What Terry Smith’s Latest Fundsmith Letter Means for Investors

Terry Smith's latest investment decisions suggest a greater willingness to adapt the portfolio when company fundamentals and earnings expectations change.

For many years, Terry Smith and Fundsmith Equity were synonymous with a simple investment philosophy: buy high-quality businesses, hold them for the long term, and avoid unnecessary trading.

That philosophy helped make Fundsmith Equity one of the better-known global equity funds among long-term investors.

But something important has changed.

Following a period of disappointing performance, Terry Smith has become more willing to sell companies when their investment case deteriorates. Portfolio turnover has increased significantly, and earnings momentum is now receiving greater attention.

So, is Fundsmith changing its investment philosophy?

Not exactly.

But the way Terry Smith applies that philosophy appears to be evolving.

The fund's long-term record remains strong, but its recent performance gap has become an important consideration for investors.

A Strong Long-Term Record — But a Difficult Recent Period

It is important to put the recent weakness into perspective.

Fundsmith Equity has produced a strong long-term return since its launch, with the fund delivering roughly 13% annualised over the long term.

However, the more recent performance has been much less impressive.

The fund has underperformed the MSCI World over several consecutive years, particularly as technology and artificial intelligence-related stocks drove global markets higher.

This has created an uncomfortable situation for Fundsmith investors.

The fund still owns many high-quality companies, but owning high-quality companies has not necessarily translated into market-beating returns.

And that is where Terry Smith's latest letter becomes particularly interesting.

Terry Smith Is Becoming More Willing to Sell

Fundsmith's traditional approach was famously associated with low portfolio turnover.

The idea was straightforward:

If you own a wonderful business, why sell it simply because the share price moves around?

That philosophy worked particularly well when the underlying businesses continued to compound their earnings and cash flows.

But Smith has acknowledged that the strategy also had a weakness.

Sometimes, an investment thesis changes.

A company that was once an excellent investment can experience structural problems, deteriorating earnings or a weakening competitive position.

Holding on simply because the company was once considered "high quality" can become a mistake.

The latest changes suggest that Smith is now prepared to act more decisively when that happens.

Portfolio Turnover Has Increased Dramatically

One of the clearest signs that something has changed is portfolio turnover.

Reports indicate that Fundsmith Equity's portfolio turnover reached approximately 51.8% during the first half of 2026.

For a fund historically associated with very low turnover, this is significant.

It doesn't necessarily mean that Fundsmith has become a short-term trading fund.

Rather, it suggests that Smith is becoming more willing to reassess his holdings and act when his investment thesis changes.

This is an important distinction.

The philosophy remains focused on owning high-quality businesses.

What appears to be changing is the willingness to admit when a particular investment no longer meets the criteria.

The Novo Nordisk Example

One of the most interesting examples is Novo Nordisk.

Novo Nordisk had long been regarded as exactly the kind of company that would fit the Fundsmith philosophy: a high-quality business with strong competitive advantages and attractive long-term growth prospects.

Yet Fundsmith eventually exited the position.

This demonstrates an important evolution in Smith's thinking.

A company can be an outstanding business and still become an unattractive investment.

The investment case depends not only on the quality of the business, but also on factors such as earnings growth, valuation and future expectations.

For investors, this is an important lesson.

"Great company" does not automatically mean "great investment at any price."

Earnings Momentum Matters More

Another important development is the increased emphasis on earnings momentum.

Historically, Fundsmith placed enormous emphasis on business quality.

That remains important.

But Smith now appears more willing to consider whether a company's earnings trajectory is moving in the right direction.

This makes sense.

Imagine two companies that are both financially strong and have excellent competitive advantages.

Company A is growing earnings steadily.

Company B is seeing earnings expectations fall.

Even though both companies may still be "high quality", the investment outlook could be very different.

The latest changes suggest that Fundsmith is becoming more attentive to that difference.

The focus on high-quality businesses remains, but Terry Smith is showing greater willingness to sell when the investment thesis or earnings outlook changes.

Does This Mean Fundsmith Has Abandoned Its Philosophy?

I don't think so.

Rather than abandoning quality investing, Fundsmith appears to be refining the process used to identify when a quality company should no longer be held.

The original philosophy can be summarised as:

Buy good companies and do nothing.

The newer approach is closer to:

Buy good companies — but don't be afraid to act when the investment thesis changes.

That may ultimately prove to be a healthier approach.

After all, "long term" should not mean holding a company indefinitely regardless of what happens to its business.

Why Fundsmith Has Struggled

Part of Fundsmith's recent underperformance can also be explained by the market environment.

Global markets have been dominated by large technology companies and the AI investment boom.

Fundsmith has historically had a preference for businesses with strong cash generation, high returns on capital and durable competitive advantages.

That has resulted in relatively limited exposure to some of the companies that have driven the recent market rally.

As a result, investors holding a conventional global equity index have often enjoyed stronger returns.

This creates an important question:

Was Fundsmith's philosophy wrong, or was it simply out of favour?

The answer may be somewhere in between.

Some of the fund's underperforming investments have experienced genuine business challenges.

At the same time, the market has rewarded a very different group of companies.

Could This Be an Interesting Entry Point?

This is where things become more interesting for investors.

After several years of underperformance, expectations surrounding Fundsmith are considerably lower than they were during its strongest years.

Terry Smith has acknowledged mistakes.

The portfolio is changing.

And the fund is becoming more willing to sell investments that no longer meet its criteria.

That combination could potentially create an attractive setup.

But investors should be careful about assuming that underperformance automatically means a fund is cheap.

A fund can continue to underperform.

The real question is whether the new portfolio is better positioned than the old one.

The Portfolio Remains Concentrated

Another factor investors should remember is that Fundsmith Equity is not a conventional "own everything" global fund.

The portfolio remains relatively concentrated, with roughly 30-plus holdings.

A large proportion of the portfolio is also invested in US-listed companies.

This concentration can work in the fund's favour when Terry Smith's stock selections perform well.

But it can also increase the impact of individual investment decisions when things go wrong.

Therefore, investors should not view Fundsmith as simply another version of the MSCI World.

It is an active investment strategy with significant manager conviction.

Fund performance, portfolio turnover, valuations, earnings growth and Terry Smith's stock-selection decisions will be key indicators of whether the fund's new approach is delivering results.

What Should Investors Watch Next?

The most important thing now is not whether Terry Smith has changed his mind.

It is whether the new approach actually produces better results.

There are several things worth monitoring over the next few years:

1. Will performance improve?

The most obvious test is whether Fundsmith can begin closing the performance gap with the MSCI World.

2. Will turnover remain high?

A 51.8% turnover rate is a dramatic departure from the fund's historical behaviour.

It will be interesting to see whether this is a temporary portfolio reset or the beginning of a permanently more active strategy.

3. Are the new holdings better positioned?

The companies replacing the older holdings need to demonstrate stronger earnings growth and attractive long-term fundamentals.

4. Will Terry Smith's timing improve?

Selling a company after its fundamentals deteriorate can be sensible.

But selling too late can lock in losses, while selling too early can mean missing a recovery.

The new approach therefore places greater importance on Smith's judgement.

5. Can Fundsmith adapt to the AI-driven market?

The investment landscape has changed considerably.

Investors will want to see whether Fundsmith can participate in the growth of the global economy without compromising its focus on quality and valuation.

So, Is Fundsmith Still Worth Considering?

My view is that Fundsmith Equity is becoming interesting again — but investors should look at it differently from five or ten years ago.

Previously, the appeal was relatively straightforward:

Own a portfolio of excellent businesses and let them compound over many years.

Today, the proposition is more nuanced.

Fundsmith still focuses on high-quality companies, but Terry Smith appears more willing to acknowledge when an investment thesis has changed.

That could ultimately make the strategy more effective.

However, it also introduces a new element of risk.

The more active the fund becomes, the more important manager judgement and timing become.

Therefore, I would not invest simply because the fund has underperformed.

Instead, I would ask:

• Are the companies currently in the portfolio attractive?

• Is the valuation reasonable?

• Has the investment process genuinely improved?

And most importantly:

• Can Terry Smith's new approach deliver better results from here?

The Bottom Line

Fundsmith is going through a significant period of change.

The recent increase in portfolio turnover, the willingness to exit longstanding holdings and the greater emphasis on earnings momentum suggest that Terry Smith has learned from the fund's recent difficulties.

That does not mean the original quality-investing philosophy has failed.

It may simply mean that even a long-term investor needs to know when the investment thesis has changed.

For existing Fundsmith investors, the latest developments are worth watching closely rather than reacting emotionally to the recent underperformance.

For new investors, the fund may deserve another look — but with realistic expectations.

The next few years could be particularly important.

Fundsmith is no longer simply asking investors to "buy good companies and do nothing."

It is now asking them to trust Terry Smith to identify which good companies are still worth holding — and when it is time to move on.