Fundsmith's underperformance, at 21 times the cost

Terry Smith built Fundsmith on the discipline of buying high-quality companies and holding them, doing as little as possible. His latest half-yearly letter records a fund that has trailed the market for five straight calendar years, and a manager now prepared to trade that patience for higher activity. The ongoing charge that once paid for the discipline has not moved.

For more than a decade, doing nothing was close to the whole point. Smith's pitch to investors was that patience beat activity: own a small number of high-quality businesses, avoid overpaying, then leave them alone. It was a discipline sold as a virtue, and for years it delivered, turning Fundsmith into one of the best-known funds in Britain and Smith into one of its most quoted managers. His 'do nothing' rule was the part people remembered. The half-yearly letter for 2026 describes a different fund.

The shape of Fundsmith's underperformance

Fundsmith's underperformance became sharper in the first half of 2026. The fund's T Class Accumulation shares fell 2.9 per cent, net of fees, while the MSCI World Index rose 11.2 per cent, a gap of 14.1 percentage points in six months. That is not a single bad spell. Fundsmith has trailed the index in every calendar year since 2021, and the cumulative shortfall has widened each year as a result. It now stands at 74.4 percentage points since the start of 2021. The two most recent full years did much of the damage: the fund trailed by 11.9 percentage points in 2024 and 12.0 in 2025.

The longer record complicates the picture. Since the fund launched in November 2010 it has returned 592.6 per cent against the index's 530.9 per cent, an annualised 13.1 per cent against 12.5 per cent. Measured from inception, Smith is still ahead. The underperformance belongs to the period since 2021, but within that period it has been consistent, the kind of shortfall that research on why active funds fall behind has repeatedly documented.

A discipline gives way

The letter also records a change of method. Portfolio turnover reached 51.8 per cent in the first half, high for a fund whose identity was built on leaving holdings untouched. Smith does not expect turnover to stay that high, but told shareholders to expect it above the fund's historic average. In all, he exited or began selling out of more than a dozen holdings and built up a similar number of new ones. He sold names long associated with Fundsmith: Novo Nordisk, which he dropped after a setback to its weight-loss drug programme; Unilever, which he left after objecting to an activist-driven plan to sell its food business; and Nike and LVMH. In came more recent winners such as AppLovin, Netflix, Uber and TSMC. He told shareholders he would 'take more account of momentum' in future decisions.

Momentum, buying what has already risen, sits close to the opposite of the contrarian patience the fund was built on, and close to the performance-chasing the evidence warns against. Smith also said he would be less willing to buy quality companies when they stumble, the very tactic that defined the fund's early years. He framed the shift as a response to a market he could not outlast: holding to the old approach, he suggested, risked the fund not surviving long enough to be proved right. He attributes the struggles partly to money moving into passive trackers and a small number of large technology stocks. Whatever the cause, his answer has been to become more active, not less.

What the premium was meant to buy

Fundsmith's ongoing charge is 1.05 per cent a year. A low-cost tracker following the same MSCI World index costs around 0.05 per cent, making Fundsmith about 21 times as expensive. The extra activity carries a cost of its own: dealing added 0.084 per cent over the half, lifting the total cost of investment to 1.12 per cent.

A premium of that size is only worth paying if it buys something a tracker cannot: judgement, discipline, the willingness to sit still when the market is fashionable and the manager is not. That was always the case for the fee. On the evidence of this letter, the discipline is the part that has changed. The fee is the part that has not.

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