AI summary and analysis
Terry Smith explains why Fundsmith will continue to underperform MSCI World in 2025, focusing on index concentration, passive fund momentum, AI leader valuations, dollar weakness and persistence in not chasing index weights.
Key points
- Fundsmith's 2025 positive returns are low, and rather than packaging it as short-term noise, Smith acknowledges the large relative gap between indexes and funds.
- He puts market concentration at its core: a small number of large technology stocks and AI-benefit stocks contribute too much to index returns, and active portfolios will come under significant pressure if they are not held according to index weights.
- Smith believes that market cap-weighted index funds are not truly "passive" and that capital inflows will continue to buy companies that have grown in size, forming momentum feedback.
- He used the cost of capital and historical bubble framework to remind investors that AI capital expenditures and high valuations may not automatically translate into future shareholder returns.
- This letter is suitable for explaining Fundsmith's consumer positioning: it would rather suffer a period of lag than buy assets that do not meet the quality, valuation and portfolio risk requirements in order to be close to the index.