Terry Smith has often been called Britain’s answer to Warren Buffett: a star fund manager whose investment philosophy could be summed up in a few simple rules – buy good companies, don’t overpay, do nothing.
However, recent times have been far from stellar. His fund slipped in the first half of 2026, even as the MSCI World index raced higher.
Fundsmith has returned 26.1 per cent since 2021, compared with a doubling for the aforementioned global index. Smith can still point to a strong long-term record, with Fundsmith ahead of its benchmark over 15 years, but it now trails over three-, five- and 10-year periods.
Investors have lost faith, with assets under management falling from £29 billion to £12 billion. As a result, the do-nothing investor now feels obliged to do quite a lot. He has radically changed his approach, reshaping more than half of the portfolio in just six months.
From now on, says Smith, he will “take more account of momentum”. In his latest client letter, Smith blames a market environment dominated by passive investing and artificial intelligence-driven momentum, saying investors are rewarding yesterday’s winners rather than focusing on fundamentals.
Some quantitative investors have successfully combined value and momentum over many years, but this is new ground for Smith. His reputation was built on ignoring short-term market trends, not adapting to them.
Investors must now decide whether they are backing a new Smith strategy, or simply hoping that a supposedly great investor can reinvent himself. And while Smith rails against index investing, his travails reveal the appeal of the passive approach. The passive investor doesn’t need to decide whether a manager’s bad run is temporary or permanent, whether a strategy has been unlucky or broken, or whether a new approach will succeed. The passive investor has one big decision: stay invested.
In contrast, Smith’s predicament highlights the burden facing active fund investors: after identifying a great manager, they must repeatedly decide whether their chosen genius remains one.
