For the fourth consecutive year, the Fundsmith Equity fund run by Terry Smith has underperformed in the MSCI World Index and for the third consecutive calendar year it has underperformed in the Global sector.
Fundsmith Equity returned 8.9% during the 2024 calendar year, below the 20.8% gain in the MSCI World Index and the 12.6% average gain in its Global sector.
Reacting to the fund’s annual letter, AJ Bell head of investment analysis Laith Khalaf said that despite the fund’s underperformance, “absolute returns have still been strong over this period”.
Khalaf also added that the large outflows from the active fund is a result of the fund’s size and industry trends “rather than investors losing faith in the manager”.
The Fundsmith Equity fundsize is £22.5bn.
AJ Bell’s latest Manager versus machine report stated only 18% of active managers in the Global sector outperformed the average index tracker in 2024 to the end of November.
Additionally, only 17% achieved this feat over the longer period of 10 years.
Khalaf said that the Magnificent Seven adds to the strength of the global index, making it harder to outperform.
The Fundsmith Equity fund was actually one of the funds that had outperformed a comparable index tracker over 10 years, and “had done so comfortably”.
However, Khalaf points out that investors will focus on the fund underperforming the average peer in the Global sector in each of the last three calendar years.
Khalaf does believe certain investors will stick by Smith through the tougher times, “especially when they have enjoyed such long-term success and when recent returns have still been so positive in absolute terms”.
Nonetheless, patience is something that Smith himself is not a fan of; he has said the speed of firing executives in the US is part of the reason for its economic success.
Regardless of the fund and its manager, “all active managers will undergo periods of underperformance”, Khalaf said.
“It’s part of the beat.”
He adds: “It’s hard to see how deep the passive rabbit hole will go, but as yet there doesn’t look to be much light at the end of the tunnel for active managers.”
