Important changes at Fundsmith Equity

One of the most widely held funds among UK retail investors is Fundsmith Equity, which enjoyed a long period of outperformance, but over the past five years has lagged the index and suffered significant outflows. This change in fortunes has prompted its high-profile manager, Terry Smith, to make an important change to the way he runs the portfolio.

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Smith still looks for companies with good business fundamentals and financial characteristics that are trading at reasonable valuations or better. However, he has abandoned the “do nothing” buy and hold mantra to which he once attached such importance.¹

That might not sound much, yet the portfolio has been completely revamped, with turnover hitting 51% during the first half of the year.² It is unlikely that activity will hit this sort of level again, but investors need to understand the revised approach and decide whether they are comfortable with it.

Why the change?

Smith says that the growing dominance of passive investing, combined with the boom in artificial intelligence, has created a market driven more by momentum than fundamentals. He still believes that owning a portfolio of higher-quality businesses will outperform the index over the long-term, but he no longer thinks he can simply wait for the market to recognise their true value.³

• Read: Terry Smith’s big bet against the passive revolution

In his mid-year update, Smith said that they will take more account of momentum - both fundamental and share price - in their investment decisions. In particular, they will be much less willing to deploy the time-honoured technique of buying quality companies when they hit a glitch.⁴

“In the current momentum driven market buying shares in companies which have hit a glitch is like trying to catch the proverbial falling knife. All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect.”⁵

The new portfolio

At the end of July, the global large-cap portfolio consisted of 28 holdings, which is similar to the number it has always had, although the composition is completely different. The ten largest positions now include the likes of Mastercard, Visa, Microsoft and L'Oréal, alongside other less familiar companies.⁶

Fundsmith Equity Fund top 10 holdings

1. Mastercard
2. Stryker
3. Waters
4. Amadeus
5. Visa
6. Microsoft
7. L’Oreal
8. Yum! Brands
9. Uber
10. Church & Dwight

Source: Fundsmith Fund Factsheet, 12 August 2026

The fund made 13 sales in the first half of the year, with well-known businesses such as Unilever, Otis, Nike and Magnum Ice Cream leaving the portfolio. These were replaced by 12 new investments, with some interesting choices such as Netflix, Taiwan Semiconductor Manufacturing Company and Uber.⁷

Smith was very vocal about his patient approach, but he has clearly taken a hard look at each constituent and changed it wherever necessary. This raises the question of whether he had become a victim of his own buy and hold philosophy, hanging on to stocks even when the fundamentals suggested that he should sell.

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Performance

Over the past 10 calendar years, the T-class accumulation shares have significantly underperformed the index, returning 208.1% compared with 245.5% for MSCI World. The pattern continued during the first seven months of 2026, with the fund trailing the benchmark by a further 12.9%.⁸ Please remember past performance is not a reliable indicator of future returns.

However, the longer-term record remains pretty good. From inception in November 2010 to the end of July 2026, the fund returned 593.4%, comfortably ahead of the MSCI World Index's 525.4%.⁹ Nevertheless, outflows had reached a point at which Smith felt changes were necessary.

At one time, Fundsmith Equity was the UK’s largest fund, with £29 billion of assets under management at its peak. It is now down to £12 billion, with investors having withdrawn £16 billion over the past 5 years and £7.9 billion in the last 12-months alone.¹⁰

What should investors do?

Smith has retained his quality investment approach, but taking greater account of momentum still constitutes a notable shift in style. The inclusion of a stock such as Taiwan Semiconductor Manufacturing Company – although not one of the largest holdings – is particularly interesting and may signal a significant change in the risk and return profile of the fund.

It is still too early to tell whether these revisions will improve performance or leave the portfolio more vulnerable if the momentum fades. Investors who are uncomfortable with the modified approach may wish to reduce their exposure and consider one of the handpicked global funds in the Select 50.

Those who are relaxed about the whole momentum argument could consider the passively managed Legal & General Global Equity Index. Alternatively, those wishing to keep a similar quality bias might look at BNY Mellon Long-Term Global Equity or Rathbone Global Opportunities, while investors favouring a value strategy could consider Dodge & Cox Worldwide Global Stock, or Schroder Global Recovery.

• More on Fundsmith Equity Fund

Source:

^1,2,3,4,5,7 Fundsmith Equity, semi-annual letter to shareholders, July 2026
^6,8,9 Fundsmith Equity, factsheet, July 2026
¹⁰ Citywire, 16.7.26

Past performance is not a reliable indicator of future returns
Source: Morningstar, total returns from 30.6.21 to 30.6.26. Excludes initial charge.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. 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. Select 50 is not a personal recommendation to buy or sell a fund. 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.