Sell Off Warning from Terry Smith as Index Trackers Dominate UK Markets

Terry Smith, the noted stockpicker behind the £17.5 billion Fundsmith Equity Fund, has issued a stark warning that a future sell off could prove even more severe than the aftermath of the dotcom collapse in 2000, when global share markets lost half their value. Smith highlights the unprecedented rise in index tracker funds as a key driver, stating that momentum generated by passive investing is building a distortion that could magnify market turbulence when sentiment reverses.

He observed that index trackers represented just 10 percent of the market at the turn of the millennium, but today they account for around 50 percent. This shift means that relatively small flows in or out of the markets can result in pronounced price swings, a theory supported by Harvard academics with their Inelastic Markets Hypothesis.

Smith made these remarks following the latest results from his Fundsmith fund management group. The company reported after tax profits of £39.6 million for the year ending March, a decline from £46.4 million the previous year. Smith, aged 72 and now based in Mauritius, saw his own pay fall by £4.6 million to £23.3 million. He described the period as particularly challenging, citing a wave of client redemptions following nearly five years of underperformance versus global equity benchmarks.

Turnover at Fundsmith slipped to £271.2 million from £280.9 million. According to Morningstar, the fund experienced net outflows of £3.3 billion in 2024 and £5 billion so far this year. Despite recent challenges, since its launch in 2010, the Fundsmith Equity Fund has delivered a total return of 614 percent, outstripping the global equities benchmark of 475 percent.

The fund has faced pressure in the wake of rising interest rates during 2022 and 2023, the boom in technology stocks, and the meteoric leap of chipmaker Nvidia, in which Fundsmith holds no position. Instead, major holdings include Alphabet, owner of Google, and Microsoft.

Smith, known for his significant stake in and occasional criticism of Unilever, commented on the company’s decision to sell off Marmite and other UK-centric brands. He remarked that Marmite is a brand with limited international appeal, adding a personal note about enjoying it with soft boiled eggs.