Following Terry’s Smith’s publication of his annual shareholder letter today, Laith Khalaf, head of investment analysis at AJ Bell, takes a look at the performance of his flagship Fundsmith Equity fund:
“Fundsmith didn’t have a great year in 2023 relative to the global stock market, and this was the third calendar year of underperformance witnessed by investors. While returns were behind the global stock market last year, in absolute terms they were still strong, so existing investors won’t be too miffed about the fund’s 2023 performance. Terry Smith has a loyal following and a great deal of credit in the bank due to his long-term track record. The problem is Fundsmith Equity is now underperforming on both a three and five year view, which are key periods fund buyers look at, so it might be harder for the fund to find new converts.
Source: FE to 8 January 2024 in GBP
“With assets of £24 billion in his flagship fund, Terry Smith isn’t likely to be too worried as plenty of investors are clearly still keeping the faith. All active managers are of course prone to periods of underperformance, especially those like Fundsmith which have a distinct investment style and run a concentrated portfolio. This is especially true when market leadership is as narrow as it was in 2023.
“The global stock market was heavily influenced by the rising share prices of a small number of large technology companies in 2023, with a lot of that growth built on expectations that artificial intelligence (AI) might deliver another leg in the tech boom. In his shareholder letter Terry Smith questions the AI boom, saying that unlike the market he will be suspending judgement on who the winners will be, if indeed there are any winners at all.
“Fundsmith has an excellent long-term performance record and a well-articulated, cogent investment philosophy, which should provide some reassurance to investors. However Fundsmith’s period of underperformance does highlight why investors shouldn’t put too many eggs in one basket when it comes to active funds. By picking a diversified portfolio of fund managers, others can take up the slack when one falls behind the pack.
“Investors might have to do some detective work to select successful managers though, because the global equity sector isn’t exactly full to the rafters of funds which have proved their ability to beat the global stock market. AJ Bell’s Manager versus Machine report shows that in 2023 only 25% of active managers were able to beat a passive alternative, and that actually falls to 22% on a ten year view. Fundsmith Equity is therefore actually the exception rather than the rule when it comes to long-term outperformance from an active global equity fund. Many of these managers have fallen short of simple index trackers because of an underweight to US equities and large cap companies, and the long running market trend which has seen these areas of the market perform spectacularly well. A reversal of market fortunes would therefore be welcomed by active managers, but with an increasing share of investment finding its way into passive funds which simply plough money into the biggest companies, that tide might prove difficult to turn.”
