Terry Smith hits back at critics over underperformance

Terry Smith hits back at critics over underperformance
Terry Smith, the manager of the Fundsmith Equity fund

Terry Smith has hit back at his critics, saying his fund was likely to underperform its peers during the post-lockdown recovery.

The manager of the £27bn Fundsmith Equity fund said those who criticised him were like "deserting rats" on a "ship which refuses to sink".

The fund is one of the top performers in the IA Global sector over the past five years - but over the past year its performance has placed it in the third quartile of its sector.

Article continues after advert

It has returned 24 per cent over the past year, slightly behind the IA Global sector, which has returned 25 per cent.

Smith's fund had outflows of £130m in the six months to the end of June 2021, after years of net inflows, but said investment gains mean the fund grew in size by £3bn in the same period. 

Smith said his fund has outperformed relative to the MSCI World index and the FTSE 100 index this year to date, and while it has underperformed relative to some value indices since market lows of March 2020, he says clients would only have benefitted from this if they timed the market perfectly, which is difficult to do. 

He said: “If you have been reading what investment commentators have been saying during this period you might be rather surprised that our fund has fared so well. You might even be surprised that we are still here.

"Since markets started to sense an end to the economic disruption caused by the lockdowns in the final quarter of 2020 there has been a so-called ‘rotation’ from quality stocks, of the sort we own, into so called value stocks and those expected to recover as the lockdowns end.

"In such a situation our fund is always likely to underperform for a period, after all the companies we invest in mostly have little or nothing to recover from."

He used a quote from German politician Helnut Kohl, “Nothing so disappoints deserting rats than a ship which refuses to sink”, to illustrate his view.

Indeed Smith's fund has returned to outperformance more recently. Over the past six months it has been one of the top performers in its sector again.

Many investors have, since the November 2020 approval of the first Covid-19 vaccine, taken the view that value stocks, those equities which are more likely to perform well when economies are recovering, would do better than growth stocks, which perform best when economic growth and inflation are low.

Smith launched his fund in 2010, just as growth stocks were beginning a long period of strong performance. His fund has not existed during an extended period of growth underperforming. 

Of the wider debate around growth versus value, he says: “You could have made some good gains by buying the value or recovery stocks at or close to the bottom, although of course this depends on getting your timing right, but if you ran the value/recovery stocks across the period of the downturn and recovery, they would still have significantly underperformed our portfolio.