Key Takeaways
- Fund manager Terry Smith has pledged to incorporate earnings momentum and be more active in exiting positions that aren’t working out.
- Fundsmith Equity Fund saw significant portfolio turnover in the first half of 2026.
- The fund has seen significant outflows in recent years but Fundsmith is still profitable at its current AUM.
The semiannual letter written by veteran stock-picker Terry Smith, manager of the Silver-rated Fundsmith Equity, is closely read by investors and the industry at large. The fund is the largest active retail offering in the UK, with more than £12 billion under management, and Terry Smith’s long-term track record—and status as founder and CEO of Fundsmith—means that UK investors pay close attention to his thoughts on markets and individual stocks.
The letter was a meandering missive that covered lots of ground. Apart from writing about the negative effect of passive investing, he also outlined some changes to how the process will be implemented. The subsequent webinar update had a flavor of “mea culpa” regarding recent underperformance. Terry Smith said he may have been slow to upgrade the quality of the portfolio and to recognize the fundamental impairments of some holdings. Some positions, such as Nike NKE, could have been sold sooner.
He took a long hard look at his “do nothing” pillar and will now try to incorporate earnings momentum—and to lesser extent, price momentum—and be more active in exiting positions that aren’t working out. Selling is hard to do, as academics have noted. Smith seems to have acknowledged this and taken action.
What this meant in practice was significant portfolio activity, mostly in the second quarter of 2026; in the year to the end of June 2026, portfolio turnover reached just over 50%. That’s certainly active. It’s also a stark departure from expectations. However, we understand that this very type of activity, which is out of character, is unlikely to persist.
This begs the question whether this represents a sensible evolution of approach or a capitulation in the face of continued outflows and weak relative performance. That question is one we will seek to answer in the coming few weeks. We remain long-term in our assessments and will qualitatively assess the evolution in thinking at Fundsmith. We are fortunate to enjoy excellent access to managers and a review meeting is upcoming.
Stocks Bought By Fundsmith in H1 2026
- AppLovin APP
- GE Vernova GEV
- Legrand LR
- Mastercard MA
- Netflix NFLX
- Nextpower NXT
- Sage SGE
- The TJX Companies TJX
- TSMC 2330
- Uber UBER
- Veeva Systems VEEV
- Yum Brands YUM
Stocks Sold By Fundsmith in H1 2026
- Atlas Copco ATCO A
- Coloplast COLO B
- Essilor Luxottica EL
- Intuit INTU
- LVMH MC
- Magnum Ice Cream MICC
- Mettler-Toledo MTD
- Nike NKE
- Novo Nordisk NOVO B
- Otis OTIS
- Unilever ULVR
- Wolters Kluwer WKL
- Zoetis ZTS
What Terry Smith’s Changes Mean for Fundsmith Investors
Earlier this year, we downgraded the People Pillar, and the Process Pillar rating back in 2024. A relatively thin bench backing the strategy compared with some peers, key-person risks, and a perceived lack of internal challenge contributed to this. Further, while lead manager Terry Smith has served early investors well over the long run, we begin to discount his involvement over the longer time periods that are appropriate for the strategy. As sole lead manager since inception, he remains central to our conviction, alongside head of research Julian Robins.
The Process Pillar rating was unchanged in 2026, also at Above Average. We previously downgraded the pillar rating in 2024. At that time, we thought Smith had made a number of missteps. Smith agreed, admitting to the wrong timing of sales. Our Process Pillar rating will now require some thought: Any change to strategy warrants careful analysis, supported by qualitative assessment. This is required to fully understand the changes.
We had signposted in our report that “we monitor the consistency of buys and sells, flow-driven portfolio activity, and whether this undermines the ‘do nothing’ pillar of the approach.” The new portfolio holdings comprise the type of company we would expect to see here and the portfolio’s cash flow generation is healthy.
In our upcoming assessment, we will determine the extent to which the changes articulated in Fundsmith’s recent letter are supported by an evidence-driven approach. We will also look at the timing of buys and sells, sell discipline more broadly and considerations around internal portfolio correlations. We will also seek to understand how long this has been in gestation. This will help us to understand whether this is a knee-jerk reaction to performance woes and the consistent outflows that have plagued the fund in recent years, or a sensible evolution.
Key Morningstar Metrics for Fundsmith Equity
- Morningstar Medalist Rating: Silver
- Process Pillar: Above Average
- People Pillar: Above Average
- Parent Pillar: Above Average
Fundsmith Outflows Have Been Significant, but the Firm Is Still Viable
In the letter, Terry Smith said he wanted to be assessed on performance in the next 18 months. That may buy him some time if clients listen to him, but reading between the lines, we sense an air of frustration that clients have left in recent years. The fund had peak assets of nearly £30 billion and that’s now just over £12 billion. The fund has sunk to the bottom of the leaderboard for net flows within the EEA Global Equity Growth category. Some £7.8 billion has left the fund in the last year and £14 billion over three years. Managing outflows is a different skill to inflows, especially for managers who explicitly want to limit portfolio turnover.
Elsewhere, for boutique managers, it is important to regularly assess firm viability. But Fundsmith is still profitable at its current AUM, and we think it can easily stomach more outflows should it have to.
