Key Morningstar Metrics for Fundsmith Equity
- : SilverMorningstar Medalist Rating
- : Above AverageProcess Pillar
- : Above AveragePeople Pillar
- : Above AverageParent Pillar
We still see merits in Fundsmith Equity‘s approach. The focus on high-quality compounders is broadly intact, and the investment philosophy is as attractive as ever. It retains useful defensive properties for long-term investors. Lead manager Terry Smith has served early investors well over the long run, but we begin to discount his involvement over such time periods. As sole lead manager since inception, he remains central to our conviction, alongside head of research Julian Robins. A relatively thin bench backing the strategy compared with some peers, key-person risks, and a perceived lack of internal challenge contribute to a People Pillar downgrade to Above Average from High. This means the strategy now earns Above Average ratings for both People and Process.
We like the investment philosophy, which is to buy and hold high-quality businesses that will continually compound in value. The approach is bottom-up, combining prescriptive screens with deep fundamental analysis. The investment process is simple and well-articulated at all levels, starting with their stated objective, their strong identification of areas in which the fund won’t invest, as well as total clarity in what they seek in investments and the price they are willing to pay. This leads to a high-conviction portfolio of 20-30 high-quality companies.
Recent years have seen us monitor sell discipline and competition for capital within the portfolio. This includes the timing of sales, the rationale behind them, and position sizing decisions. The focus on long-term cash flow compounders remains evident. This focus, alongside continued, significant outflows in recent years, has contributed to further evolution in portfolio shape. Having represented almost a third of the portfolio a few years ago, there has been a reduction in consumer defensive companies where the manager is now less positive on some names. He remains overweight versus the Morningstar Category and category benchmark.
We no longer see the more permissive approach to sizing for the top two holdings in recent years, which has skirted the maximum 10% permitted under UCITS rules. This was at odds with the fund’s earlier years. Smith says this increased weighting was the result of “running his winners,” but there was a slight inconsistency in that the smaller Fundsmith Stewardship fund, which he also runs, has stuck to the 6%-7% range for top positions that was previously in place. We are happy that this has come down but now see a discrepancy in holdings versus the recently launched US-domiciled Fundsmith Equity ETF, which holds some positions—such as Taiwan Semiconductor Manufacturing—that are not in this flagship portfolio.
Overall, the portfolio remains high-quality and different from the benchmark. More than 90% of the fund is invested in companies where we assign wide and narrow Morningstar Economic Moat Ratings. While the manager is willing to pay a premium for this, we note that the portfolio’s free cash flow yield is now modestly more attractive than the category index. This is driven in part by partial profit-taking in Magnificent Seven-type holdings in 2025, such as Meta Platforms, Alphabet, and Microsoft.
The fund can see periods of underperformance given its concentrated nature and the tilt to quality-growth. We think some recent struggles prove more cyclical than structural. It is typical to see quality-growth lag in strong bull markets driven by a narrow subset of stocks and more cyclical names. As such, investors are encouraged to remain long-term when using quality-growth strategies.
Fundsmith Equity: Performance Highlights
A strong long-term record has been dented by recent underperformance, though this may prove to be cyclical rather than structural.
From its launch in November 2010 to the end of April 2026, it has outperformed its MSCI World Index benchmark, the Morningstar Global Growth Target Market Exposure Index category benchmark, and the global large-growth equity category average. Its lower volatility has also resulted in strong risk-adjusted performance over this period. Performance benefited from style tailwinds for much of the fund’s life, but the manager has added value above and beyond the strategy’s investment style bias.
Like many quality-growth peers, recent relative performance has been challenging, hit by the rise in interest rates. The fund has now underperformed its MSCI World Index prospectus benchmark and the category index over one, three, and five years. Some of this has been style-related, but there have also been some stock-specific upsets.
This has been compounded by the odd nature of the market in recent years, which proved difficult to beat given narrow market leadership among the Magnificent Seven stocks and among some lower-quality companies this fund avoids. Relative to a subset of funds with similar portfolio characteristics, the long-term returns have proved superior, including on a risk-adjusted basis. One should expect it to struggle more in strongly rising, momentum, or low-quality beta-driven markets. In addition, given the structural underweighting in most financials, energy, materials, utilities, and telcos, we would expect the fund to underperform if those sectors were all outperforming. That has been the case of late. We note that downside resilience has been a key strength since inception, and it has captured just 69% of category index losses from its inception to the end of April 2026. Most of the holdings retain useful defensive properties.
For the year to date to end April 2026, market volatility has once again been extreme. In some instances, this has served as a reminder to remain long-term. Some holdings that had initially done poorly have since recovered some lost ground, but over this short period, the portfolio has lagged. This follows a weak year for relative performance for calendar years 2025, 2024, and 2023. It has been influenced by the Magnificent Seven effect, which dominated index returns, but there was also weakness in some of the consumer holdings and Novo Nordisk.
The main detractors over the three years to the end of 2025 can be found in the consumer defensive and healthcare sectors. In single stocks, Brown-Forman Corp (now sold), The Estee Lauder Companies (now sold), and Nike (now sold) have been painful. Danish healthcare companies Novo Nordisk and Coloplast also count among the top detractors, though Terry Smith has retained the positions. This was partially offset by the portfolio’s Magnificent Seven holdings, including Meta (which was added to in 2022), Microsoft, and Alphabet. Smith has taken profits in these trimmed positions. Elsewhere, Philip Morris and IDEXX Laboratories have been successes over this time period.
When looking at attribution using the Morningstar Style Box, one can see that a large proportion of underperformance can be explained by a significant underweighting in large-cap growth.
We advise investors to take a long-term view to fully benefit from quality-growth approaches such as this.
