The Fundsmith Equity Fund has become one of the most recognisable names in long-term investing in the United Kingdom. Admired by supporters for its disciplined philosophy and questioned by critics during periods of underperformance, the fund continues to attract attention from private investors, financial commentators, and professionals alike.
Introduction to the Fundsmith Equity Fund
The Fundsmith Equity Fund is a global equity fund focused on owning shares in a relatively small number of high-quality companies for the long term. It was launched in 2010 and is managed by Fundsmith LLP, a London-based investment management firm.
From the outset, the fund positioned itself as different from many actively managed funds. Instead of frequent trading, complex derivatives, or short-term market calls, it adopted a simple and transparent philosophy: buy good companies, do not overpay, and do nothing.
This clarity has played a major role in building the fund’s reputation, particularly among investors who value patience, consistency, and business fundamentals over market speculation.
The Origins and Philosophy Behind the Fund
Who Founded Fundsmith?
The fund was established by Terry Smith, a highly experienced investor with decades of involvement in financial markets. Before founding Fundsmith, he built a reputation as a financial analyst, company director, and outspoken commentator on the investment industry.
Terry Smith’s views on investing are well known for their directness. He has frequently criticised excessive trading, high fees, and the tendency of investors to chase short-term performance rather than long-term value.
A Long-Term Mindset
At the heart of the fundsmith equity fund lies a belief that time in the market matters more than timing the market. The strategy assumes that strong companies, if held long enough, can compound returns through consistent growth in profits and cash flows.
This philosophy deliberately avoids reacting to daily market noise, political headlines, or economic forecasts. Instead, it focuses on the enduring strength of the underlying businesses.
Investment Strategy Explained
Quality Over Quantity
The fund invests in a concentrated portfolio, typically holding around 20 to 30 companies. Each holding is selected because it meets strict criteria, including:
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High and sustainable returns on capital
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Strong competitive advantages
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Resilient business models
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Low levels of debt
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Ability to reinvest profits at attractive rates
This approach means that every company in the portfolio matters. There is no attempt to mirror an index or to own hundreds of stocks for diversification’s sake.
Buy, Hold, and Rarely Sell
Unlike many active funds, the fundsmith equity fund has a low turnover rate. Shares are sold only when the original investment case no longer applies, such as when a company’s quality deteriorates or valuation becomes unreasonable.
This long holding period helps reduce transaction costs and allows the power of compounding to work over time.
Global Exposure and Sector Focus
International Reach
Although based in the UK, the fund invests globally. A significant proportion of its holdings are in international companies, particularly those with substantial operations in North America and Europe.
This global exposure allows investors to benefit from worldwide economic growth rather than relying solely on the UK market.
Sector Preferences
The fund tends to favour sectors that produce steady cash flows and sell essential or repeat-purchase products. These often include:
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Consumer goods
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Healthcare
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Technology services
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Industrial businesses with strong brands
Conversely, it generally avoids highly cyclical industries such as commodities, banks, and airlines, where profits can fluctuate sharply with economic conditions.
Performance History and Market Perception
Long-Term Track Record
Since its launch, the fundsmith equity fund has delivered strong long-term returns compared with many peers. In its earlier years, it gained particular attention for outperforming global equity benchmarks over extended periods.
This performance helped establish Fundsmith as a major name in UK retail investing and attracted billions of pounds in assets.
Recent Challenges
Like many active funds, the fund has faced periods of underperformance, particularly when markets favoured fast-growing technology stocks or speculative assets. These phases have prompted debate among investors about whether the strategy remains suitable in a changing investment landscape.
Supporters argue that temporary underperformance is a natural part of disciplined investing, while critics point to the growing popularity of low-cost index funds as an alternative.
Fees and Cost Structure
Understanding the Charges
The fund charges an annual management fee that is higher than most passive index trackers but typical for an actively managed fund. Importantly, there are no performance fees, which means returns are not reduced further when the fund performs well.
For long-term investors, fees matter, but proponents of the fund argue that paying for skill, discipline, and transparency can be justified if results are delivered over time.
Risk Factors to Consider
Concentration Risk
Holding a relatively small number of companies increases exposure to individual business risks. If one or two major holdings perform poorly, this can have a noticeable impact on overall returns.
Market and Currency Risk
As a global fund, returns are influenced by movements in international markets and currency exchange rates. These factors can affect performance independently of how well the underlying companies operate.
Style Risk
The fund’s emphasis on quality and stability means it may lag during periods when markets favour speculative or high-risk assets. Investors need patience and alignment with the fund’s philosophy.
Who Is the Fund Suitable For?
The fundsmith equity fund is generally best suited to:
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Long-term investors with a horizon of five years or more
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Those comfortable with periods of underperformance
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Investors who value simplicity and transparency
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Individuals seeking exposure to high-quality global businesses
It may be less appropriate for those seeking short-term gains or who are uncomfortable with market volatility.
Comparison with Passive Investing
Active vs Passive Debate
The rise of passive investing has raised questions about the role of active funds. Passive funds aim to match market performance at low cost, while active funds like Fundsmith seek to outperform through careful selection.
The fundsmith equity fund represents a clear case study in this debate. Its supporters see it as proof that disciplined active management can add value, while critics view it as an example of how difficult consistent outperformance can be.
Reputation and Influence in the UK Investment Scene
Beyond performance figures, the fund has influenced how many UK investors think about investing. Its clear messaging, straightforward language, and focus on fundamentals have helped demystify investing for a wide audience.
Terry Smith’s regular commentary and willingness to challenge industry norms have also contributed to the fund’s high public profile.
Criticism and Support: A Balanced View
No fund is without criticism. Some investors question whether the fund’s conservative approach limits upside in fast-changing markets. Others argue that its avoidance of certain sectors may reduce diversification.
However, supporters value the honesty of the approach. There are no promises of quick wins, only a consistent philosophy applied over time.
The Long-Term Outlook
The future of the fundsmith equity fund depends on whether its core beliefs continue to deliver results in an evolving global economy. While markets change, the principles of strong cash generation, durable brands, and disciplined management remain relevant.
For investors aligned with these principles, the fund continues to offer a clear and coherent strategy.
Conclusion
The Fundsmith Equity Fund stands as one of the most influential and widely discussed investment funds in the UK. Its disciplined philosophy, global outlook, and focus on business quality have shaped how many investors think about long-term wealth creation. While it is not immune to criticism or market challenges, its clarity of purpose and transparency continue to set it apart. For investors willing to commit to a long-term approach, it remains a compelling case study in patient, principles-based investing.
FAQs
What is the main aim of the fundsmith equity fund?
The fund aims to deliver long-term capital growth by investing in high-quality global companies and holding them for extended periods.
Is the fund suitable for beginners?
It can be suitable for beginners who understand long-term investing and are comfortable with market fluctuations, but it is not designed for short-term trading.
Does the fund invest only in the UK?
No, it invests globally, with significant exposure to international markets and companies.
Why does the fund hold so few stocks?
The strategy focuses on quality over quantity, allowing deeper analysis and conviction in each holding.
Can the fund underperform the market?
Yes, like all active funds, it can underperform during certain periods, particularly when markets favour different investment styles.
