Fundsmith Equity Fund: update from Terry Smith

2025 was a strong year for stock markets with double digit gains pretty much right across the board, yet investors in Fundsmith Equity may feel they missed out. The popular global fund has £15.3bn in assets under management, but holders of the T-class accumulation shares saw a gain of just 0.8%  ̶  around a fifth of what they could have achieved from cash.¹ 

• Read: Investment winners of 2025 at a glance 

Unfortunately, this was the fifth consecutive calendar year that it had underperformed the MSCI World benchmark, although the longer-term record is still excellent. The fund’s high-profile manager, Terry Smith, has recently published his annual letter to shareholders, which is always worth reading regardless of whether you are an existing investor or just want to understand his view of the markets. 

Objective and approach

Smith is a long-term investor who focuses on high-quality businesses that can sustain strong returns on operating capital employed. He looks for companies with durable competitive advantages that are difficult to replicate and that do not rely on significant leverage to generate returns.²

These businesses must also offer a degree of certainty around growth, driven by the reinvestment of cash flows at high rates of return. They should be resilient to change - particularly technological innovation - and trade at an attractive valuation.³

When interest rates were low, this quality bias provided a strong tailwind and helped the fund build an impressive early performance record. Although the macroeconomic environment has since turned against him, Smith has remained committed to the approach, confident that the cycle will eventually move back in his favour.

What are the managers’ latest views? 

In his annual letter to shareholders, Smith said that one of the main reasons for the recent underperformance was the concentration risk of the large tech stocks in the index. By the end of 2025 the ten largest constituents of the S&P 500 accounted for 39% of the market value and 50% of the annual return, which was too big a bet to take in a diversified portfolio even if he thought they were all good companies.⁴ 

The second issue he highlighted was the growth in the proportion of US equities fund assets in index trackers, which passed 50% for the first time. This additional demand pushes up the price of the largest stocks regardless of the quality of the business or the valuation and runs the risk of creating a major investment disaster.⁵

“We intend to continue holding a portfolio of good businesses in the hope and expectation that their strong fundamental returns will shine through into superior share price and fund performance over the long term and that in the interim our fund will prove relatively immune from any shocks which arise if or when the present extraordinary market conditions unwind,” he said.⁶ 

Performance and costs 

In the year to 31 December 2025, the T-class accumulation shares returned just 0.9%, well behind the 12.8% generated by the MSCI World Index in sterling with dividends reinvested. Despite the underperformance over the past five years, the fund’s longer-term record remains impressive.⁷

Between inception on 1 November 2010 and 31 December 2025, Fundsmith Equity produced a cumulative gain of 612.9%, compared with 467.6% from the benchmark and 290.8% from its peer group. This performance was achieved with significantly lower downside volatility than the index.⁸ Please remember past performance is not a reliable indicator of future returns.

Another key tenet of the fund is cost discipline. The ongoing charges figure is a competitive 1.04%, and the buy-and-hold approach helps keep transaction costs—often an overlooked drag on returns—as low as possible.⁹
 

The underlying porfolio

As at 30 January, the portfolio held 29 stocks with a median market capitalisation of £71.2bn. The ten largest positions included well-known names such as L’Oréal, Visa, Unilever and Alphabet, alongside some less familiar companies.¹⁰

Top-10 holdings

1. L’Oreal
2. Waters
3. Stryker
4. Marriott
5. IDEXX Laboratories
6. Visa
7. Unilever
8. Philip Morris
9. Alphabet
10. Novo Nordisk

Source: Fundsmith, January 2026

At the country level, the largest allocation was to the US at 67%, which was similar to the benchmark. However, it was not the tech stocks that made up the bulk of this, with Health Care, Consumer Staples and Consumer Discretionary all having considerably higher weightings.¹¹ 

Smith says that the portfolio holdings have become a lot more lowly valued than the S&P 500, as the free cash flow of many of the major stocks that now dominate the index has shrunk or disappeared in the face of massive capital expenditure on Artificial Intelligence.¹²

“AI may have a profound effect on our lives and employment but that does not guarantee that investment in it will attain an adequate return or that returns will gravitate to the present incumbents.”¹³

• For more information see Fundsmith Equity Fund

Alternatives within the Select 50

If you are an existing investor in Fundsmith Equity and looking for other fund options, there are several handpicked global alternatives within the Select 50. 

Those seeking a passive option could consider Legal & General Global Equity Index. This aims to replicate the performance of the FTSE World benchmark and might be suitable for anyone who doesn’t share Smith’s concerns about the risks of tracker funds. 

Investors looking for a similar quality bias but with different underlying holdings might want to look at BNY Mellon Long-Term Global Equity or Rathbone Global Opportunities.

Alternatively, those who prefer a value-oriented approach could consider Dodge & Cox Worldwide Global Stock, one of Tom Stevenson’s fund picks for 2026, or Schroder Global Recovery, which is well known for this style of investing.
 

Past performance is not a reliable indicator of future returns

^{1,4,5,6,7,8,9,12,13} Terry Smith shareholder letter, January 2026
^2,3,10,11 Fundsmith Equity factsheet, 30 January 2026

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. The Fundsmith Equity Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.