It has been another tough six months for investors backing fund veteran Terry Smith.
The Fundsmith Equity fund, managed by Smith with £24.6 billion of assets under management, is a favourite among investors and of the top funds purchased by DIY investors each month.
He has a loyal following and a strong reputation due to his contrarian approach, but that has led to underperformance at least in the short-term.
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Smith’s latest letter to shareholders show the fund was down 1.9% in the six months to June 2025.
The MSCI World Index was up 0.1% in comparison.
It comes after the Fundsmith Equity fund underperformed the wider markets in 2024.
The fund posted an 8.9% return compared with 20.8% in the MSCI World Index and 12.6% in the IA Global sector.
Most active managers have struggled in recent months as Middle East tensions and economic uncertainty over Trump tariffs continue to rile the markets.
Smith is also affected as he isn’t as invested in the Magnificent 7 and artificial intelligence stocks as others.
But it isn’t the technology sector that he is blaming for the latest underperformance.
Two Danish companies are named as the main culprits for the fund’s latest results.
Smith said Danish weight loss drug maker Novo Nordisk alone accounted for almost all the underperformance during the period, contributing to 1.7% of the dip.
Smith added: “Its ability to snatch defeat from the jaws of victory in respect of its leadership in weight loss drugs continues to be remarkable. Its inability to deal with the US legal and regulatory system’s approach to its success would be interesting to observe from a safe distance.”
Another Danish medical company, Coloplast, was also amongst our largest detractors.
Smith said: “Coloplast was a company whose revenue growth rate was metronomic. Probably not coincidentally, following two major acquisitions, it has encountered a series of operational failures.
“Both Novo and Coloplast are controlled by foundations which we have seen as a strength in terms of their ability to make good long-term decisions.”
He highlighted that both have now fired their chief executives, adding: “We wait with increasingly thin patience to see whom they appoint as replacements and what changes they bring.”
Smith also blamed the US dollar and Trump’s trade policy for some of the underperformance.
He said: “The majority of the companies we invest in are based in the United States, report in US dollars and more importantly have the majority of their revenues in this currency. Therefore the move in the pound vs the US dollar exchange rate from $1.25 at the beginning of the year to $1.37 at the end of June has had a major effect.”
Smith highlighted that his US dollar denominated fund was up by 6.3% in the first half of 2025.
He added: “I doubt this performance by the dollar relative to the pound is a reflection of the strength of the UK economy, and in fact the USD Trade Weighted Index has fallen by a similar amount.
"I have no clue if or when this will reverse but would merely observe that the apparent policy aims of the Trump administration — reducing the US trade deficit and lowering interest rates — are incompatible with a strong dollar. But equally the course of events in the UK do not suggest to me that the Pound is likely to see continued strength either.”
Laith Khalaf, head of investment analysis at AJ Bell, said these companies probably highlight a risk with the patient, quality growth approach employed by Fundsmith.
“Portfolio companies can often trade at high multiples, which is extremely positive for performance if you catch them on the way up, but it can be painful if they fail to match expectations, as both growth forecasts and stock multiples get simultaneously trimmed.”
Not everyone takes that view though.
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, says Smith seems to suggest that the most likely way he will generate returns is when Trump changes his policies on tariffs.
He said: “If investors wanted a forex fund that’s what they would have bought. It’s a shame Smith hadn’t hedged his dollar exposure, and he’s not one to chase risk, so maybe a lacklustre second half to the year is on the cards too.”
Some of Smith’s bets are still working. Meta and Microsoft, two of the technology stocks that he does like, are among the top five performers.
Tobacco brand Philip Morris, which is known for building a smoke-free portfolio, was the top performer in the first half of 2025.
Should you invest in the Fundsmith Equity fund?
Investing is a long-term game and the fund has still delivered for investors since inception.
It is up 593.6% since launch in November 2010 and by 14.1% annually.
That beats the MSCI World Index, which has an 11.6% annual return.
Khalaf highlights that Smith has never pretended to be anything other than a patient investor, and that comes with both rough and smooth elements.
He said: “On the one hand patient investing does mean less trading, lower fees and a longer-term perspective which can help with identifying winners and riding them. But it does also mean sometimes holding onto waning stocks for longer than you might if you had a perfectly clear crystal ball. The hope in this patient approach is that the good outweighs the bad, and Fundsmith’s long-term track record suggests that in this case, it does.”
Fund managers may always have a reason for underperformance but Scott Gallacher, director at Rowley Turton, suggests a passive investing approach may be more effective.
He said: “Terry Smith has built a solid track record over the long term, but recent underperformance highlights the risks of relying on any single ‘star’ manager.
“Personally, I prefer a lower-cost, well-diversified, hybrid portfolio—using low-cost funds that use passive as their core but also some with selective active overlays. It’s not about trying to be the smartest person in the room, just making sure you’re not the stupidest. Over time, I’ve found this approach more reliable than betting on individual managers, no matter how talented.”
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