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Terry Smith Warns of Investment Disaster
11 Jan
Summary
- Fundsmith's 2025 return lagged the market, posting 0.8% gain.
- Shifting to passive funds could create a major investment crisis.
- Dominance of tech stocks like Magnificent Seven distorts market performance.
Star fund manager Terry Smith has issued a stark warning regarding the growing trend of investors favouring passive funds, suggesting it could precipitate a major investment disaster. His flagship Fundsmith Equity fund experienced a lacklustre year in 2025, yielding only a 0.8% return, a sharp contrast to the MSCI World index's 12.8% performance.
Smith identified three primary drivers for his portfolio's underperformance. He highlighted the overwhelming dominance of a select group of tech stocks, particularly the 'Magnificent Seven,' which heavily influence index performance. Fundsmith Equity maintains a concentrated portfolio, investing in only three of these tech giants, in line with its strategy of avoiding excessive sector bets.
The proliferation of passive funds, which track market indices and are typically cheaper than actively managed funds, is another major concern for Smith. He argues that their increasing popularity can distort market valuations through momentum investing. Smith drew a parallel to the Dotcom boom, noting that the proportion of assets in index funds was significantly lower then, making the current dominance of large stocks a self-fulfilling prophecy with potentially disastrous outcomes.
