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Fundsmith Equity manages a staggering £24billion, much of which belongs to private investors. Yet many are pulling their money out after several years of disappointing performance.
Fundsmith is the flagship vehicle of star fund manager Terry Smith, who launched it in November 2010.
Millionaire stock picker Smith, who now lives in Mauritius, became the undisputed star of the UK fund management industry after Neil Woodford, once the biggest star of them all, crashed and burned.
Smith still has a strong long-term track record, but some Isa investors are running out of patience as he struggles to lives up to his stellar early years.
Fundsmith Equity smashed the market by investing in a small portfolio of high-quality global businesses with solid growth prospects and a healthy competitive advantage.
It has delivered a total return of a staggering 599.9% since 2010, which would have turned a £10,000 lump sum into a stunning £69,990. That’s far superior to the 371.8% return on its benchmark index, MSCI World.
However, Fundsmith has now underperformed for three years in a row, as Smith’s fund management style falls out of favour.
It’s trailing this year, too. Fundsmith is up 7.7% year to date but that compares to 13.2% for his benchmark.
So what’s gone wrong?
Smith has been punished for largely shunning US tech giants like Apple, Nvidia and Tesla (although he does hold Microsoft and Meta Platforms).
He is instinctively wary of these high-flying stocks, preferring to target companies that should deliver steady, solid long-term returns.
However, this has cost him dear as Apple, Amazon, Google-owner Alphabet, Meta Platforms, Microsoft and Nvidia have driven 50% of US stock market gains this year.
Big tech has been boosted by the hype over artificial intelligence (AI), especially silicon chip maker Nvidia. Its shares are up a staggering 2,316% over five years. That would have turned £10,000 into an unbelievable £246,100.
By shunning Nvidia and others, Smith has missed out.
New figures from Interactive Investor reveal that Fundsmith was relegated from its list of top 10 most bought investment funds in August after a staggering eight-year run.
Kyle Caldwell, funds and investment education editor at Interactive Investor, said: “Smith is struggling as global stock market returns are heavily influenced by a small number of US technology companies.”
Investors have been piling into tech with the L&G Technology Index now the most-bought fund.
However, Caldwell says this is a risky move as 40% of the fund is invested in just three of stocks: Apple, Microsoft and Nvidia.
Two other tech-focused funds are also topping the sales charts: Polar Capital Technology and Allianz Technology.
“This could spell trouble for investors who are overexposed to technology should there be a sharp correction,” Caldwell added.
The correction may have begun. Nvidia’s shares plunged almost 10% on Monday. That wiped $279billion (£215billion) off its value in a single day.
Rightly or wrongly, Smith has unshakeable faith in his stock-picking abilities. He’s banking on his investment style coming back into favour. Only time will tell.
As ever, Stocks and Shares Isa investors need to diversify rather than go all in on one type of fund or stock. Investing goes in cycles. Today, US tech is in and Fundsmith is out. Tomorrow? Nobody knows.