Terry Smith, a well-known British fund manager, has told investors his flagship fund struggled to deliver returns last year, earning less than what people could’ve made by keeping their money in cash savings accounts.

Smith said Thursday his £16 billion Fundsmith Equity fund managed just 0.8 per cent gains in 2025. That’s way below the global stock market benchmark, which climbed 12.8 per cent, and even came in behind the 4.2 per cent cash deposits offered. Other funds in the same category averaged 10.8 per cent returns, according to Investment Association figures Smith mentioned in his letter.

Tech dominance and index funds blamed for struggles

The fund manager warned investors they shouldn’t expect his fund to beat the market every single year. But he pointed out the fund’s done better over time. Since it started in 2010, Fundsmith Equity has beaten the benchmark index by 1.7 per cent each year on average.

Smith talked about several things that made last year tough. The big problem was seven massive American tech companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. People call them the Magnificent Seven.

“It was difficult to even perform in line with the index in recent years if you did not own most of these stocks in their market weightings, and we would not do so even if we became convinced that they were all good companies of the sort we seek to invest in, which we are not,” Smith wrote.

The fund does own three of those companies – Alphabet, Meta, and Microsoft. Those three were actually among the top five performers in the portfolio last year.

Still, Smith made it clear he won’t buy shares in companies “simply because they are large and dominate the index weightings and performance unless we become convinced that they are good businesses of the sort we wish to own, which have long-term, relatively predictable sources of growth and more than adequate returns on the capital they invest”.

Smith also blamed the growing popularity of cheap index-tracking funds. He said huge amounts of money flowing into these products “gives added momentum” to large American tech stocks. “The increasing proportion of equities held by index funds is invested without any regard to the quality or valuation of the shares bought, which produces dangerous distortions,” he added.

The weakening US dollar didn’t help either. That hurts returns since most companies in the portfolio are American and make a lot of their money in dollars.

The fund focuses on quality growth companies and holds them for long periods. Investors pay a 1.04 per cent annual management fee.

Novo Nordisk proves most costly investment

Some holdings really hurt last year. Novo Nordisk, the Danish company that makes Wegovy weight-loss medication, was the worst. It knocked 3 percentage points off the fund’s overall performance, making it the single biggest drag in 2025.

Smith wasn’t happy with how Novo Nordisk messed up its leading position. “The company has parlayed a market-leading position in what is probably the most exciting drug development for about three decades into a secondary position and has failed to prevent illegal generic competition in its core US market,” he wrote.

Other stocks that did poorly included American payroll company Automatic Data Processing, household goods maker Church & Dwight, Danish medical device firm Coloplast, and cybersecurity business Fortinet.

The Novo Nordisk situation made Smith share something interesting about his investment approach – he looks for businesses that can be run by “idiots” because it means success doesn’t depend too much on management. “We have been made painfully aware that the range of businesses which can be run by an idiot is much more limited than we thought, and hereafter we will aim to be more aware of the impact that poor management can have,” he admitted.

But Smith’s not giving up on Novo Nordisk yet. With a new boss and major board changes happening, the stock now trades at 13 times earnings. That suggests the market is “expecting very little” from it. “If we did not already own it, I suspect we would contemplate buying it as a good business which has been depressed by a ‘glitch’, albeit a rather large glitch,” Smith said.

He also admitted that trying to work with struggling companies “is less effective than selling the shares”, though he seems willing to hold on.

Smith wrapped up by repeating his main investment rules: don’t overpay and do nothing, meaning stay patient instead of trading all the time.

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