Terry Smith, Neil Woodford and the test Smith set for himself
- Robin Powell
- Jul 15
- 8 min read
In January 2020, Terry Smith told his investors why Neil Woodford had failed: the star manager abandoned the approach that made his name. Six and a half years later, Fundsmith's own half-yearly letter records portfolio turnover of 51.8 per cent and says momentum will count for more in its decisions. Fundsmith is not another Woodford. But Smith's test for a manager in trouble — watch whether he changes his game — now deserves to be applied to the man who set it.
When Terry Smith broke his silence on Neil Woodford in Fundsmith's annual letter for 2019, he was careful about where he placed the blame. Woodford's problem, he wrote, was not that he had become a star. It was that he had changed his game, drifting from the large-cap conviction investing that built his reputation into small, illiquid holdings and unquoted start-ups. Fundsmith, Smith assured his own investors, had no desire to change — and the fund's annual letters and meetings were where they could satisfy themselves of it.
The half-yearly letter Fundsmith published in July 2026 is the letter he invited them to read. It records portfolio turnover of 51.8 per cent in six months, at a fund whose third rule is 'do nothing', and it tells shareholders the fund will in future 'take more account of momentum'. The mantra has not changed on the page: buy good companies, don't overpay, do nothing. What the letter describes is a fund doing a great deal.
What has changed at Fundsmith
In the first half of 2026, Fundsmith Equity fell 2.9 per cent while the MSCI World Index returned 11.2 per cent in sterling terms — a gap of 14.1 percentage points in six months, extending a run of calendar-year underperformance that stretches back to 2021. TEBI examined that record, and what the fund's fees have bought over the period, on 9 July.
The turnover figure is the news. Smith began 12 new positions in the half-year — among them AppLovin, Mastercard, Netflix, TSMC and Uber — and began or completed exits from 13 others, including Novo Nordisk, Nike, LVMH, Unilever and Zoetis. He describes the 51.8 per cent figure as a high for the fund, says turnover will settle back but remain above its historic average, and tells shareholders he will be 'much less willing' to buy quality companies when they hit a bad patch — the technique that defined Fundsmith's early years.
The pressure behind the change is not in dispute. Smith acknowledges in the letter that investors have increasingly been withdrawing money, which he attributes largely to the exodus from active funds to passive. Assets under management, which Investors' Chronicle puts at a peak above £23 billion in 2023, stood at around £12 billion by the end of June — a fall that reflects performance and market movements as well as redemptions.
What Terry Smith saw in Neil Woodford
Woodford matters here not because his fund collapsed but because Smith himself defined what went wrong with it. In the 2019 letter, Smith described a manager who had abandoned the approach that worked for one that did not, the new holdings sharing no common theme except that they fared badly. He reached for a sporting image to make the point: the trouble starts when a star insists on playing a different game from the one that made him.
What happened next is a matter of record. Facing sustained redemptions between July 2018 and June 2019, Woodford sold down the liquid holdings he had least conviction in and held on to the illiquid, high-conviction positions he believed in most. The proportion of the fund that could be sold within seven days fell from 18 per cent to 8 per cent over that period. In June 2019 the fund was suspended, and it never reopened.
Woodford's public certainty survived all of it. Deep into the fund's decline, he declared himself absolutely convinced that valuation and fundamentals were the only things that mattered, and that, 'like gravity', they would reassert themselves. They never did, for him. As Investors' Chronicle put it this month, Woodford was never proved right.
The parallel ends where the structures differ, and the difference matters. Woodford Equity Income was a daily-dealing fund full of unquoted holdings it could not sell; Fundsmith Equity is a liquid portfolio of global mega-caps whose investors can leave any day they choose. It does not present the same liquidity mismatch, and nothing here suggests it will. Smith also remains ahead of the market since inception, with a cumulative return of 592.6 per cent against 530.9 per cent for the MSCI World — 13.1 per cent a year against 12.5. The claim in this article is narrow. What the two situations share is not a destination but a pattern of behaviour under pressure, and the pattern shows up in what both men wrote.
How the letter assigns responsibility
Read simply as a document, the July 2026 letter has a consistent structure. The fund's underperformance is attributed to forces outside it: the rise of passive money, the artificial-intelligence boom, a market in which momentum has crowded out fundamentals. Whether index funds really are distorting markets in the way Smith argues is a question TEBI has examined against the evidence. The holdings that failed are explained by the failings of the companies themselves. Novo Nordisk, in the letter's account, 'parlayed a market leading position' in the biggest drug discovery in decades 'into an investment disaster'. Zoetis is judged to have unimpressive management. Unilever's board is said to have listened to an activist.
The sharpest example is Intuit, which the letter criticises for 'a continuing state of denial' over a poor acquisition — in the same document that records Smith selling the stock for the second time, having bought it back after selling it once before for the same reason. Nowhere in the letter is the decision to buy or hold any of these companies identified as the error. The letter notes that some holdings were sold at a loss, or soon after purchase, and observes that share prices do not move according to whether the fund owns them.
The change of approach, meanwhile, is explained as survival: 'the market can remain illogical longer than we can remain in business', Smith writes. And his strongest argument sits alongside it, deserving a fair hearing. Buying quality companies during a bad patch worked for Warren Buffett, whose American Express purchase during the 1960s salad-oil scandal is Smith's own example — but, as Smith points out, Buffett executed it in a closed vehicle he controlled, not an open-ended fund facing daily flows. That is a real constraint, not a rationalisation.
Yet the letter's confidence in its own judgement is undimmed. Having set out the case against passive investing at length, Smith writes 'I rest my case'. The new holdings, he estimates, will grow their cash flows by about 14 per cent a year, and the letter closes by hoping investors will still be there to see it: 'We will be.' Conviction that the market is wrong and the manager will be vindicated is the register Woodford used near his own end. It is now the register of this letter.
Writing in Investors' Chronicle on 14 July, Taha Lokhandwala found that the manner, speed and motivation of Smith's changes reminded him of Woodford's descent from hero to villain — a comparison he said he did not make lightly, while stressing that the situations themselves are very different. The tone of the letter, in his reading, was that of a man fighting the world rather than calmly investing other people's pensions and savings. 'The psychology of the man behind the numbers is worth considering,' he wrote. An impression, though, however carefully formed, is still an impression. What does the research actually support?
What the research can and cannot tell us
Explaining bad outcomes through markets, companies and circumstances is one half of a pattern researchers have measured. The full pattern — crediting success to skill while assigning failure to external forces — is known as self-attribution, and it is one of the most consistently documented biases in behavioural finance. TEBI reported the most direct evidence in 2024, when it was a finding about an industry. It now has a live application.
In a working paper titled 'Heads I Win, Tails It's Chance', the researcher Meng Wang used language models to classify how fund managers explained their results across 15,434 shareholder reports from 1,969 US equity funds between 2006 and 2018. On average, managers attributed 59 per cent of the factors behind good performance to their own decisions, but only 17 per cent of the factors behind bad performance. The funds whose managers showed the strongest bias went on to trade more, take more risk and deliver worse returns. The paper has not been peer-reviewed, and it does not name Smith. Whether the letter fits the pattern it describes is a judgement the reader is now equipped to make — ideally by doing what Wang's models did, and comparing it with the letters Fundsmith published in its winning years.
There is also the question of what a shareholder letter is for. Alexander Hillert, Alexandra Niessen-Ruenzi and Stefan Ruenzi, writing in Management Science in 2025, analysed tens of thousands of US fund shareholder letters and found that a letter's tone was associated with the money that followed it — less negative letters attracted more — while telling investors little about future performance. Whatever its formal purpose, a letter can influence flows as well as explain them.
And the pressure Smith names is the kind researchers have long studied. Judith Chevalier and Glenn Ellison, in the Quarterly Journal of Economics in 1999, showed that career concerns shape what fund managers do with their portfolios; Angeline Chua and On Kit Tam, in the Journal of Corporate Finance in 2020, found that deliberate shifts towards whatever style is currently popular tended to attract inflows without delivering returns for the people providing them. These papers describe populations, not this manager and this letter. They frame the question; they do not close it.
One line has to be drawn clearly. None of this justifies inferring a personality from a document — attempts to read character from language patterns have fared badly under scrutiny, with one large multi-sample study (Carey and colleagues, Journal of Personality and Social Psychology, 2015) finding first-person pronoun use essentially unrelated to narcissism. This article makes no claim about who Terry Smith is. It reports how two managers explained themselves under pressure, in their own published words, and what research associates with explanations of that kind.
Reading the letters
One letter cannot tell investors whether Fundsmith's changes will work, and it certainly cannot tell them whether history is repeating. What it can show is that the process is changing, and how the change is being explained.
The questions a reader can put to it are straightforward. What exactly has changed? Was the change part of the stated process before performance weakened, or a response to it? And does the manager hold his winners and his losers to the same standard of responsibility? Fifteen years of Fundsmith letters are freely available for anyone who wants to check the last one — the audit trail Smith himself recommended.
Because that is where this piece began. Six and a half years ago, Smith told investors that a manager's letters were where a change of game would show, long before it showed anywhere else. He was right about that, too.
Resources
Carey, A. L., et al. (2015). Narcissism and the use of personal pronouns revisited. Journal of Personality and Social Psychology.
Chevalier, J., & Ellison, G. (1999). Career concerns of mutual fund managers. The Quarterly Journal of Economics.
Chua, A. K. P., & Tam, O. K. (2020). The shrouded business of style drift in active mutual funds. Journal of Corporate Finance.
Hillert, A., Niessen-Ruenzi, A., & Ruenzi, S. (2025). Mutual fund shareholder letters: flows, performance, and managerial behavior. Management Science.
Wang, M. (2024). Heads I win, tails it's chance: mutual fund performance self-attribution. SSRN working paper.
Beyond the star manager
If this piece has left you wondering whether your own money is riding on one person's judgement, TEBI's Find an Adviser directory is a place to start. Everyone listed has publicly committed to evidence-based investing — low-cost, globally diversified, and built to work without a star at the helm.
For readers who would rather absorb the case themselves first, How to Fund the Life You Want by TEBI's Robin Powell and Jonathan Hollow sets out the evidence at book length. Bloomsbury published the second edition, and it is written for UK investors deciding how to build and spend their wealth. It is available on Amazon.