Fundsmith Equity, managed by star fund manager Terry Smith, grew to a staggering £28billion after smashing the market in the years after launching in 2010. However, it has now trailed its benchmark index for the last five years.
Laith Khalaf, head of investment analysis at AJ Bell, said any Isa investor holding Fundsmith Equity must ask themselves this question: “Should I stay or should I go?”
Millionaire stock picker Terry Smith became the undisputed star of the UK fund management industry after Neil Woodford, once the biggest star of them all, crashed and burned.
Since 2010 Fundsmith Equity has delivered a total return of a staggering 596 percent, much higher than the 343 percent return on the MSCI World Index over the same period.
Yet lately it has fallen behind.
Smith’s flagship fund has returned 16.9 percent over the last 12 months and 73 percent over five years.
Now that’s not bad. However, the MSCI World returned 19.6 percent and 82.5 percent over the same periods.
Khalaf said four out of five actively managed funds underperformed the global stock market over the same period.
However, investors expect more of Terry Smith, given his stellar reputation. He’s now worth an estimated £300million and lives a luxury life in tropical Maritius.
So has success gone to his head, like it did with Woodford?
The answer lies with the runaway success of the so-called Magnificent Seven US tech stocks – Amazon, Apple, Google-owner Alphabet, Facebook-owner Meta, Microsoft, silicon chip maker Nvidia and Elon Musk’s Tesla.
They now make up a staggering 20 percent of the entire global stock market, and even Terry Smith cannot keep pace, Khalaf said.
Fundsmith does include Microsoft and Meta in its top 10 holdings. However, it mostly holds companies operating in less whizzy sectors that haven’t done as well.
Khalaf says we must view Fundsmith’s performance in context. “It might have underperformed the MSCI World lately, but has still comfortably beaten the average global fund.”
Over the last five years, Fundsmith investors have got the equivalent of an compound annual return of 11.6 percent. “That’s hardly a slap in the face,” Khalaf says.
While Neil Woodford came unstuck after investing in ever riskier companies, Smith is sticking to his guns. “There are no signs of Fundsmith deviating from its well-articulated investment philosophy.”
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In Smith’s own words, this means buying high-quality businesses whose competitive advantages are difficult to replicate, offer a high degree of certainty of growth, and are resilient to change.
These principles have delivered long-term success over but Khalaf says: “Investors should always expect periods of underperformance, and these spells can be lengthy.”
So should Fundsmith investors jump ship? Khalaf doesn’t think so. “You might well miss out on a bounce back, or simply hop out of the frying pan and into the fire.”
And my own view?
While I can’t give financial advice, I can say that nobody should put all of her money into a single fund, no matter how successful. Always diversify to spread risk.
I can also say that I bought Fundsmith Equity for my own pension on 16 June last year. It’s up 12.95 percent since, and I’m not complaining.
I bought it precisely because Smith is not fixated on the Magnificent Seven. I’m worried that US tech stocks look overvalued now, and could crash. Apple and Tesla are already struggling.
Fundsmith may shine again when investment trends change, and that’s why I bought it. But as ever with investing, there are no guarantees. Even for Terry Smith.
