Ithy - Navigating Fundsmith Equity in May 2025: A Comprehensive Outlook

Key Highlights for Fundsmith Equity in May 2025

Recent Underperformance: Fundsmith Equity has underperformed the MSCI World Index for four consecutive calendar years through 2024, continuing into early 2025. This has led to concerns among some investors and analysts.
Long-Term Track Record Remains Strong: Despite recent setbacks, the fund boasts a top-quartile 10-year performance of 256.8% in the IA Global sector and has consistently beaten its benchmark since its inception in November 2010 with annualized returns of 12-15%.
Core Investment Philosophy Unchanged: Terry Smith, the fund manager, continues to adhere to his "buy good companies, don't overpay, and do nothing" strategy, focusing on high-quality global equities with sustainable long-term growth.

As of May 2025, investors are keenly evaluating Fundsmith Equity's suitability as an investment choice. The fund, managed by veteran stock picker Terry Smith, has garnered a reputation for its distinctive "quality-growth" investment strategy. However, recent performance trends have sparked debate and raised questions about its immediate future prospects.

A Look at Recent Performance Trends

The Challenge of Outperforming the Market

Fundsmith Equity has faced a period of underperformance, specifically for the fourth consecutive calendar year through 2024, extending into early 2025. In 2024, the Fundsmith Equity T Class Accumulation fund returned 8.9%, significantly trailing the MSCI World Index (net) which grew by 20.8%. This divergence has been a point of concern, especially given the fund's historical track record of strong outperformance.

The underperformance has been attributed, in part, to the fund's investment style and its concentrated portfolio. Fundsmith's strategy involves investing in a relatively small number of high-quality companies, which can lead to significant deviations from broader market returns, especially when certain market segments dominate performance. For instance, the strong performance of a concentrated group of US technology majors, often referred to as the "Magnificent Seven" (which include companies like Nvidia and Apple, largely absent or underweighted in Fundsmith's portfolio), has made it particularly challenging for active managers like Terry Smith to keep pace with the MSCI World Index.

While the fund holds some growth-focused companies such as Novo Nordisk, Microsoft, and Meta in its top holdings, its decision not to include trailblazers like Nvidia has impacted its recent performance. Furthermore, specific stock movements, like the fall of Novo Nordisk and Stryker in December 2024, also contributed to the fund's rough patch.

Terry Smith's Investment Philosophy: Steadfast Amidst Volatility

The "Buy Good Companies, Don't Overpay, Do Nothing" Approach

Terry Smith's investment philosophy for Fundsmith Equity is famously distilled into three core principles: "buy good companies, don’t overpay, and do nothing." This strategy emphasizes long-term investment in businesses with strong fundamentals, high returns on capital, and sustainable competitive advantages. The fund focuses on companies that can compound earnings over time, avoiding speculative sectors and short-term trading strategies.

Despite the recent underperformance, Smith has urged investors to take a "longer-term look" at the fund's performance, reiterating that outperforming the market every year is not a guarantee. This adherence to a disciplined, quality-growth approach, even during periods when it's out of favor, is a hallmark of Fundsmith's strategy. The fund's concentrated nature, typically holding 20 to 30 stocks, means that the performance of individual holdings can have a more pronounced effect on the overall fund's returns. This concentration is a deliberate choice, aiming for higher conviction in selected businesses.

Terry Smith speaking at an event, likely an annual shareholders' meeting.

Terry Smith, the acclaimed founder of Fundsmith, addressing an audience.

Portfolio Adjustments in 2024

While the core strategy remains consistent, Terry Smith did make some notable investment changes in 2024. The fund sold out of three companies: Diageo, McCormick, and Apple. Such changes, while not frequent, underscore Smith's willingness to eject companies from the portfolio if they start to lose direction or no longer meet the stringent investment criteria. For example, issues within Estée Lauder's supply chain hinted at a potential ejection from the portfolio if the company cannot turn the situation around.

The fund's relatively low allocation to the Information Technology sector (around 12.6%) in late 2024, especially in the context of the burgeoning AI boom, has been a point of discussion. This conservative positioning reflects Smith's focus on established quality rather than chasing rapidly appreciating, potentially overvalued, tech stocks.

Long-Term Performance and Investor Confidence

A Decade of Strong Returns

Despite the recent short-term underperformance, Fundsmith Equity's long-term performance remains robust. Since its inception in November 2010, the fund has delivered impressive annualized returns of 12-15%, consistently outperforming its benchmark. It holds the position of the second-best performer since its inception in the Investment Association Global sector, surpassing the sector average by a significant margin.

This strong long-term track record provides reassurance to many investors and financial advisors who continue to stick with the fund. Fundsmith's ability to generate life-changing returns over extended periods has cultivated a loyal investor base, with many expressing satisfaction with their investments. The fund's consistent focus on high-quality companies with strong balance sheets that are expected to compound in the long term is often cited as a key reason for continued confidence.

Analyst and Advisor Perspectives

Analyst opinions on Fundsmith Equity in early 2025 are varied. While some express concern over the prolonged underperformance, others believe the fund is poised for a resurgence. Experts note that the fund's strategy, which prioritizes quality and long-term compounding, may face headwinds during periods dominated by speculative growth stocks or value plays, neither of which perfectly aligns with Smith's style. However, many remain confident in the efficacy of Smith's strategy over the long run, emphasizing that there are "no obvious challenges to the quality of the businesses Fundsmith holds."

The decision by Morningstar to downgrade Fundsmith Equity to bronze, citing performance issues, is a notable development. However, even with this downgrade, many discretionary fund managers (DFMs) are choosing to maintain their allocations to Fundsmith, signaling a continued belief in its long-term potential. This suggests that for many professional investors, the current underperformance is viewed as a cyclical phase rather than a fundamental flaw in the investment approach.

The Fundsmith Annual Shareholders' Meeting 2025

Insights from Terry Smith

The Fundsmith Annual Shareholders' Meeting in February 2025, introduced by Ian King, provided a fresh opportunity to understand Terry Smith's perspective on the fund's performance and outlook. These meetings are crucial for investors to gain direct insights into the management's thinking and to hear their rationale for the investment decisions and performance. Terry Smith’s address during the meeting, also filmed on March 24, 2025, discussed his quality-growth investment strategy and outlook for the future.

Discussions from the meeting highlighted the challenging market conditions in 2024, where the fund significantly underperformed the market. Smith acknowledged the 8.9% return for the T class in Sterling with dividends reinvested, compared to the market's 20% gain. He reiterated that outperforming the market every year is not an expectation and that 2024 was particularly challenging. Investors should consider the information from this meeting to gain a deeper understanding of the fund's current positioning and the manager's expectations.

This video features Ian King introducing the 2025 Fundsmith Annual Shareholders' Meeting, offering key insights from Terry Smith.

Comparative Analysis of Fundsmith Equity's Strengths and Weaknesses

A Balanced View for May 2025 Investment Decisions

To provide a more holistic view, let's consider Fundsmith Equity's key attributes through a radar chart, comparing its perceived strengths against potential areas of concern from an investor's perspective in May 2025. This chart is based on an opinionated analysis drawn from the provided sources and aims to illustrate the trade-offs involved.

The radar chart visually represents Fundsmith Equity's standing in key areas. "Long-Term Outperformance" and "Investment Philosophy Adherence" score high, reflecting the fund's historical success and consistent strategy. "Current Market Adaptation" and "Recent Relative Performance" are lower, indicating the challenges faced in the prevailing market conditions. "Diversification (Concentration Risk)" is moderate, acknowledging the inherent trade-off of a concentrated portfolio. "Cost-Effectiveness" is also relatively high, reflecting the fund's commitment to reasonable costs. This chart offers a snapshot of the fund's profile for investors in May 2025.

Investment Considerations for May 2025 Onwards

Evaluating Fundsmith Equity for Your Portfolio

When considering Fundsmith Equity for your portfolio in May 2025 and beyond, several factors warrant consideration:

Investment Horizon: Fundsmith's strategy is inherently long-term. Investors with a short to medium-term horizon might find its recent underperformance unsettling. However, those looking for long-term compounding growth, aligned with Terry Smith's buy-and-hold approach, may still find it appealing.
Risk Tolerance: While the fund invests in high-quality companies, its concentrated nature means that the performance or underperformance of a single stock can have a greater effect on the fund's price. Investors should be comfortable with this level of concentration risk.
Diversification: As with any single fund, Fundsmith Equity should ideally be part of a diversified portfolio. It is not a "silver bullet" and should be complemented by other investments to mitigate risks and potentially capture opportunities in different market segments or asset classes.
Market Environment: The fund's performance is susceptible to prevailing market styles. If "hyper-growth" stocks or specific sectors continue to dominate, Fundsmith may continue to face headwinds. Conversely, a shift back to favoring quality and stable growth could see its performance rebound.

Key Performance Metrics and Data Points

To provide a concrete overview of Fundsmith Equity's performance and characteristics, here's a summary table based on available data as of May 2025:

Metric	Value (as of May 2025)	Context/Notes
Fund Size	£23.27 billion - £25.5 billion	One of the largest funds in the UK.
Launch Date	November 2010	Long operational history.
Annualized Return (Since Inception)	12-15% p.a.	Consistently beaten benchmark over the long term.
10-Year Performance (IA Global sector)	256.8% (top-quartile)	Demonstrates strong long-term outperformance.
2024 Return (T Class Accumulation)	8.9%	Underperformed MSCI World Index (20.8%).
YTD 2025 Return (I Acc Class, as of 20/05/2025)	-1.42%	Continues to face challenging conditions.
Morningstar Rating	Bronze (downgraded)	Reflects recent performance concerns.
Number of Holdings	Typically 20-30 stocks	Concentrated portfolio approach.

This table provides a snapshot of Fundsmith Equity's key performance indicators and operational details, offering a clear reference for investors assessing its current standing.

Frequently Asked Questions (FAQ)

Is Fundsmith Equity suitable for all investors?

Fundsmith Equity is generally suited for investors with a long-term investment horizon (5 years or more) who understand and are comfortable with its concentrated, quality-growth investment style. It may not be suitable for those seeking short-term gains or with a low tolerance for periods of underperformance relative to broader market indices, particularly during times when growth stocks are out of favor.

Why has Fundsmith Equity underperformed recently?

Recent underperformance has been primarily attributed to its investment style not aligning with the market's strong focus on a few very large technology stocks (like the "Magnificent Seven," including Nvidia and Apple) which have seen exceptional growth and significant weightings in the MSCI World Index. Fundsmith's disciplined approach of not overpaying for companies, even high-quality ones, means it may not hold these highly valued stocks or hold them in smaller proportions.

Does Terry Smith's investment strategy remain consistent despite recent performance?

Yes, Terry Smith continues to adhere to his core investment philosophy: "buy good companies, don’t overpay, and do nothing." While he has made some portfolio adjustments, such as selling Diageo, McCormick, and Apple in 2024, these are generally in line with his long-term focus on investing in high-quality, resilient businesses. He encourages investors to maintain a long-term view.

What is the significance of the 2025 Fundsmith Annual Shareholders' Meeting?

The annual shareholders' meeting, held in February 2025, provides a crucial forum for Terry Smith to directly address investors, discuss the fund's performance, explain market conditions, and reiterate his investment outlook. It's an important event for transparency and for shareholders to gain insights directly from the fund manager.

Is Fundsmith Equity a good choice for a Stocks and Shares ISA in 2025?

Whether Fundsmith Equity is a good choice for a Stocks and Shares ISA in 2025 depends on an individual's financial goals, risk tolerance, and existing portfolio. While it has a strong long-term track record, its recent underperformance suggests that investors should consider if its specific investment style aligns with their expectations for the current market environment. It's advisable to combine it with other investments for diversification and to consult with a financial advisor.

Conclusion

Fundsmith Equity, under the stewardship of Terry Smith, presents a compelling case for long-term investors focused on quality-growth equities. While the fund has experienced a period of underperformance relative to the broader MSCI World Index, particularly in 2024 and early 2025, its long-term track record remains exceptional. The core investment philosophy, centered on identifying and holding high-quality businesses, has not wavered. For investors considering Fundsmith Equity in May 2025, the decision hinges on their investment horizon, risk appetite, and belief in the fund's disciplined, long-term approach. It is crucial to view the fund not as a guaranteed short-term outperformer, but as a potential compounding engine for significant wealth creation over many years, ideally as part of a well-diversified portfolio.