 years | |
| Fundsmith Equity | 12.4% | 15.7% | 69.8% | 296.2% |
| MSCI World Index | 16.8% | 27.9% | 76.6% | 195.3% |
In absolute terms, Fundsmith is still doing okay. As Khalaf pointed out: “Smith has a loyal following and a great deal of credit in the bank due to his long-term track record.”
But with the fund underperforming over those key periods for investors, he may struggle to win new converts, Khalaf added.
When I transferred three legacy pensions into a self-invested personal pension (SIPP) last summer, one of the first things I did was put a chunk into Fundsmith Equity on 6 June. My stake is up a meagre 2.72% since then.
I prefer buying my own stocks
I invested most of the rest in UK stocks, and five I bought at the same time have romped ahead of Fundsmith. My returns from housebuilder Taylor Wimpey, fund manager M&G, private equity specialist 3i Group, Legal & General Group and Lloyds Banking Group are all into double digits.
Even my humble FTSE All-Share tracker has smashed Smith, up 7.75%. Among my summer trades, only Unilever has done worse. Fundsmith’s underperformance is particularly shocking because it’s 67.3% invested in the all-conquering US.
So am I selling? Not yet. Recent US performance was turbo-charged by the ‘Magnificent Seven’ US mega-tech stocks. Of those, only two appear in Smith’s portfolio, Microsoft and Meta. By contrast, all seven appear the MSCI World top 10. They now look potentially overvalued to me.
Smith suffered because he shunned red hot tech to invest in slow burners like Stryker, L’Oréal, LVMH and Philip Morris. They’re out of favour but investing is cyclical and that could quickly change.
I already have exposure to US tech, through tracker L&G Global Technology. Smith gives me diversification into stocks I wouldn’t otherwise hold. I’ll keep a watching brief on Fundsmith, but any future funds are going straight into UK shares.
