- Terry Smith has issued his annual letter to shareholders
- The Fundsmith Equity fund posted a return of just 0.8% in 2025
- That compares to the MSCI World which returned 12.8%
- Even cash returned five times more than the fund
- Has Smith lost the Midas touch?
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“There’s no dressing it up, 2025 was a grisly year for Fundsmith Equity. The fund didn’t make a loss, but in a strongly rising market, it eked out a return of just 0.8%. As the performance table in Terry Smith’s shareholder letter shows, even cash returned five times more than the fund last year. What Terry Smith says about index concentration and valuation risk is spot on, but investors might still be scratching their heads about why absolute fund performance was so weak last year.
“As Smith points out, one reason is dollar weakness, which reduces investor returns in pounds and pence. That goes some way to explaining lower absolute performance for sure, though the index and other global funds suffered the same currency headwind, so on a relative basis, it’s no excuse. Novo Nordisk has been a headache for Fundsmith, and cost the fund 3% of performance in 2025. Not all of Smith’s stock picks can be expected to work out all of the time, but his concentrated approach means that when they go wrong, they really sting.
“This is now the fifth calendar year of Fundsmith Equity underperforming the MSCI World Index. Since launch in 2011 the fund has still posted strong outperformance, but over the last five and the last ten years, the fund has now fallen significantly behind the index. Or to put it more accurately, the index has pulled far ahead of Fundsmith Equity.
Source: FE, Fundsmith, total return in GBP to 31 December 2025.
Active managers are under the passive cosh
“Fundsmith is by no means alone here. Active managers simply can’t compete with the index or the funds that track them in an era when so much of the market return comes from the biggest stocks within it. AJ Bell’s latest Manager versus Machine report found that over ten years, fewer than a quarter of active managers (24%) had outperformed a passive alternative. In the Global sector inhabited by Fundsmith Equity, just 13% outperformed their passive peers.
“Absent some major rotation in the market, things may yet get worse before they get better. These longstanding market trends are being exacerbated by fund buying patterns which partly stem from the same root cause. The dominance of megacap US stocks is driving better passive performance, leading to more flows into trackers and out of active funds.
“However, that’s not the only reason money is flowing from active to passive. Risk and return are now very much judged with reference to global benchmarks by pension schemes, financial advisers and retail investors alike. There was a time investors were happy when their fund went up, and miffed when it went down. The industry and the internet patiently explained that a fund should really be judged in terms of relative performance, so even a loss could be a good result in a financial market.
“Fast forward to today, and investors have so much information and so many tools at their disposal, they can easily see when a fund is underperforming its benchmark, or its passive peers, and by how much. It doesn’t take a huge leap of logic to start asking why not buy the benchmark itself, especially when it’s so much cheaper.
Has Smith lost the Midas touch?
“As for Fundsmith, the fund has still delivered a handsome return over ten years, and an acceptable return over five. But another year of underperformance will beg the question: has Smith lost the Midas touch? The honest truth is, he never had it. No fund manager can spin straw into gold, and it’s unhelpful to believe they can.
“Since launch, Smith has provided a well-articulated investment strategy, followed it, and provided exceptional absolute returns over the long term, making him a highly successful fund manager who has won the backing of a wide and numerous range of investors.
“For a while Fundsmith’s returns were flattered by low interest rates, which proved a tailwind to Smith’s investment style. Now the shoe is on the other foot as his preference for quality stocks has struggled next to other parts of the market. Across these periods of performance, Smith has been consistent in applying an investment approach which is similar to that employed by Warren Buffett.
“Recent performance has of course been disappointing, but investors should take encouragement from the fact Smith is sticking to his guns, and at some point, performance should turn a corner. That’s not to say such a turnaround is imminent, or that an index fund might not perform better. But it you’re an active fund investor, you have to accept the fallow with the fertile, sometimes for much longer than you might like. That in itself is a hard discipline, and another reason so many investors are turning to passive funds.”
