Terry Smith’s massive overhaul as underperformance gap widens

Terry Smith has radically overhauled his flagship fund, ramping portfolio turnover up to a record high of 51.8% in the first half of 2026 as he seeks to salvage its performance. 

Smith’s semi-annual letter to Fundsmith Equity I Acc (B41YBW7) investors noted that the fund had continued its long run of underperformance in the first half of 2026. It lost 2.9%, versus a positive return of 11.2% from the MSCI World index.  

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This continues a streak that has seen the fund underperform the market since 2021, now placing it well behind the MSCI World index even over a 10-year period. Nor is the fund now that far ahead of the index if judged by returns since its 2010 inception. 

The fund has also had to contend with substantial outflows: it comes to around £12 billion in size, well down from its peak of around £29 billion in the early 2020s.

Source: FE Analyics. Past performance is not a guide to future performance.

As he did at the start of the year, Smith again sought to blamed the sheer weight of money in passive funds for the poor showing, arguing that this meant momentum had become more important to performance than investment fundamentals.  

“The backdrop to this [underperformance] continues to be a market which is dominated by so-called passive or index funds (of which the majority are exchange-traded funds or ETFs) and the boom surrounding artificial intelligence (AI), which have combined to produce a market dominated by momentum rather than any fundamental factors like profitability, returns on capital and growth - in other words the factors we focus on,” he said. 

No more ‘do nothing’ 

Smith pointed to the fact that both Snowflake Inc Ordinary Shares (NYSE:SNOW) and Dell Technologies Inc Ordinary Shares - Class C (NYSE:DELL) saw enormous one-day gains earlier this year, and warned that such momentum now made it unwise to buy high-quality companies experiencing a “glitch”, as Smith has tended to do in the past, notably with both Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc Class A (NASDAQ:META). 

“We will take more account of momentum - both fundamental and share price - in our investment decisions,” he said.  

“In particular, we will be much less willing to deploy the time-honoured technique of buying quality companies when they hit a glitch.” 

He added: “In the current momentum-driven market, buying shares in companies which have hit a glitch is like trying to catch the proverbial falling knife.  All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect.” 

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Smith has therefore moved away from his famous “do nothing”, low-turnover strategy, instead carrying out a major overhaul of the fund.  

He noted that turnover could continue to be above the fund’s historical average in future, even if the 51.8% level from this six-month period may not be repeated. 

For context, turnover came to 12.7% for the full year of 2025, a figure that was well up from 2024’s 3.2%. 

The changes 

Smith started to build stakes in 12 new companies in the first half of the year, while exiting or starting to exit 13 positions.  

Our first table below lists the sales and a brief summary of Smith’s given rationale, with the second table showing new entrants to the portfolio and what those companies do.  

Smith’s full rationale for each buy is pretty lengthy, and is included in the letter, available via the Fundsmith website. 

Smith noted that the sales were “often driven by a complex mix of factors including lack of fundamental momentum, mismanagement and simple valuation”. 

Of the sales, one prominent name is UK-listed Unilever (LSE:ULVR), which has attracted Smith’s ire many times in recent years. 

In his rationale for the sale, Smith pointed to the multiple changes in leadership at the consumer goods giant, but also noted that the company spun out The Magnum Ice Cream Co NV (LSE:MICC) and then transferred the remainder of its food business to McCormick, despite having said no divestments were planned. 

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Of the McCormick deal, Smith said: “Apart from the fact that this flies in the face of what we were told and what we liked about Hein Schumacher’s approach, it has all the hallmarks of Nelson Peltz, the activist investor who is on the board.  

“We have seen Nelson in action back to the 1980s. We are not fans of the idea that corporate activity solves fundamental problems. Nor are we fans of boards that listen to activists who are not long-term investors.” 

Smith has also called time on his Novo Nordisk AS ADR (NYSE:NVO) position, noting that it “parlayed a market-leading position in the biggest drug discovery in decades into an investment disaster”.  He has also given up on turnaround play Nike Inc Class B (NYSE:NKE). 

 Of the purchases, it’s notable that Smith has joined the crowd in backing semiconductor play Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM). This marks a departure from the previous Fundsmith Equity approach of investing only in developed-market shares.  

He also buys into some big beasts of the US equity market, from Uber Technologies Inc (NYSE:UBER) to Netflix Inc (NASDAQ:NFLX). 

Smith suggested that the new portfolio scored well by his preferred investment metrics, noting that it came with a return on capital employed of 31%, a gross profit margin of 62%, an operating margin of 29% and cash conversion of 92%. The portfolio’s free cash flow yield comes to 4.3%.