Fundsmith Equity: August 2026 fund update

• Terry Smith is a seasoned investor with a wealth of experience

• Smith uses an established process based on buying good companies and not overpaying

• The fund’s long-term performance is strong but has been tested in recent years

• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Fundsmith Equity aims to deliver long-term growth by investing in high-quality companies from around the world. The fund focuses on larger businesses from developed markets, so it could complement other funds investing more in higher-risk emerging markets or smaller companies. A focus on quality-growth means it could also work well alongside funds investing in unloved companies with recovery potential.

Manager

Terry Smith has had a long financial services career, working his way from bank analyst at Barclays to Chief Executive of broker Tullett Prebon. He was also previously adviser to the Tullett Prebon pension fund, and appointed Andy Brown of Cedar Rock Capital to manage the investments. Inspired by Brown’s investment philosophy and process, Smith launched Fundsmith Equity in 2010. He initially ran it part-time while still chief executive of Tullett Prebon, before leaving the business in 2014 to focus full-time on the fund.

Smith’s been the sole manager of the fund ever since but has the support of a small team that has worked closely with him for many years. He also manages a sustainable version of this fund, in addition to being Chief Executive and Chief Investment Officer of the Fundsmith business. As both his funds are similar and the business is focused on a small number of portfolios, we think he’s able to devote enough time to managing the fund.

Given how long Smith has been in the industry, questions around his retirement are natural. Over the years he has built a tight-knit team. Succession plans are in place but for the moment he remains integral to both this fund and the wider business. Head of Research Julian Robins, a long-term colleague, is viewed as a likely successor to Smith when he does decide to step back.

The fund doesn’t currently feature on the Wealth Shortlist. To conduct our analysis, we require regular access to the fund manager and up-to-date, monthly portfolio data which Fundsmith choose not to disclose. We can’t make an exception to our process, so we won’t be considering the fund for inclusion as things stand.

Process

The Fundsmith philosophy is to buy good companies and not overpay. Smith hunts for what he believes are high-quality businesses which can dominate their market. Companies with intangible assets are favoured, such as brand power, intellectual property, or a product or service that customers can’t do without and would struggle to replace, even when times are tough. A focus on resilient growth means he avoids companies whose prospects are closely tied to the fate of the economy like airlines and property developers.

Smith also looks closely at a company’s profits and pricing power – the ability to raise prices without impacting consumer demand. Companies must also be in a strong financial position, so businesses like banks and real estate that require lots of debt to function are avoided.

Smith only invests in companies he feels he can buy at a fair share price. That doesn’t mean he isn’t prepared to pay for quality, though. Whilst some of these companies may be considered ‘expensive’ by other investors, Smith believes the ability to grow faster than competitors can be worth a premium price.

The process results in a portfolio of 20-30 companies and at the end of July there were 28. This concentrated nature means each holding can have a significant impact on performance, both positively and negatively, which increases risk.

Smith mainly invests in companies from developed markets. At the end of July 2026, 84% of the fund invests in the US and the remainder in France, Spain, and the UK. In terms of sectors, consumer companies make up 30% of the fund, with a further 17% in technology and 16% in healthcare.

The Fundsmith philosophy previously had a third step, which was to ‘do nothing’ once invested in a company. Smith recently adapted this part of the process to account for what he views as increased momentum in global markets. Smith has indicated he’ll be less willing to invest in quality companies that experience short-term issues as market momentum often means the share price keeps falling. As a result, changes to the fund may be more frequent than in the fund’s history, but Smith still aims to invest in companies for the long term and allow growth to compound over time.

A number of changes were made to the fund recently to reflect this change in approach. Smith sold investments in healthcare companies Mettler-Toledo and Coloplast as growth in both companies has slowed. Luxury goods business LVMH was also sold as demand from China continues to be weak.

New investments in the fund include software business Sage, industrials companies Legrand and GE Vernova, and streaming platform Netflix. Smith also invested in technology company AppLovin, which provides software that services adverts in mobile apps. Development of an AI-driven recommendation engine has the potential to increase profits through improving the company’s targeted advertising.

Culture

Fundsmith is a boutique fund group with offices in London, Mauritius, and the US. It was founded by Terry Smith in 2010 with the launch of Fundsmith Equity and has expanded to include a small range of funds, most of which are run along the same lines.

The business is employee-owned, with Smith owning the largest stake, and managers all investing significantly in the funds. This means both the business and the funds are run with the long term in mind, and managers’ interests are aligned with investors.

Investors should note that the fund is large in size. Assets at the end of July 2026 stood at around £12bn and we’ve not conducted full due diligence on the group’s risk and governance oversight. This is because the group’s funds don’t feature on the Wealth Shortlist or in any of our other investment solutions.

ESG integration

The team at Fundsmith aims to invest in high quality companies that are in control of their own destiny with the potential to generate a high return on capital. This generally discounts companies in areas like oil & gas production, mining, airlines, biotechnology, and banks, but the flagship Fundsmith Equity fund does not have any specific exclusions, and it does invest in tobacco.

Fundsmith offers a Sustainable fund, which excludes companies in the following areas: aerospace & defence, metals & mining, oil, gas and consumable fuels, tobacco, gas and electric utilities, brewers, distillers & vintners, and casinos & gaming companies.

In 2020, the firm formed a Stewardship & Sustainability Committee to centralise discussions around its stewardship and responsible investment-related policies, processes, and activities. While we feel Fundsmith has well thought out positions on many ESG topics, transparency on its ESG-related activities could be improved.

Cost

The fund is available for an annual ongoing charge of 0.94%. The HL platform fee of up to 0.35% per year also applies, except in the HL Junior ISA where no platform fee applies. Both a buy and sell instruction will be subject to HL dealing charges. Find out more about our charges.

Performance

The fund has performed better than the global stock market, measured by the MSCI World benchmark, and peers in the IA Global sector since launch in November 2010. To the end of July 2026, the fund returned 590.7%*, compared with 522.7% for the benchmark and 338.0% for the sector average. Past performance isn’t a guide to the future.

Our analysis suggests that Smith’s stock selection has been the primary driver of returns, while the fund’s quality growth style was also a factor. His focus on quality has helped the fund hold up relatively well when markets are falling.

In the 12 months to the end of July 2026, the fund fell 2.8%. Over the same period, MSCI World gained 18.4% and the average fund in the IA Global sector returned 14.6%.

Our analysis suggests that healthcare companies were among the largest detractors to performance. Stryker, a medical equipment manufacturer and one of the fund’s largest investments, fell in value over the year. Investments in technology companies also detracted. The fund’s quality focus means it doesn’t tend to invest in the companies at the centre of AI-related spending, which have been a key driver of market growth recently.

Investments that worked well for the fund include hotel chain Marriott International and cybersecurity business Fortinet. Tobacco company Philip Morris, which has been in the fund since inception in 2010, also contributed.

Over the longer term, we expect the fund to do better when quality investing is in favour. If the recent market trend reverses, it should outperform valued-focused funds, though this isn’t guaranteed. Investment styles go in and out of favour, which is why we suggest investors build diversified portfolios with exposure to a variety of asset classes, styles, sectors, and countries.