Fundsmith Equity is a popular investment fund. And it’s easy to see why – since its inception in 2010, it has delivered impressive returns (around 14% per year). Recently however, the performance has been underwhelming. This begs the question: is the fund still a good option to consider for a Stocks and Shares ISA now?
Quality focus
Let me start by saying that I have a position in Fundsmith myself. The reason why is that I like portfolio manager Terry Smith’s ‘quality’-based investment strategy. Buy good companies, don’t overpay, do nothing is his approach. That’s a good strategy, in my view.
Now, there’s no doubt that Fundsmith’s performance over the last two years has been disappointing. In the tech-driven bull market of 2023/24, the fund wasn’t able to keep up. But I’m not too concerned here as returns were still decent. And most active fund managers weren’t able to beat the market with mega-cap tech stocks having such a strong run.
What I want to see is outperformance in normal and/or weak market environments. Can it beat the market in these conditions? That’s the big question for me. Because if it can, it could potentially play a valuable role in my portfolio as a diversifier/hedge against risk.
So, what has performance looked like this year?
| Q1 2025 | 2024 | 2023 | 2022 | 2021 | 2020 | |
| Fundsmith | -5.7% | 8.9% | 12.4% | -13.8% | 22.1% | 18.3% |
| MSCI World | -4.7% | 20.8% | 16.8% | -7.8% | 22.9% | 12.3% |
Well, it’s concerning, to be honest. Given the fund’s focus on quality, I would have expected it to outperform in 2025 as markets have fallen. But it hasn’t. For Q1, it returned -5.7% versus -4.7% for the MSCI World index – that’s not good.
March’s performance was particularly bad. Here, it returned -9.2% versus -6.8% for the MSCI World.
An underperformer
Looking under the bonnet to see what’s gone wrong, it seems a few top holdings have taken a big hit. An example here is Novo Nordisk (NYSE: NVO).
Year to date, it’s down about 20%. Over 12 months, it’s down roughly 45%.
What’s happened?
Well, the main issue is that investors have become concerned that the Danish company – which is the producer of weight-loss drugs Wegovy and Ozempic – is losing ground to US rival Eli Lilly. This has led to a major valuation re-rating.
Personally, I think the stock has fallen too far, could bounce back and is worth considering today. To my mind, it now looks cheap (the price-to-earnings ratio is just 18) relative to its forecast growth of a 20% revenue rise this year.
That said, the competition from Eli Lilly – which makes Zepbound and Mounjaro – is a legitimate risk. It could lead to a slowdown in growth for Novo.
Concentration risk
Now, if you own 100 stocks in your portfolio and one bombs like this, it’s not going to be the end of the world. However, if you only have 25-30 stocks, like Fundsmith does, this kind of underperformance can result in a real drag on performance. This concentration is one of the big risks here. If Smith picks the wrong stocks, it can lead to poor returns.
What I’m doing
Looking at Fundsmith today, the bottom line is that performance needs to pick up and quickly. For the fee, I’d want to see better returns.
I’m continuing to hold it and I still think it’s worth considering as part of a diversified portfolio. But right now, I’m putting more money into passive funds, niche funds, and individual stocks.
This post was originally published on Motley Fool
