The flagship investment fund run by star manager Terry Smith is on course for its most challenging year yet, as investors have withdrawn more than £5 billion in 2024. The Fundsmith Equity fund, a giant in the UK retail investment landscape, is experiencing a significant reversal of fortune after years of attracting massive inflows.
A Stark Reversal for a Former Darling
For over a decade, Fundsmith Equity was the destination of choice for British savers seeking growth. Its straightforward strategy of buying and holding high-quality global companies, famously dubbed 'buy good companies, don't overpay, and do nothing', delivered stellar returns and made Terry Smith a household name. However, the tide has turned decisively this year. Data reveals the fund has seen net outflows of £5.1 billion in the first ten months of 2024 alone, putting it on track to surpass the record £4.9 billion withdrawn in the whole of 2023.
This sustained exodus of capital marks a profound shift in investor sentiment. The outflows have accelerated despite a modest recovery in the fund's performance in recent months. Analysts point to a combination of factors driving the retreat, including increased competition, a search for better value elsewhere, and a natural cooling of enthusiasm after a period of exceptional growth.
Performance Under the Microscope
The fund's recent performance history provides crucial context for the investor exodus. While the Fundsmith Equity fund has risen by approximately 7% in 2024, this follows a difficult period. The fund suffered a rare loss of 13.8% in 2022, a year that tested its concentrated portfolio's resilience. Although it has rebounded, the returns have not kept pace with the soaring US market indices, where many of its key holdings like Microsoft and Novo Nordisk are listed.
This relative underperformance compared to a simple index tracker has led some investors to question the fund's hefty fee structure. The ongoing outflows have also had a tangible effect on the fund's size, reducing its total assets under management and impacting the business's revenue stream from annual charges.
What This Means for Investors and the Market
The record outflows from Fundsmith signal a broader trend of reassessment in the active fund management industry. Investors are becoming more cost-conscious and performance-sensitive, willing to move capital when strategies appear to falter. For Terry Smith and his team, the challenge is to demonstrate that their quality-growth philosophy can reassert itself in a market environment that has recently favoured different sectors, such as technology and artificial intelligence.
The situation also raises questions about the sustainability of the 'star manager' culture in investing. Fundsmith's fortunes have been intensely linked to the personal brand of Terry Smith. The current outflows test whether investor loyalty can endure through a prolonged patch of relative difficulty. The coming months will be critical in determining if this is a temporary setback or a more permanent recalibration for one of Britain's most famous funds.
For the wider market, the movement of such a large sum of money out of a single fund is significant. It represents a major reallocation of capital that will flow into other investment vehicles, potentially boosting competitors, passive index funds, or different asset classes entirely. The story of Fundsmith in 2024 is a powerful reminder that in finance, past performance is never a guarantee of future success, and investor patience has its limits.
