Fundsmith Equity manager Terry Smith (pictured) has defended recent performance after a fourth straight year of lagging the broader market.
The £22.5bn fund rose by 8.9% in 2024, trailing both the MSCI World Index (up 20.8%) and the IA Global sector average of 12.6%.
In an annual letter to shareholders, he said a “longer-term perspective may be useful” and is more consistent with the fund’s investment aims and strategy.
Since inception in 2010, the fund has returned 2.7% more than the index per year with less downside volatility, with a Sortino Ratio of 0.87 against 0.60 for the index.
Smith said that market concentration made it a particularly difficult year to outperform, with just five stocks making up 45% of S&P 500 returns in 2024.
While US tech giants Microsoft and Meta were the two most positive contributors to performance over the calendar year, the fund’s performance has been hurt in recent years by the performance of Nvidia particularly, which is not in the Fundsmith Equity portfolio.
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“Clearly investors want active funds to outperform all the time, but that simply isn’t possible, especially in current market conditions,” Laith Khalaf, head of investment analysis at AJ Bell, said.
“Indeed the question at present isn’t so much whether Terry Smith is underperforming the MSCI World Index, but whether the index is outperforming Smith and his fellow active managers.
“As detailed in our latest Manager versus Machine report, only 18% of active managers in the Global sector outperformed the average index tracker in 2024 to the end of November, and only 17% achieved this feat over the longer, and hence more substantive, period of 10 years.
“A large part of the strong index performance has been driven by a relatively small number of big technology names, which hold such a high weighting in the index that active managers are unlikely to be anything other than underweight this grouping, known as the Magnificent Seven, as a whole.”
Weight loss drugs impact alcohol stocks
Smith also revealed that the fund has sold its stake in Diageo amid concerns over the impact of weight-loss drugs on demand for alcohol.
Fundsmith has held a position in Diageo since inception.
“We suspect the entire drinks sector is in the early stages of being impacted negatively by weight loss drugs. Indeed, it seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption.”
Brown-Forman, one of the world’s larges drinks companies, was one of the largest detractors over the year. Smith said that the stock has suffered from the fall in consumption from the pandemic highs and is “probably seeing early signs of the adverse impact of weight loss drugs”.
However, retaining Brown-Forman “keeps a foothold” in the drinks sector.
Smith added that a larger bias towards premium spirits than Diageo which may help to negate the impact of weight loss drugs, with consumers potentially drinking less but better quality.
“It is a company which survived Prohibition so we hope there is literally something in the DNA to help with these adverse circumstances.”
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