- Terry Smith today published his semi-annual letter to shareholders of the Fundsmith Equity fund
- Fundsmith Equity underperformed the MSCI World Index in the first half of 2025
- The fund is now playing catch up to post outperformance this calendar year
- Two Danish companies were major culprits responsible for the underperformance
- Dollar exposure explains weak absolute performance, but not relative underperformance
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“Terry Smith has published his semi-annual letter to shareholders and has reported the Fundsmith Equity fund fell behind the MSCI World Index in the first half of 2025. The fund isn’t managed in relation to any specific benchmark, but the MSCI World Index is probably the most appropriate comparator which investors would reach for as a yardstick. A second possible comparator is the peer group of Global funds, which actually outperformed the MSCI World index by 0.8% (see chart below).
“This suggests global active funds have on the whole had a good first half for performance compared to the index, though Fundsmith Equity hasn’t joined the party. The interruption to the dominance of the Magnificent Seven this year has provided a golden opportunity for active managers to prove their worth, and the outperformance of the Global sector compared to the MSCI World Index implies many have grasped this chance. Our biannual Manager versus Machine report will be available later in July, which will explore active versus passive performance in greater detail.
Source: FE total return to 30 June 2025 in GBP.
“Smith points to two Danish companies, Novo Nordisk and Coloplast, as major culprits responsible for the underperformance in the first half. Novo has been on the end of an extremely steep share price decline in the last year, hampered by US supply issues, disappointing trials data, and fierce competition in the weight loss drugs space. Coloplast has also experienced a significant downdraft after trimming growth guidance on the back of a slowdown in China and operational issues. Smith is clearly frustrated with the previous leadership of both Novo Nordisk and Coloplast, and his trigger finger may be getting twitchy. However, with new leadership coming in at both companies, it makes sense that he wants to wait to hear what they have to say before calling time.
“These companies probably highlight a risk with the patient, quality growth approach employed by Fundsmith. Portfolio companies can often trade at high multiples, which is extremely positive for performance if you catch them on the way up, but it can be painful if they fail to match expectations, as both growth forecasts and stock multiples get simultaneously trimmed. Smith has never pretended to be anything other than a patient investor, and that comes with both rough and smooth elements. On the one hand patient investing does mean less trading, lower fees and a longer-term perspective which can help with identifying winners and riding them. But it does also mean sometimes holding onto waning stocks for longer than you might if you had a perfectly clear crystal ball. The hope in this patient approach is that the good outweighs the bad, and Fundsmith’s long-term track record suggests that in this case, it does.
“However, the last calendar year in which Fundsmith Equity outperformed the MSCI World Index was 2020, and the fund is now playing catch up to produce outperformance in 2025 as a whole. The underperformance experienced in the first half of this year is pretty small, and can be easily overturned in the second half. However, investors shouldn’t bank on performance turning a corner over such a short time frame, especially when there is so much noise in markets created by the new US administration.
“Terry Smith also points to a weak dollar as being responsible for disappointing returns in the first half of this year. It’s important to recognise he’s talking about absolute performance here, not relative to the index, which also has a huge amount of dollar exposure. Fundsmith states the dollar denominated version of the flagship fund returned 6.3% in the first half of the year, and by the same token the dollar denominated version of the MSCI World Index posted a total return of 9.5% over the same period (source: FE). This is all somewhat academic to UK investors though, given they will almost certainly be holding the sterling version of the fund. But a weaker dollar is similarly likely to have dented absolute returns across other global and US fund holdings this year.
“All active managers do of course go through periods of underperformance, and these can be lengthy. Investors can mitigate the damaging effects of underperformance by holding a variety of active funds run by managers with differing investment styles. Of course, eventually there comes a point when investors might decide to cut and run on an active manager. This decision shouldn’t just be influenced by performance, particularly over the short term, but by an assessment of whether the manager is sticking to their stated strategy, whether the strategy is still fit for purpose, and if the fund remains appropriate in the context of the investor’s wider portfolio and risk appetite.
“Ultimately it’s impossible to know whether sticking or twisting is the better approach without the benefit of perfect hindsight. Investors who switch managers at the first signs of underperformance will probably find themselves jumping out of the frying pan into the fire at some point, and missing out on a rebound. On the flip side, those who exercise patience with active managers will inevitably end up holding on longer than they ideally should in some cases. Out of the two approaches the latter, more patient approach is preferable in the round, provided you run a diversified portfolio of active managers so that if one falls behind, the others can pick up the slack.
“Fundsmith continues to execute its clearly communicated strategy. Even though that has delivered underperformance in recent years, it would be much more concerning if Smith had decided to depart from the fund’s established approach. The strategy itself is uncontroversial, with considerable similarities to Warren Buffett’s approach. Given Fundsmith’s relatively high conviction approach to portfolio construction, investment style and stock selection can be expected to produce hefty deviations from the index, both positive and negative. Investors do need to acknowledge this, and be comfortable with it. The fund’s long-term performance numbers do still look good, despite the recent poor run, and Fundsmith enjoys a particularly loyal base of supporters. However, even die-hard fans will be hoping for a turnaround in performance before too long.”
