Fundsmith Equity Fund
Why is this fund on our radar?
Fundsmith Equity keeps things simple: invest in great companies from around the world, then leave them alone. Veteran fund manager Terry Smith is very selective about which businesses he backs, following the mantra: “buy good companies, don’t overpay, do nothing”.
In practice, this means investing in companies that are financially strong, consistently profitable and able to keep growing whatever the economy is doing. The aim is then to hold these shares for many years, ideally forever, rather than buying and selling them frequently, whilst also avoiding businesses that rely on heavy borrowing, like airlines or indebted banks.
What we like about this approach is its simplicity. There's a real danger in overcomplicating an investment process, so keeping things clear and straightforward can be a strength in itself. But simple doesn't mean easy and Terry’s simplicity comes with high standards: only a handful of businesses make the cut, with the fund typically holding just 20 to 30 stocks, meaning each one carries real weight, for better or worse.
Whilst short-term performance has been tested, the long game has paid off. Since its 2010 launch, Terry's focus on strong, well-established businesses around the world has delivered impressive returns, helping the fund become one of the most popular with UK investors. That focus on quality also means it can work well as a steady foundation in a portfolio, sitting alongside more adventurous investments like emerging markets or smaller companies funds.
Skip to Our VerdictPerformance
Since its November 2010 launch, Fundsmith Equity has beaten the wider market, as shown in the chart below through a passive fund that simply tracks it. It's also delivered stronger returns than the average of other global funds in its peer group. We think this long-term record reflects Terry's focus on financially strong companies that can keep growing profits regardless of the economy, a quality that has counted exactly when investors need it: when confidence dips and markets turn choppy.
Historically, it has also achieved this while falling less than the wider market during rocky periods, though as we cover below, this has been tested more recently. Take 2018, for example. Fundsmith Equity made modest gains while the wider market and many other global funds lost ground in a tricky market marked by political tensions. The fund also delivered strong returns in 2020 despite economies shutting down worldwide during COVID-19, as many of the companies Terry invests in provide goods and services that are essential, even in the direst of times.
That said, it’s a different story when markets are driven by a narrow group of companies riding a specific trend or market event. This became clear in 2022, when energy companies boomed as Russia's invasion of Ukraine triggered a global energy crisis. That year also saw inflation and interest rates rise sharply, which tend to push investors towards cheaper stocks; although Terry aims not to overpay, the companies he invests in still tend to be more expensive than the wider market.
A similar pattern played out later that same year, when OpenAI's launch of ChatGPT sparked a wave of investor enthusiasm for artificial intelligence (AI), concentrating market returns in a handful of companies seen as best placed to benefit. While Fundsmith Equity owns some of these companies, it has less invested in AI-related businesses than the market as a whole, which has weighed on its short-term returns. Terry, however, remains cautious on the AI trend, arguing many of today’s beneficiaries may struggle to sustain their profits (indeed in some cases to make a profit at all!), and that the huge sums being poured into AI may not generate returns big enough to justify them.
performance since launch
Source: Morningstar
Past performance is not a reliable indicator of future results
Portfolio
Terry invests in financially strong companies that can keep growing under their own steam, rather than relying on favourable economic conditions to deliver their profits. He also wants the businesses he backs to have advantages that are hard for rivals to replicate, which should help them withstand rising competition as well as disruption, such as technological changes. Terry aims not to overpay for these types of business as paying a high price for a company already recognised as high-quality can mean less room for its share price to climb further. That said, this isn't a hard rule; he's prepared to pay a premium if there is value present which he thinks, either given its business quality or if its long-term growth potential, can justify the price.
Many of the businesses that meet these criteria tend to be recognisable brands you may encounter in your everyday life, such as tobacco company Philip Morris or payment card provider Visa, but there aren’t that many of them in the portfolio. Given Terry’s high standards, he would rather back a smaller number he truly believes in than spread his money thinly across lots of different companies. As a result, Fundsmith Equity typically holds a small number of stocks (around 20 to 30), with more of its money invested in the US, where he finds more businesses that meet his criteria. This does mean, however, that each individual stock will have a large impact on the fund’s overall performance, whether positively or negatively.
country allocation
Source: Fundsmith
Our Verdict
In our view, Fundsmith Equity’s quality-first approach makes it a solid building block for a portfolio, one that pairs well with more adventurous options like emerging markets or smaller companies funds. By focussing on financially robust, consistently profitable businesses, Terry has built a fund that has generally proved more resilient than the wider market when conditions turned difficult. This has been key in the fund’s exceptional performance since it launched in November 2010.
That said, this high conviction process comes with trade-offs. Because Terry backs a concentrated portfolio of around 20 to 30 stocks, individual companies carry real weight on how it performs, for better or worse, meaning Fundsmith Equity is likely to behave quite differently from a fund that simply tracks the market. It may also lag when markets are driven by specific trends, such as AI since late 2022, or by companies riding temporary economic conditions.
Overall, this makes Fundsmith Equity best suited to investors who can look past short-term wobbles in pursuit of long-term growth, and don’t suffer greatly from ‘FOMO’, rather than those wanting a fund that moves in step with the wider market day to day.
Key Risks
- May struggle when the market favours a specific trend or companies benefiting from specific circumstances in the economy.
- The fund has tended to find it harder to keep up with the market when interest rates were high.
- The fund's small number of holdings means that each stock will have a significant impact on the fund’s overall performance.
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