The Terry Smith timing trap: why most investors lost money
- Robin Powell
- Nov 3
- 6 min read
Terry Smith refuses to discuss his fund's four consecutive years of underperformance. But the real story isn't his silence — it's the £3.3 billion that flooded into Fundsmith Equity after stellar returns, then bled out when the market turned. Most investors who backed this "star" manager lost money compared to a simple tracker.
"You might want to talk about it, but I do not."
Terry Smith's reply when The Telegraph's Jeremy Warner called him at his home in Mauritius last week to discuss his flagship Fundsmith Equity fund. Smith, once hailed as Britain's answer to Warren Buffett, has trailed the MSCI World Index for four straight years. Warner's frustration cuts through: why are investors paying 0.9-1.5% annually "when they can get superior performance from indexed and exchange-traded funds for a fraction of the price?"
The fund has shed nearly £10 billion since its peak. Last year alone, £3.31 billion walked out the door — among the largest outflows in UK fund history. Warner's verdict: "Smith needs to pull his socks up, and fast."
But Warner misses the bigger question. Even if Smith's thesis proves right, even if Fundsmith roars back, who benefits? Most investors won't. They've already left.
When stellar returns become investor losses
The numbers are brutal. Fundsmith has underperformed the MSCI World by 6.0 percentage points in 2022, 4.4 points in 2023, 11.9 points in 2024, and 12.8 points year-to-date through 31 October 2025. Four years. Cumulative damage in double digits.
Yet Smith's lifetime record still beats the index — 13.8% annualised since November 2010 against the MSCI World's 12.1%. On paper, he's winning.
Strip away those early years and everything changes. Fundsmith's entire outperformance came before 2021. Since then: relentless divergence.
The chart shows it with painful clarity. For a decade, Fundsmith climbed above the benchmark. From late 2021, the lines split apart. Early investors who got in near launch and held tight have done well. But how many actually did that?
Fundsmith Equity vs MSCI World Index, November 2010 - October 2025
The flow data answers. Peak inflows hit between 2019 and 2021, when assets climbed toward £30 billion. That's when investors piled in, drawn by Smith's track record and star status. Anyone who bought then endured every bit of the four-year drought.
Then the exodus began. Last year, £3.31 billion fled — confirmed by Morningstar Direct. Another £463 million left in early 2025. By September, assets had shrunk to £17.9 billion.
Do the maths. Anyone who bought during 2019-2021 has suffered four straight years of losses relative to the index. Their returns? Almost certainly worse than a 0.1% passive global tracker.
The fee gap twists the knife. Fundsmith charges 0.9-1.5% annually. Global trackers cost 0.05-0.20%. Over four years, that adds roughly one percentage point annually — another four points of underperformance. For late arrivals, the damage is catastrophic.
Terry Smith is not immune to the iron law of fund flows
Smith didn't create this problem. The system did.
Jack Bogle, founder of Vanguard and pioneer of index investing, captured it perfectly: "Hint: money flows into most funds after good performance, and goes out when bad performance follows."
Morningstar's Mind the Gap research quantifies the damage. UK investors lose around 0.32% annually to mistiming — actually the lowest figure among six countries studied. Americans sacrifice more. But even conservative estimates show investors buying after strength and selling into weakness.
The pattern is mechanical. Strong returns attract money after those returns have occurred. By the time you've read glowing press coverage, seen "best fund" lists, or heard your adviser's recommendation, the outperformance is history. What matters — the future — looks different.
Weakness triggers exits during the weakness itself. Investors crystallise losses that patient holders avoid.
Brilliant stock-picking can't save anyone who arrives late and leaves early. The fee gap makes it worse. Over four years, Fundsmith's 0.9-1.5% charge versus a tracker's 0.05-0.20% adds 2.8 to 5.2 percentage points of drag. Mistimed entries. Panicked exits. Higher fees. The investor experience diverges dramatically from quoted returns.
A structural shift made things worse. In 2023, passive funds overtook active globally for the first time — $13.25 trillion versus $13.24 trillion in the US by year-end, according to Morningstar and Cerulli. Passive inflows now mechanically inflate the largest stocks through market-cap weighting. The Magnificent Seven tech giants — Apple, Microsoft, Alphabet, Meta, Amazon, Nvidia, Tesla — drove more than half the S&P 500's 25% gain last year.
Active managers who avoid overvalued mega-caps face structural headwinds. Fundsmith, deliberately underweight in several of these names, swam against a tide of passive money. Smith's critique of this distortion has merit. His fund paid the price.
The numbers are extreme. Nvidia alone delivered over 20% of the S&P 500's gains last year. The top seven stocks now make up roughly 35% of the index, double their share from a decade ago. Smith's underweight in these names guaranteed losses during their parabolic rise.
The Tony Dye lesson: correct but too early
History offers a warning. Tony Dye, chief investment officer at Phillips & Drew in the 1990s, watched the tech bubble inflate and acted. Starting in 1995, when the FTSE hit 4,000, he declared markets overvalued and vulnerable. He shifted client money into cash and bonds. The press called him "Dr Doom".
The bubble kept inflating. By 1999, Phillips & Drew ranked 66th out of 67 UK institutional managers. Clients fled. In February 2000, weeks after the FTSE broke through 7,000, Dye was sacked.
The dot-com crash followed immediately. Three years of bear market wiped out more than half of global equity values. Dye's analysis proved right — but too late to save his career.
Smith faces the same trap. He's avoided overvalued Magnificent Seven stocks, especially Nvidia. He admitted recently: "we simply got it wrong on Nvidia." If AI valuations collapse, if the tech bubble bursts as Dye predicted, Smith's defensive stance could eventually pay off.
When, though? Markets stay irrational longer than investors tolerate losses.
Even Warren Buffett, the most celebrated investor alive, trails the S&P 500 this year. Berkshire Hathaway's up roughly 8-11% year-to-date against the index's 13-16% gain. Value struggles in a growth-dominated market, just as Smith's quality focus does.
Active management demands two correct calls: what to buy and when. Timing can't be predicted consistently. Dye's story isn't about stubbornness or poor analysis. It shows the impossibility of maintaining any strategy that diverges from the benchmark when client withdrawals punish deviation.
Dye was fired before vindication arrived. Smith has survived — his £18 billion buys patience Dye never had. But Smith's investors? They've already paid.
The unwinnable game
Terry Smith hasn't failed investors. The structure of active fund management ensures most investors fail — even when managers succeed long-term.
Smith's early returns were real. His philosophy remains sound. His 15-year record still beats the index. None of that matters if you bought in 2020 and sold in 2024.
Client withdrawals force managers' hands during any deviation from the benchmark. Dye got fired before vindication arrived. Smith may survive — but the exodus suggests patience is wearing thin.
Even if Smith is right about AI valuations, even if the Magnificent Seven crash, investors who bought during peak inflows and sold during weakness won't benefit. They've locked in losses relative to a passive alternative. Future vindication helps future investors, not those who've already left.
This isn't about effort or talent. When passive flows mechanically inflate benchmark stocks, when withdrawals force sales during weakness, when fees compound regardless of results, manager skill becomes secondary.
You can't beat this by being smarter. You avoid it by not playing.
Questions to consider
If you hold Fundsmith Equity — or any actively managed fund that's struggled recently:
When did you invest? After reading about past returns?
What would a global tracker have delivered over the same period?
If Smith's tech thesis proves right, can you stomach another two to three years waiting?
Even if he's right eventually, will you still be there for the turnaround?
What's the chance you exit just before recovery?
The evidence says active fund management is a game where timing matters more than skill. And no one times it consistently.
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