Why Terry Smith halved his Microsoft exposure

Terry Smith has confirmed that he “roughly halved” his positions in Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc Class A (NASDAQ:META) last year because of worries about their spending spree on artificial intelligence (AI) infrastructure.

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The Fundsmith Equity I Acc manager told his annual investors’ meeting, a recording of which went online yesterday, that the team “roughly halved the holding in Microsoft, Meta and slightly less so in Alphabet Inc Class A (NASDAQ:GOOGL)”.

He added: “We did so because of concerns about what we’re seeing in terms of spending.

“There’s £600 billion per annum going out from four companies. If we’re looking for a 30% return on capital, those companies need to generate £180 billion of new cash flow […] to justify that in terms of returns on capital, per annum.” 

Smith added that businesses and consumers were largely not paying for AI so far, and not to a degree that could justify such spending.  

And while he conceded that some business models could get people “hooked” before charging them in some fashion, he argued that a company would likely need to establish a dominant position in its industry to make that work. 

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“At the moment, it looks to us like anybody’s choice in terms of who might be the winners, if any,” he said. “It might not be a company in the West.” 

He added that the big tech companies previously had very high returns on capital and were very capital-light, but said: “These are not going to be capital-light businesses. This is going to fundamentally change the characteristics of these companies in a way that we don’t like.” 

Source: Morningstar, end of 2025.

Microsoft has long been a mainstay of the Fundsmith Equity fund, while that and Meta have tended to be among the bigger positions in the fund in recent history. But both quietly disappeared from the fund’s list of top 10 holdings in late 2025. 

Smith did express concerns about AI spending from the US tech majors in his annual letter to investors, although he didn’t directly talk about reductions to his Microsoft and Meta positions at the time. 

We noted last month that Smith was among those managers seeming to back away from the Magnificent Seven stocks because of their heavy AI spending. The WS Blue Whale Growth I Sterling Acc team has also sold out of such names, as has the Manchester & London Ord (LSE:MNL) investment trust, which previously had an enormous position in Microsoft. 

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The Fundsmith team lists its top 10 positions but doesn’t detail the weightings in its factsheets – although Morningstar does provide this breakdown with a delay of a few months. 

Top holdings include Waters Corp (NYSE:WAT), which makes scientific equipment (such as mass spectrometers), medical device manufacturer Stryker Corp (NYSE:SYK) and IDEXX Laboratories Inc (NASDAQ:IDXX), which offers products for the veterinary sector. The fund’s biggest sector exposure is to healthcare. It’s also notable that the fund’s top position sizes are much lower than they have been in the past.

Performance troubles 

Smith again talked about the fund’s poor performance, and pointed to the culprits highlighted in his last letter (such as market concentration and the volume of money in passive funds) to explain this. 

While he still seems to largely be blaming market dynamics for the fund’s woes, Smith suggested that investors should see more changes to the portfolio in future in response to big trends. 

“We’ve done more in the last year and we will continue to increasingly do a little more because there are things that are causing change,” he said. 

“It’s not just AI. There are plenty of other things causing change: weight-loss drugs. It’s clearly going to be felt across the food and drink industry and across other industries.” 

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While he added that the team were “not about to become traders”, Smith suggested that they would be more nimble – and pointed to their move away from the big tech stocks and towards seemingly more defensive names such as recent portfolio addition (and software sell-off victim) Wolters Kluwer NV (EURONEXT:WKL).