Terry Smith
1953- · Fundsmith · Three instructions, and only one of them is hard.
Quality, and nothing else
~15% a year✓
2010-2023 · Fundsmith Equity
Overview
Founded Fundsmith in 2010, at fifty-seven, with his own money and a method he reduced to three sentences: buy good companies, don't overpay, do nothing. The fund compounded at roughly 15% a year for its first decade and became one of the largest in Britain.
The open question
The open question is which of the three is actually difficult. He says it is the third, and the record partly disagrees with him. Doing nothing is easy while the good companies are winning. The strain arrived when they stopped: from 2022 the fund underperformed, the quality style fell out of favour with rising rates, and the pressure landed squarely on the first two instructions — whether the companies were still good, and whether he had, after all, overpaid.
“Buy good companies. Don't overpay. Do nothing.”
Terry Smith
Background
East London, working class, and he has never made any attempt to disguise it. Cardiff University, then Barclays as a graduate, then bank analysis.
His career turns on one act. In 1992, while at UBS Phillips & Drew, he wrote Accounting for Growth — a systematic catalogue of the devices British companies used to flatter their profits, naming firms. His employer, which advised many of them, asked him to withdraw it. He refused, was fired, and the book went to the top of the bestseller lists. He then ran Collins Stewart and Tullett Prebon as chief executive for over a decade before starting Fundsmith.
Style, and how it evolved
Twenty to thirty companies, and a permanent exclusion list. No banks, no insurers, no utilities, no resources, no property, no heavily cyclical industrials. He does not argue these are bad businesses; he argues he cannot analyse them well enough to hold them through anything, and that a rule beats a judgement made under pressure.
Return on capital employed, and cash conversion. The twin tests. High returns on capital show the business earns well; cash conversion shows the earnings are real. His analyst's training is the actual edge here — he reads accounts adversarially, looking for the distance between reported profit and cash, which is exactly what Accounting for Growth was about.
Do nothing. Turnover in low single-digit percentages. He has repeatedly said that most of a manager's value destruction happens through activity.
The evolution is minimal by design — the letters barely change from year to year, which is the point — but the honest note is that the portfolio's centre of gravity has drifted, and he has been publicly wrong about several of the era's largest compounders, which he discusses in the annual letters rather than hiding.
Performance
paid offa decisiona losswalked awaythe lifeshaded columns are the crashes — hover any mark
Fundsmith Equity, from November 2010 to the end of 2023: roughly 15% a year, against about 11-12% for the MSCI World index. ✓ The fund grew to over £20bn and became the largest actively managed equity fund in Britain.
The other half belongs on the same page: from 2022 the fund trailed its benchmark for several consecutive years, assets fell, and the quality style he embodies had its worst relative run since he started.
| Year | ||
|---|---|---|
| 1992 | Publishes Accounting for Growth; is fired for refusing to withdraw it | ✓ |
| 2010 | Founds Fundsmith at 57, with his own capital | ✓ |
| 2010-21 | Roughly a decade of substantial outperformance | ✓ |
| 2022- | Underperforms as rates rise and the quality style de-rates | ✓ |
✓ documented — a daily-priced UK-regulated fund, so unusually checkable for this library
Case studies
1992 — the book that cost him his job. He documented how listed companies manufactured earnings growth, named them, and refused to pull it when his employer's clients objected. The mechanism: research produced inside a firm that sells to the companies being researched is compromised by construction, and the only proof of independence is what happens when it costs something. His entire later credibility rests on this episode rather than on any holding. ✓
Never owning a bank. Fundsmith has held no bank since inception. The rule cost him during periods when financials led, and he has never relaxed it. The mechanism: a permanent exclusion removes a decision from the moment when the decision would be hardest — which is the same reasoning, in the opposite direction, as a pre-committed buy list. ✓
Being publicly wrong, in writing. He has used annual letters to say plainly which large compounders he failed to own and why the reasoning was mistaken. It is not a trade, and it is the most transferable thing on this page. ✓
The other side of the record
A record this good is where scepticism is most worth spending, so:
Fourteen years is one regime. Fundsmith launched into a decade of falling rates and expanding multiples — precisely the conditions under which long-duration, high-quality compounding stories perform best. The relative record has weakened materially since that regime ended, which is either bad luck or the point.
The quality factor is well documented, and cheap. A systematic tilt to high return on capital, low leverage and stable margins can now be bought for a few basis points. How much of the record is selection and how much is factor exposure is a fair question that the three-sentence framing does not invite.
"Do nothing" and the actual turnover do not perfectly agree. Positions have been exited abruptly, sometimes shortly after being defended in a letter. The mantra is cleaner than the practice.
The exclusion list is a confession as much as a discipline. Refusing whole sectors guarantees you will miss whole cycles, and the honest framing — that he cannot analyse them — is not the framing the marketing uses.
He is an exceptionally effective self-promoter, and Fundsmith's fee income on £20bn is very large. The plain-spoken register is genuine and it is also an asset.
Key lessons
- Buy good companies, don't overpay, do nothing. The compression is the achievement; most methods cannot survive being stated this briefly.
- Return on capital tells you the business is good; cash conversion tells you the profits are real. Neither alone is enough.
- Read the accounts adversarially. The gap between reported earnings and cash is where companies hide, and finding it is a learnable skill rather than a talent.
- A permanent rule beats a judgement made under pressure. Exclusion lists exist to remove the decision from the worst possible moment.
- Say which ones you got wrong, in writing, annually. He does, and almost nobody else in the industry does.
Reading and links
- Accounting for Growth — 1992. Dated in its examples and not in its method.
- Investing for Growth — 2020. The collected letters and columns.
- The Fundsmith annual letters and shareholder meetings — free, and the primary source.
Marked ✓ where documented. Fundsmith is a daily-priced regulated fund, so the performance figures here are more checkable than most in this library. This is a profile of an investor, not a view on any security.
Primary sources
Go to the thing itself. These are the subject’s own publications or an institution’s own site. No bookseller links, and no referral arrangements — a reading list that earns per click is not a reading list.
- Fundsmith annual letters and meetingsThe letters are the primary source, and he says in them which ones he got wrong.
Profiles of investors, not views on any security, and not personal advice. Figures are marked ✓ where they are documented and ○ where they rest on secondary or private accounts — investing biography is heavily mythologised and the well-known numbers drift with each retelling. Capital is at risk.
Corrections and right of reply. Where a criticism is made of a named person it is stated as a specific measure over a stated period, attributed to its source, and separated from opinion. Assessments are opinion, honestly held, on facts believed accurate at the date shown. If anyone profiled here — or anyone acting for them — believes a fact is wrong, it will be corrected promptly and visibly, and a reply will be published alongside it on request.