Terry Smith: Fundsmith, “Do Nothing” and the Year He Changed Course

The analyst who lost his job over a book

Terry Smith was born in London in 1953 and made his name in the City as a bank analyst. In 1992, while head of research at UBS Phillips & Drew, he published “Accounting for Growth”, a book showing how well-known British companies used accounting techniques to flatter their profits. The bank tried to stop it, Smith lost his job, and the book became a bestseller. It set the tone for the rest of his career: blunt, sceptical of corporate spin and focused on how much cash a business really produces.

He went on to run the stockbroker Collins Stewart and the interdealer broker Tullett Prebon before setting up Fundsmith in 2010. Its flagship fund, Fundsmith Equity, launched on 1 November 2010.

Buy good companies, don’t overpay, do nothing

Smith’s strategy fits into three short instructions, and he repeats them in almost every letter to investors.

• Buy good companies: businesses that earn high returns on the capital they use, mostly in cash, and can reinvest to grow — think consumer brands, software and medical devices rather than banks, airlines or miners.
• Don’t overpay: a great company can still be a poor investment if you pay too much for it, so valuation matters, measured mainly against free cash flow.
• Do nothing: once you own great companies, the less you trade the better, because trading costs money and great businesses keep compounding.

The fund’s costs are simple too: an ongoing charge of 0.94% a year and no performance fee, which is far more than an index fund costs but easy to understand. For a decade the approach worked brilliantly, and Fundsmith Equity grew into one of the most popular funds among British savers, with about £29 billion at its peak in the early 2020s.

Five years behind the market

Then the market changed. From 2021 Fundsmith trailed the MSCI World index year after year, as many of its consumer and healthcare holdings stalled while a small group of US technology giants drove the index higher. According to interactive investor, over the five years to 8 July 2026 the fund returned 9.5% against 76.3% for the MSCI World, and over ten years it now trailed the index, 145% against 230.2%. Since launch it was still ahead, 593.5% against 526.2%, but the lead had shrunk sharply, and the fund had fallen to about £12 billion.

Smith’s long-run record is still ahead of the index, but anyone who bought Fundsmith in 2021 saw almost none of the market’s gains for five years.

2026: the year he did something

In his letter for the first half of 2026, Smith made the biggest change in the fund’s history. Turnover hit a record 51.8% as he started buying 12 companies and sold, or began selling, 13. Out went long-time holdings such as Unilever, LVMH, Nike, Novo Nordisk and Zoetis; in came companies including Mastercard, Netflix, Uber, GE Vernova, Taiwan Semiconductor (TSMC) and AppLovin. He wrote that the fund would “take more account of momentum — both fundamental and share price” and would be much less willing to buy quality companies after a setback. In the same letter he warned that today’s passive-led momentum market would end “badly”, without saying when.

Critics called it capitulation; supporters called it adapting. Either way, the first half of 2026 was another poor stretch: the fund lost 2.9% while the MSCI World gained 11.2%.

What investors can learn from Smith

Smith’s three rules remain a sensible way to think about owning shares, and his warnings about accounting tricks and trading costs have aged well. His recent years carry a second lesson: even a strategy with a strong long-term record can trail the market for years, and the pressure to change course is greatest exactly when sticking with it is hardest. Before backing any single manager, it is worth asking whether you would hold on through five years like 2021 to 2026. This profile is general education, not a recommendation to buy or sell any fund.

This article is educational and general in nature. It isn’t personalized investment, tax, or legal advice — always weigh your own circumstances, or talk to a licensed professional, before making financial decisions.

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