A disappointing first half saw the Fundsmith Equity fund report a 3% fall compared with a 11% gain for the MSCI World index, which means the £12 billion global equity fund now lags its benchmark over three, five and 10-years.
It is worth pointing out the fund remains ahead of the benchmark since launching nearly 15 years ago, having delivered cumulative returns of 593% compared with 530% for the benchmark.
Founder Terry Smith believes it is time to make changes to the strategy to improve performance and stop outflows from the fund.
When fund managers announce a change of strategy it can cause apprehension and prompt questions about future returns and risks.
For investors, meaningful changes in strategy are an opportunity to review how a fund fits into their overall portfolio and consider if it remains appropriate.
In his half year report, Smith goes into some detail on the market backdrop and the reasoning which prompted the changes, but essentially, he is arguing the growth of passive ETFs (exchange traded funds) has changed the way in which stock markets work.
One example sums up the problem for Smith: Vanguard’s UK All Share tracker has made 66% over the past five years, trouncing the average UK equity fund’s return of just 32%.
This has prompted more money to switch from active to passive funds. Investors that make the switch will be giving up the possibility of outperforming the market, but because of how much active managers have underperformed tracker funds in recent years, many seem to feel the risk is not worth the reward.
What has changed and should investors be worried?
To adapt to market conditions, Smith has dropped his ‘do nothing’ mantra and and instead changed over half his portfolio in the first half of 2026.
Smith insists the team will continue investing in ‘good’ companies while seeking not to overpay for them but “we will take more account of momentum — both fundamental and share price — in our investment decisions.
“In particular, we will be much less willing to deploy the time-honoured technique of buying quality companies when they hit a glitch,” added Smith.
In the current momentum driven market, where investors are piling quickly into the same investment, Smith argues that trying to buy quality companies in a ‘glitch’ is like trying to catch the proverbial ‘falling knife’.
It is not the first time Smith has tinkered with the strategy; around two years ago, he tweaked the sell discipline to allow him to hold companies for longer if they showed signs of momentum.
However, the latest change suggests the fund will more actively trade positions to reflect greater volatility in equity markets. Whether Smith will be successful in adapting to these conditions is an open question.
It also raises questions around some of Fundsmith’s values which include ‘No Market Timing’, ‘No Index Hugging’ and ‘No Trading’.
A dozen buys
During the first half of the year, the fund started buying stakes in 12 companies and exited 13. One surprising addition is contract chipmaker TSMC (Taiwan Semiconductor Manufacturing Company).
In the past, Smith has argued that he doesn’t own Nvidia, one of TSMC’s customers, because of its cyclicality, lack of predictable earnings and vulnerability to an economic downturn.
Smith likes companies with identifiable ‘moats’ and he believes TSMC’s moat is related to its ‘unmatched technological lead’ in making the most advanced chips. Smith has also previously questioned the sustainability of the AI boom and described parts of the sector as being in an ‘extreme bubble’. So far, he’s not made clear what effect a potential bubble bursting would have for TSMC.
The holding in TSMC is already popular, with research by Bank of America highlighting it as the most widely held stock by global funds, appearing in 92% to 95% of funds.
Two other perhaps surprising additions are fast-food KFC and Taco Bell owner Yum! Brands, as well as discount retailer and owner of TK Maxx, The TJX Companies.
Both companies operate in industries which are more economically sensitive than the typical Fundsmith holding.
TJX appears to be a steady growth company with earnings per share growing around 14% a year on average over the last two decades.
Yum! Brands is undergoing a global franchise expansion and sees growth opportunities across emerging markets.
For now, it’s impossible to tell how Fundsmith’s strategy change will play out. But investors may start considering is if the new holdings mean the fund is taking a different role in their portfolio.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
