Has Terry Smith Lost His Edge?
Takeaways from a candid interview on doubt, discipline, and doing right by clients
Introduction
This month’s podcast guest is Terry Smith, a manager I have wanted to interview for some time. We did it in person on his recent visit to London and I didn’t expect him to open up the way he did. Best listen to the podcast, but a few notes below on what I learned from our conversation and from his recent annual letter to clients.
Terry Smith is the fund manager the professionals love to hate. A billionaire, he is in the third and most successful phase of a varied career. He trounced the index for years with a simple mantra of buy good companies, don’t overpay, do nothing. He thus built one of the largest funds in the UK, made himself a fortune and moved to Mauritius. None of this made him popular with his peers and after 5 years of underperforming the S&P500 (his global fund has been mainly invested in the US) and underperforming the world index in 2025, there is quite a bit of schadenfreude around.
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Star Managers Can Have Bad Phases
Before I get into our discussion, both Smith and recent guest Nick Train had periods of stellar performance but have had several years of underperformance since, leading to many commentators questioning whether they have lost their touch.
I have been reading multiple posts about their underperformance on social media. Some of the posts and particularly comments made by others are strongly critical of the two managers - one highlighted that Train should have sold Diageo at £40 and perhaps bought it back at £16.
It may not entirely be a coincidence that both came on my podcast in a 3 month period. Perhaps the underperformance and the related public criticism has put pressure on their marketing departments.
First, I should highlight that I don’t condone the underperformance and I agree that it has been for an extended period. And yes, it would have been marvellous to have sold Diageo at £40 and bought it back at £16. That’s easy with hindsight. Less easy to sell a winning stock you have held for 15-20 years because of a “temporary” issue.
I also think observers need to put this recent, long term underperformance in context. Over a near 20 year period, Train beat his benchmark return by around 3x. In the last several years he underperformed it by around 30%. The precise data are in the show notes on my website.
It’s perfectly fair to criticise a manager’s performance, especially when it has been extended. Smith attracts similar criticism to Train, more of it and more vocal. His period of strong performance was shorter and hence less spectacular; he was also managing a much larger pool of assets, has likely made more money and moved offshore to Mauritius.
I asked Smith about his response to some of the critics:
“We are not wealth managers we are fund managers. We offer a fund which is run with a certain investment strategy which we have made crystal clear and which we think we and others have demonstrated can add value for investors over time. If wealth managers or investors do not like the strategy, they are of course at liberty to invest elsewhere in different strategies. Why this requires often vitriolic commentary is beyond me, but I suspect there are some fairly old-fashioned concepts like envy, tall poppy syndrome, the English desire to see the successful fail and the work of competitors who would rather play the man and not the ball at work. The irony is that if history is any guide, it is just when the tide is about to turn that we will see the worst of the criticisms.”
Handling Underperformance
In the podcast, I asked Terry about his attitude to underperformance and compared his position to that of Nick Train who agonised on the show about his 6 year stretch of underperforming his benchmark, even though his 20+ year track record remains outstanding. Smith has been criticised for making excuses and in this interview he revealed that he takes the now 5 year stretch of underperformance very personally.
He respects Nick Train and points out that
“he hasn’t suddenly got stupid.”
He went on:
“There will be phases in markets that knock you off course - underperformance is a feature not a failure; it’s inevitable and it’s how you deal with it that matters. It involves introspection – what could you have done better?”
Smith points out that neither he nor Train are doing it for the next dollar, but “it’s what we want to do”. The thing which most upsets him is not losing money, but letting people down.
“It literally causes me sleepless nights sometimes”.
Both managers have suffered because quality did extraordinarily well for an extended period – Smith’s portfolio started out with a 7% free cash flow yield and a year ago the portfolio had a FCF yield of just over 3%. And the companies had grown their free cash flow in the interim.
So the period of strong performance was in part driven by the quality factor, and that has similarly driven the period of underperformance for both managers. Neither has gone from being a genius to being an idiot. These managers are going through a rough patch which may be temporary, albeit extended.
If I put myself in their shoes, I am not sure what I might do differently. I have never been wedded to a particular style of investing, other than buying companies whose profits growth had been under-estimated – I wasn’t smart enough to come up with anything more sophisticated and accidentally this led to a varied portfolio with holding periods of years rather than decades.
But if I had a distinct and firm investment philosophy, then when it stopped working for a few months, I would assume it would be temporary. And the longer it went on, and the cheaper my portfolio became, I suspect I would become more convinced that I was right.
That’s my reading of their situation and I wonder if we shall only see if they are proved right in a few years. But even Anthony Bolton, one of the best managers of all time, with a totally flexible investment philosophy - unlike Smith and Train who have a distinct emphasis on quality - underperformed for a period of time. I recall him telling me that he found it difficult and started to doubt himself.
Rather than criticising the two managers, perhaps those commentators should be asking if quality is now so out of favour that it might be cheap and possibly even attractive.
Should You Change Course?
Neither is interested in changing his investing philosophy. Train has been looking at other stocks which benefit from owning data which may be valuable in an age of AI – a slight strategy shift. Smith, although he professes that no change is on the horizon, teased at his last shareholder meeting that he was looking at a bank stock.
I asked him about this as it seemed a radical change of strategy. Indeed it seems to go against all the investment principles that he has espoused. If it were to go wrong, he would likely be crucified by commentators.
Smith explained that he feels that the reputational risk is less than the discomfort he would feel personally if he passed up an opportunity to make money for his clients – as Roosevelt said, “don’t be the timid soul who knows neither victory or defeat”.
The full quote, if you are interested, is
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Smith says he is prepared to change strategy if he has enough conviction, but to date he hasn’t. The fund’s underperformance is at least in part due to his exposure to expensive quality; and he is prepared to dilute that, but hasn’t done so. I haven’t seen any of Smith’s many critics complaining that he hasn’t bought bank stocks.
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Getting into Investing
Smith founded Fundsmith while still CEO of Tullett Prebon and his main fund just released its 16th annual letter. This is the third phase of an illustrious career. Smith started out at Barclays Bank then moved to the sell-side as a banks analyst where he was number 1 for several years, famously publishing a sell note on parent Barclays when at BZW.
He moved to Phillips and Drew where he was Head of Research and published a note on dubious accounting practices. This caused controversy as a number of the offenders cited were P&D corporate clients. That note, penned by Smith and several analysts (notably Richard Hannah, my former competitor in the transport sector), was the basis for the book, Accounting For Growth, which leaped to the bestseller list as “the book they tried to ban”.
Smith’s next move was to Collins Stewart, a startup where he rose to CEO, led an MBO then a flotation, and later acquired moneybrokers Tullett Liberty and Prebon. He then spun off the original broking firm and stayed as CEO of Tullett Prebon. One issue was the pension deficit which Smith attacked using a quality equities approach, which subsequently led to the establishment of Fundsmith.
Fundsmith has been an incredibly successful operation. It has likely turned Smith into a billionaire. When asked about his success, Smith attributes it to a desire to succeed - to escape his impoverished roots (he grew up in a house without running water and with an outside toilet) – hard work and luck. It’s impressive when a successful person acknowledges the role of luck.
He acknowledges that his time spent at Barclays was helpful in giving him a good training and advises young people to start their career working for a large organisation and similarly to get the benefit of that initial training. Smith thinks that you need to want to be the best and publicise that, giving rise to the possibility of failure.
Fundsmith Performance
Smith reports performance relative to the MSCI World Index, the Investment Association Global Sector (ie global equity funds based in the UK) as well as bonds and cash. He has been criticised for not using the S&P500 as a benchmark, as his fund has mainly been invested in the US. The relevant stats are shown in the chart, extracted from his 2025 letter.
His recent performance has been poor and he doesn’t shy away from this. He attributes this to
Index concentration
The growth of passive
Dollar weakness
The dollar has been weaker in 2025 but it was very strong in other years. The growth of passive and the concentration of the index and the fact that the top 10 stocks delivered 50% of the S&P500 performance last year is clearly an issue for active managers, few of whom would be prepared to take on the concentration. This seems perfectly reasonable and clearly the S&P500 has become a growth and momentum story. Smith has explained why Nvidia doesn’t meet his criteria for several perfectly understandable reasons and Tesla similarly. He looks for a degree of certainty in his investments and he owns Microsoft, Alphabet and Meta so he has not avoided the tech sector, far from it.
His problem has been that Microsoft (+15.6%) and Meta (+13.1%) underperformed the S&P 500 (+17.8%) in 2025. Alphabet did much better, up 66.4%, but it had a smaller weight in his portfolio until Q3.
In his letter, he highlights how Apple (which made a short-lived appearance in his portfolio) may be a big winner by avoiding all the capex on AI. He compares its capex last year of $12bn with an estimated $218bn across his holdings Alphabet, Meta, Microsoft and a further $114bn by Amazon. It’s a strange comment, as I don’t think he owns Apple now but he does own those 3 hyperscalers; and he is clearly concerned that their AI capex will not deliver returns commensurate with their past records. It seems almost inconceivable that it could. Yet he continues to hold the stocks.
Source: WhaleWisdom
The data in the table is as of the last reported quarter (September 2025) and it shows that the positions in Meta and Microsoft have been reduced and the Alphabet position has been increased. Alphabet rose 37% in Q3 as the market perceived it could be a winner in the LLM race. There was no position in Apple at end-September.
Smith acknowledges that his investors are unlikely to do as well in the next ten years as in the fund’s first ten years – when he started, the free cash flow yield on the portfolio was 7% and he reckons the returns will equate to the starting yields plus the growth rate. Today the FCF yield on the portfolio is 3.7% (vs 3.1% at the start of the year) and he expects a growth rate of 8% - so he looks for a return of c.11-12% vs 15% pa in the first ten years. And he may pick up the odd bargain to boost that overall return.
Markets
The biggest part of the relative performance hasn’t been his investing mistakes but the particular features of markets, notably:
The sharp rise in interest rates in 2022/23 which hit quality stocks with duration
The rise of the Mag 7 in 2023/24
The rise of AI from May ’24 when Jensen Huang stood up and since then the majority of the growth in the S&P has been in the top 10 stocks
A huge tailwind in the rise of index funds and the growth of momentum investing as a result.
Smith believes that
“we are massively overdue for a major correction”.
Accounting
Smith believes that his team is almost alone in reading the accounts properly and in detail, in voting on proxies and in trying to ensure that management are appropriately incentivised – he doesn’t care about the quantum, but the structure of compensation. He has no time for adjusted earnings – this is relied on too heavily by the sellside analyst community and even by investors; the addback of stock-based compensation is a particular bugbear.
The Rewards
Amusingly, each year the FT reports on Fundsmith’s profitability but manages to mis-report how much Smith takes home. Not once, but every year!
Oddly, I have explained this mistake before to the FT – I know Deputy Editor Patrick Jenkins quite well as he is the founder of the FLIC charity which the podcast supports – yet they continue to make the same mistake. Here is the relevant note to the accounts:
Premium subscribers can read on for a lesson on reading the accounts and an insight into how much Terry really makes.