Fundsmith Underperforms, Smith Takes Aim at AI Hype

In a letter to investors, manager of the Gold-rated Fundsmith Equity fund questions the market's ability to crown AI winners

Sunniva Kolostyak 10 January, 2024 | 12:07PM
Facebook Twitter LinkedIn

Illustration of a large letter held up on the back of a person

Terry Smith, manager of the UK’s biggest fund Fundsmith Equity, has published his annual letter to investors outlining his thoughts on the past year, explaining why the fund underperformed against the global stock market.

In 2023, Fundsmith underperformed the MSCI World Index for the third year in a row (although the fund is not managed with reference to any benchmark, Smith states). The fund’s T class accumulation shares rose by 12.4% in 2023, versus MSCI World’s 16.8% net growth. However, the fund’s annualised return since 2010 is about 4 points ahead of the index, at 15.3%.

Picking the AI Winners

So why did the Morningstar Gold-rated fund lag the overall global market? Notably, Fundsmith does not hold Nvidia (NVDA), one of the key share price success stories of last year. The stock alone accounted for 11% of the Nasdaq Composite Index’ 43% growth.

In the letter, Smith discusses his reservations – for one, he does not want to hold all “Magnificent Seven” stocks due to concentration risk, even if they all fitted the fund’s investment criteria.

He also observes that the stock market “has decided at the outset that it can identify winners in AI in the form of Nvidia designing the chips on which the generative AI models will run and Microsoft (MSFT) as a provider of an AI model. If it can do so at this stage it would seem to me to be a break with tradition.”

He goes on to name some early leaders that have since more or less disappeared from their sectors: BlackBerry for smartphones, Yahoo! for search engines, and Myspace for social media.

Fundsmith's Portfolio Winners ... and Losers

Smith does however hold Microsoft, which was the fund’s second biggest performance driver last year (3.9%), and Meta Platforms (META), the top contributor to the fund (4.5%).

Also contributing to the strategy’s double digit growth was Novo Nordisk (NOVO B) with 3.6%, L’Oreál (OR) 2.1%, and IDEXX Laboratories (IDXX) with 1.4%.

He says: “Meta Platforms’ (formerly Facebook) performance makes me wonder whether I should have a fund which invests solely in the one stock in our portfolio each year for which we have received the most critical comments. Meta makes its third appearance in this list of top contributors while Microsoft appears for the eighth time having attracted strident criticism when we started buying at about $25 a share in 2011 (2023 year end price $354).”

Not all the fund’s bets were winners this year either. Estée Lauder (EL) detracted 1.8% after its mishandling of the supply and demand situation in China as it reopened after Covid-19. Fundsmith has subsequently decided to sell its stake in the company.

McCormick (MKC) accounted for a 1.1% reduction but the company will remain in the fund as Smith awaits profit margins to return to pre-covid levels in its food service business.

These were followed by Diageo (DGE), Mettler-Toledo (MTD), and Brown Forman (BF.B), all detracting about half a percentage point each.

Smith's Stock Sales

As well as selling its Estée Lauder stake, Fundsmith Equity also disposed of Adobe (ADBE) and Amazon (AMZN) and purchased Procter & Gamble (PG), Marriott (MAR) and Fortinet (FTNT) shares.

“As last year this may seem a lot of names for what is not a lot of turnover as in some cases the size of the holding sold or bought was small. We have held ten of our companies for more than 10 years, five of which since inception in 2010,” Smith said, highlighting the fund house’s three-step investment strategy: buy good companies, don’t overpay, do nothing.

Earlier this week, we covered the best and worst performing funds available to UK investors. Fundsmith didn’t feature in either of the lists, but it did end the year in the top 20th percentile overall.

Commenting on Terry Smith’s letter to investors, Laith Khalaf, head of investment analysis at AJ Bell, comments: “While returns were behind the global stock market last year, in absolute terms they were still strong, so existing investors won’t be too miffed about the fund’s 2023 performance. Terry Smith has a loyal following and a great deal of credit in the bank due to his long-term track record.

“The problem is Fundsmith Equity is now underperforming on both a three- and five-year view, which are key periods fund buyers look at, so it might be harder for the fund to find new converts.”


Subscribe to Our Newsletters

Sign Up Here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Sunniva Kolostyak

Sunniva Kolostyak  is data journalist for

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures