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I've toyed with the idea of adding Fundsmith Equity to my Shares or Shares ISA or Self-Invested Personal Pension (SIPP) for some years now. But I have never invested in the fund.
Should I fix that in 2025? Let's take a look.
Keeping it simple
At just over £23 billion, Fundsmith is the largest of its kind in the UK. Its goal is to generate long-term growth by investing in large, high-quality companies around the world.
Key traits it looks for include predictable earnings, durable competitive advantages, high returns on equity and low debt.
I have always admired manager Terry Smith's simple investment philosophy, based on three principles:
- buy good companies
- Don't pay more
- do nothing
Here are the top 10 positions, as of November 29.
| Top 10 holdings |
|---|
| Metaplatforms |
| microsoft |
| Nordisk |
| Stryker |
| Philip Morris |
| Automatic data processing |
| Visa |
| L'Oréal |
| waters |
| Marriott |
A handful of quality companies.
The portfolio is concentrated in only 26 stocks. Personally, I like Smith's high-conviction strategy as it stands out among a crowd of fund managers who hedge their bets with hundreds of stocks.
But it does add risk, especially if the main positions do not perform. Or the manager does not invest in the stocks or sectors that drive market returns. Unfortunately, this has happened in recent years.
Low performance
Fundsmith hasn't outperformed the market since 2020, when it returned 18.3% versus 12.3% for the MSCI World Index. From the beginning of this year through November, the return was 10.7%, well below the index's 22.2%.
As we can see, the long-term outperformance is still intact. But the recent bad run is very disappointing, especially when the fund has ongoing charges of 0.94% on the large investment platforms.
The main issue has been an underweight allocation to some of the big names leading the artificial intelligence (ai) rally. It hasn't had ai, honey. NVIDIAwhose shares have risen 2,297% in five years, or tesla (up to 75% in 2024).
<h2 class="wp-block-heading" id="h-mistimed-amazon-trade”>Untimely amazon Trade
In 2023, the fund also sold amazon (NASDAQ: AMZN), just 19 months after investing. That was a mistake, as amazon stock has nearly doubled since then.
Smith saw amazon's investments in the grocery sector as a potential misallocation of capital. He said there was already “a blow was struck in this sector with the acquisition of Whole Foods”a few years earlier.
To be fair, he's right. amazon is taking risks to invest in different areas, including autonomous vehicles and artificial intelligence projects. None of these are guaranteed to pay off and could impact future earnings.
That's why I was surprised when Smith invested in amazon (it has unpredictable earnings from year to year). And while I've never owned amazon stock, it seems like you “do nothing” after investing, letting trends like e-commerce, digital advertising, and cloud computing play out over the long term. So I was a little confused by the whole thing.
my decision
Has Smith lost the Midas touch? My hunch is that this is just a bad streak, although admittedly it will last for four years. I would prefer to be more confident before investing.
The fund now has only 12.6% in the information technology sector. If the ai boom continues, it could prove costly. Or perhaps one of Smith's best decisions.
I'll be interested to know which one, but not as a Fundsmith investor as things stand.
