FundSmith Equity is the UK’s most popular investment fund among Stocks and Shares ISA investors, and with good reason. It’s returned a stunning 596% since launch in November 2010, against 343% for the MSCI World Index.
Yet lately, there have been mutterings. Instead of thrashing its benchmark, Terry Smith’s flagship vehicle has trailed.
Over the last five years, MSCI World returned 82.5%. Fundsmith Equity trailed with 73%. Over 12 months, MSCI delivered 19.6%. Smith managed 16.9%. Has he lost his touch?
Yesterday’s man? I don’t think so
There’s nothing shameful about Fundsmith’s figures. It still beat four out of five actively managed funds, according to AJ Bell. But he’s not shooting the lights out either, and that’s what made his reputation.
I bought Fundsmith Equity on 16 June last year. I saw it as a way of giving my new Self-Invested Personal Pension (SIPP) broad-based US exposure. The fund is up 12.95% since, so I’m not complaining. There were already signs of slippage, but I decided that’s because Fundsmith is only around 10% invested in tech stocks, while the Magnificent Seven mega-caps alone make up 20% of MSCI World.
Was I too cautious though? When investing in the UK, I don’t buy actively managed funds but individual FTSE 100 stocks. So why I didn’t I go the whole hog and buy Nvidia (NASDAQ: NVDA) instead? The AI chip-maker was shooting the lights out at the time, and has done so ever since.
On 16 June, its shares traded at $426. As I write, they’re at $840. That’s a rise of 97.1%, more than seven times as much as Terry Smith gave me.
I’m being daft. Comparing an investment fund, no matter how good, with a cherry-picked, world-beating growth stock is hardly a fair fight. However, Nvidia’s record-breaking run, which saw the company add $272bn to its value in a single day on 22 February, has taught me something.
Tech stocks may have peaked
Ever since I got my fingers burned in the dotcom bubble, I’ve avoided momentum stocks like the plague. I decided the moment I bought them, sod’s law would strike and they’d crash. Nvidia, I felt, was being driven by artificial intelligence (AI) hype that was overdone. But with Q4 revenues up 265% year-over-year, there’s substance here.
Nvidia’s shares had almost tripled in the six months prior to me deciding the rally had gone too far. That didn’t stop them doubling again. Lesson learned. Don’t fear momentum. Embrace it.
I don’t regret buying Fundsmith. It’s delivered a compound return of 11.6% a year for the last five years, when Smith supposedly did badly. Over the long run, it might even beat Nvidia. Who knows?
Naturally, I wish I’d bought Nvidia last June, but that ship’s sailed. It’s now a $2trn company trading at 70 times earnings. It’s gone too far, too fast. I think the US mega-cap mania has run its course, for now.
If I’m right and the share price dips, I’ll pounce. If I’m wrong, I’ll try not to beat myself up about it. I’ve already done enough of that.
