Terry Smith Refuses to Abandon Strategy Despite Fifth Consecutive Year of Underperformance

Terry Smith has reaffirmed his commitment to his investment strategy despite his flagship fund experiencing its fifth successive year of underperformance. The Fundsmith Equity portfolio, which manages £16 billion in assets, returned just 0.8 per cent during 2025, significantly lagging the MSCI World Index’s 12.8 per cent gain.

The veteran stockpicker, aged 72, has built a formidable reputation over decades as one of Britain’s most accomplished fund managers. However, the persistent weakness in his fund’s results threatens to erode the credibility he has carefully cultivated throughout his career in the City of London.

In his annual letter to investors released on Thursday, Smith acknowledged the disappointing outcome but declined to alter course. He stated that whilst remaining committed to his investment philosophy, his team would endeavour to execute the strategy more effectively. Smith cautioned investors that positive annual returns and market-beating performance should not be expected in every year.

Smith identified three principal factors contributing to his portfolio’s recent struggles. The dominance of America’s largest technology companies within global equity markets represents the primary headwind; investor enthusiasm surrounding artificial intelligence has concentrated market value within the so-called “Magnificent Seven” companies: Amazon, Apple, Nvidia, Tesla, Alphabet, Meta Platforms and Microsoft. Smith’s fund holds only three of these companies, and he expressed reluctance to acquire the others even if convinced of their quality, citing concerns about valuations and investment characteristics.

The rising influence of passive investment funds represents a second significant challenge. Unlike active managers who exercise discretionary stock selection, passive funds mechanically track market indices and have attracted growing capital owing to their lower fee structures. Smith warned that passive strategies effectively adopt momentum investing approaches, which artificially inflate valuations and encourage destructive capital allocation decisions. He expressed concern that markets could experience severe disruption when the cycle reverses, though he declined to predict the timing or mechanism of any correction.

The dollar’s recent weakness constitutes the third material drag on Smith’s sterling-denominated returns, given that the majority of his holdings are American corporations. This currency headwind has compounded the challenge of achieving competitive performance during a period when technology stocks have dominated investment returns.

Smith built his reputation during the 1980s whilst working as an analyst, earning notice when he issued a “sell” note on Barclays shortly after joining the firm’s investment banking division. He currently operates his Fundsmith investment management business from Mauritius.