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I’ve been an investor in Fundsmith Equity for a long time now. And over the long run, the fund – which focuses on high-quality stocks – has done well for me. However, returns recently have been poor relative to major indexes. Over the last year, it has only returned about 1% versus around 16% for the Vanguard S&P 500 UCITS ETF (LSE: VUAG) and 17% for the Vanguard FTSE All-World UCITS ETF.
That’s disappointing, especially when you consider that Fundsmith’s fees are much higher than those of the two ETFs. And it has got me wondering – is it time to dump the fund and move my money into index funds?
Lousy performance
The poor relative performance here is not a new phenomenon. Sadly, this fund has been underperforming for a while now.
Last year, it returned 8.9% versus 20.8% for the MSCI World index. The year before that, it did 12.4% versus 16.8% for the MSCI.
The year before that (2022), it returned -13.8% while the MSCI posted a return of -7.8%. So, it even underperformed in a bad market.
Multiple issues
What’s gone wrong? Well, for me, the main issue has been a lack of exposure to large-cap technology businesses, which have gone from strength to strength in recent years as the world has become more digital.
To my mind, there hasn’t been enough of an acknowledgement that the world is undergoing a major tech revolution. Ultimately, I think Terry Smith and his team could have taken more of a ‘top-down’, thematic view and then focused on high-quality businesses.
Stock selection has also been an issue. This has been poor, which is a problem when a fund only owns 25 to 30 stocks like Fundsmith does.
Some examples of stocks in the fund that have underperformed in recent years include LVMH, Novo Nordisk, and Unilever.
Do I switch into a tracker?
So, do I offload Fundsmith and move into something like the Vanguard S&P 500 ETF? I’m not sure, to be honest.
This ETF would give me more exposure to large-cap tech. The largest weightings here are currently Nvidia, Microsoft, Apple, Alphabet, Amazon, and Meta.
It would also eliminate the stock selection issue. I’d get exposure to 500 stocks including some really exciting ones such as Oracle, Broadcom, and Palantir.
I’m just concerned that the S&P has raced higher recently. Since April, it has risen more than 30% – a huge move in a short period of time.
After that kind of rise, I wouldn’t be surprised to see a pullback. And in this scenario, Fundsmith may end up outperforming the S&P 500 due to its focus on quality and exposure to the Healthcare and Consumer Staples sectors (around 50% of the portfolio).
My move now
Given my concerns over the S&P 500’s move higher, I’m going to hold on to Fundsmith for now. I see it as a hedge against mainstream market risks.
That said, it’s definitely ‘under review’ for me. For the fees, it needs to start delivering again.
