Fundsmith Equity is a household name for many investors. Run by the veteran stock picker and FE Fundinfo Alpha Manager Terry Smith, it has a top-quartile 10-year performance of 256.8% in the IA Global sector and has made many investors money over this time.
However, recent performance may have disappointed investors, with the fund declining into the third quartile over five and three years. In 2024, the portfolio had a return of 8.9%, one of the weaker performances of the ‘giant’ equity funds.
According to FE Analytics data, investors have pulled more than £1.2bn from the fund over the past year, suggesting some have started to lose faith in the portfolio.
Performance of fund vs sector and MSCI ACWI over 10yrs
Source: FE Analytics
Given this backdrop, Trustnet asked fund pickers for their thoughts on the strategy in 2025, including whether it was a buy, hold or sell. The most optimistic was Darius McDermott, managing director at FundCalibre, who argued that the fund remained a core equity holding for investors.
The decision to underweight the Magnificent Seven since 2022 has caused performance to drag, but McDermott argued it was "far from disastrous".
He explained that recent results did not negate the portfolio’s qualities. Smith’s “clear and straightforward process” of finding easy-to-understand businesses without overpaying for them has proven very successful, giving it a “benchmark-beating long-term performance”.
Indeed, over the past 10 years, it beat the most common index in the IA Global sector – the MSCI ACWI – by more than 50 percentage points. In his recent shareholder letter, Smith highlighted his strong long-term record, demonstrated by delivering 2.7 percentage points per annum more than the index.
As a result, McDermott said it remained a highly effective global equity play that would be suitable for both new and more experienced investors.
Rob Morgan, chief analyst at Charles Stanley Direct, agreed that the portfolio was worth holding onto. He explained that it “remained high-quality and well-managed”, with a disciplined process that has led to generally strong long-term performance.
Morgan added, “The manager was assisted stylistically since its 2010 launch with good-quality growth stocks largely in favour, but the stock selection has added considerable value for much of its history."
However, he was also more critical than McDermott and said, “although the fund is well known and well-publicised, it is not necessarily unique”.
Morgan said investors may have preferred a semi-passive option, such as the iShares Edge MSCI World Quality Factor UCITS ETF. Over the past 10 years, the exchange-traded fund (ETF) also posted a top-quartile return of 253.8%.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The passive portfolio invests in an index of ‘quality’ stocks, assessed based on their return-on-equity, leverage and earnings visibility. This meant that it was similar stylistically to Fundsmith. However, it has an ongoing charges figure (OCF) of 0.25%, less than a quarter of Fundsmith's cost before transaction fees.
Morgan also identified the £4.2bn Rathbone Global Opportunities fund, run by Alpha Manager James Thomson, as an actively managed alternative.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Over 10 years, it had returned 271.5%, making it the 10th-best global fund, beating Smith’s flagship portfolio. Like Fundsmith Equity, recent results have been weaker: it had second quartile returns over the past one, three and five years.
“Rather like Terry Smith, he is willing to completely avoid regions, sectors and stocks that do not fit his ‘secret sauce’ qualitative criteria”, Morgan explained. Thompson’s approach of targeting underappreciated “companies with star quality” brings similar long-term value to investors.
Michael Heapy, senior investment analyst at IBOSS Asset Management, was the most critical of Smith’s portfolio. While Smith is unapologetic in his approach to stock selection, Heapy argued there was “limited evidence of economies of scale for buyers”. Even the cheapest share class had an OCF of 0.94%, and its large size could limit the ability to buy smaller stocks.
Instead, he explained he favours managers who are “more flexible in their positions” because it allows the IBOSS team to outsource decision-making to stock pickers who can adapt to changing markets.
As a result, Thomson’s Global Opportunities fund was also his preferred pick. He noted the fund had a “respectable 23.5% return” over the past year, compared to the 13.7% delivered by Fundsmith.
The IBOSS analyst attributed this to differing stock selection, notably Nvidia, which is currently Thomson’s largest holding. However, he added that this was a relatively cautious position for Thompson, demonstrated by the fact that he has trimmed it consistently over the past year.
This means the fund has no holding above 4% weighting, giving comparatively lower stock-specific risk to many of its IA Global peers.