Fundsmith founder Terry Smith published his annual letter to shareholders last week. As well as being a high-profile stockpicker, Smith is an entertaining writer. Regardless of whether you agree with his views and stock choices, I find his letters well worth reading – especially for investors pursuing a compounding quality strategy.
Among the topics covered in this year’s letter are why Smith sold Apple (NSQ:AAPL) and Diageo (LON:DGE) last year, plus what could go wrong for NVIDIA (NSQ:NVDA) shareholders.
He also touched on the issue of the fund’s four years of underperformance and explained why – in his view – this is not necessarily at odds with the successful delivery of his strategy.
4 years of underperformance
Fundsmith’s flagship Equity Fund underperformed the global market for the fourth consecutive year in 2024, although the fund’s long-term performance since inception in 2010 remains excellent:
Source: Fundsmith website 11/01/25
Perhaps a little more worrying for me is why Fundsmith has underperformed rival fund managers in IA Global Sector for most periods under five years:
Looking back at past factsheets suggests this underperformance has only crept in during 2024. Perhaps this indicates that many rivals succumbed and bought Nvidia last year!
Smith says he is maintaining his disciplined long-term strategy and (presumably) believes he will be vindicated over time with further index outperformance.
He suggests – and I’d agree – that some investors may be suffering from recency bias with regards to the Mag 7. In other words, they are assuming the current growth trajectory will continue indefinitely.
On the other hand, Smith’s critics (and he has a few!) suggest he has failed to understand tech and may be running out of excuses for his fund’s underperformance.
Time will tell. I agree that active fund managers should be under pressure to answer for their own underperformance.
But it’s also worth noting that Fundsmith’s top 10 holdings include three of the Mag 7. A fair chunk of Fundsmith’s underperformance last year may simply be down to the fund not owning Nvidia. More on this below.
Source: Fundsmith website 14/01/25
The reality is that without taking a…
