I’ve held Fundsmith Equity in my Stocks and Shares ISA for many years now. And it’s generated strong returns for me over the long term. Recently however, its performance has been disappointing on a relative basis. For example, in 2024, the fund returned 8.9% versus 20.8% for the MSCI World index.
Is it time to boot the fund out of my ISA and reinvest my capital elsewhere? Let’s discuss.
Quality investing works
I continue to like the investment strategy here. Fundsmith portfolio manager Terry Smith is a quality investor (he likes to buy ‘good companies’ and hold them for the long term) and quality investing tends to work well over the long run.
However, I do think Smith has made some mistakes in recent years.
Not enough tech
One’s been his weighting to technology. The world’s going through a major tech revolution and Fundsmith hasn’t had enough exposure (especially to mega-cap tech).
He was very slow to buy Apple, meaning that he missed out on some big gains. And when he did buy shares in the iPhone maker, he only took a small position (which he recently sold).
It was a similar story with Alphabet (Google). This now has a top 10 position in the fund but he was slow to buy this stock and missed out on some large gains.
As for Amazon, he really made a mess of this stock. Here, he bought high and then sold low which led to him missing out on the recent rise to new all-time highs.
I think he could have had larger positions in all three of these stocks as they all have a lot of quality.
Where’s Nvidia?
Turning to Nvidia (NASDAQ: NVDA), Fundsmith’s never held this stock. But that doesn’t surprise me, to be honest.
Personally, I’m bullish on the stock. Right now, all the major tech companies are scrambling to buy Nvidia’s artificial intelligence (AI) chips. As a result, the company’s generating spectacular growth. For the year ending 31 January 2026, analysts expect revenue and earnings per share growth of 53% and 50% respectively.
But history shows that the semiconductor industry can be highly cyclical. It also shows that Nvidia’s share price can be very volatile at times. This is a stock that can fall 10% or more in the blink of an eye. It’s already had one 10%+ pullback this year and we’re still in January!
That’s not the kind of stock Smith goes for. He prefers companies/stocks that are more stable and I’m fine with that.
There are plenty of other tech stocks he could look at though to position Fundsmith for the tech revolution. An example, there’s Synopsys, which makes software for chip designers and has plenty of quality.
Hopefully, we will see more high quality tech stocks in the portfolio in the future.
My move now
As for my move now, I’m going to continue to hold Fundsmith in my ISA. I’m looking at it as a portfolio diversifier – if mainstream indexes take a hit, I’m hoping the fund will outperform.
It’s only a relatively small position in my portfolio though. I have plenty of other funds (both active and passive) and lots of high-quality individual stocks for growth and diversification.
This post was originally published on Motley Fool
