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Terry Smith, one of the UK’s most renowned stockpickers, failed to beat returns on cash last year and told investors in his flagship fund that outperforming the market “was challenging once again in 2025 “.
In his annual letter to investors in Fundsmith Equity on Thursday, Smith said that “outperforming the market or even making a positive return is not something you should expect from our fund in every year”.
The £16bn fund delivered a total return of 0.8 per cent in 2025, underperforming the MSCI World index’s 12.8 per cent and the 4.2 per cent return from cash. The average rival fund delivered 10.8 per cent, according to Investment Association categorisation cited by Smith in the letter.
However, over the longer term, Smith noted that the fund, launched in 2010, has delivered 1.7 per cent a year more than the index. Fundsmith Equity invests in so-called quality growth stocks globally for long periods.
Fundsmith Equity charges a 1.04 per cent annual management fee on investments.
Smith said that he was “not seeking to ‘blame’ anyone or anything for our fund’s relative performance” but noted that the dominance of the so-called Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — was one of the main issues.
“It was difficult to even perform in line with the index in recent years if you did not own most of these stocks in their market weightings, and we would not do so even if we became convinced that they were all good companies of the sort we seek to invest in, which we are not,” Smith said.
Fundsmith Equity holds Alphabet, Meta and Microsoft, which were among the top five contributors to performance last year.
Smith also pointed to the surging popularity of low-cost index funds, noting that the huge flows of money into these products “gives added momentum” to the large US tech stocks.
“The increasing proportion of equities held by index funds are invested without any regard to the quality or valuation of the shares bought, which produces dangerous distortions,” he added.
The US dollar’s weakness was also a drag on the fund’s performance, as the majority of the companies in which the fund invests are in the US, where they derive a lot of their revenue.
Smith said that he would not buy shares in companies “simply because they are large and dominate the index weightings and performance unless we become convinced that they are good businesses of the sort we wish to own, which have long-term relatively predictable sources of growth and more than adequate returns on the capital they invest”.
Novo Nordisk, the Danish pharmaceutical company that makes the Wegovy weight-loss drug, was among the worst-performing stocks for Smith’s fund last year, along with US company Automatic Data Processing, consumer staples business Church & Dwight, Danish medical company Coloplast and cyber security firm Fortinet.
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