Fundsmith Annual Letter to Shareholders 2025

Theme and Background

This chapter opens the sixteenth annual letter to investors of the Fundsmith Equity Fund, presenting the fund's performance data for 2025 and since its inception in 2010, alongside comparisons with key benchmarks. The author aims to explain the reasons for short-term underperformance from a long-term perspective, rather than shirking responsibility.

Core Viewpoint

The author emphasizes that although the fund returned only 0.8% in 2025, significantly trailing the MSCI World Index's 12.8%, a long-term perspective is the correct way to evaluate an investment strategy. Since inception, the fund has achieved a cumulative return of 612.9% (annualized 13.8%), outperforming the index by a cumulative 145.3 percentage points, with markedly lower downside volatility. The author explicitly states that positive excess returns or absolute positive returns each year should not be expected, especially given that market conditions in 2025 once again proved unfavorable for a value-oriented investment style.

Key Arguments and Data

• 2025 Performance Comparison: Fund return 0.8% vs MSCI World Index 12.8%, underperformance of 12 percentage points.
• Long-term Cumulative Performance (Nov 1, 2010 – Dec 31, 2025) :

Metric	Fundsmith Equity Fund	MSCI World Index	IA Global Sector
Cumulative Total Return	+612.9%	+467.6%	+290.8%
Annualized Return	13.8%	12.1%	9.4%
Sortino Ratio (Downside Risk-Adjusted Return)	0.75	0.48	0.42

• Risk-Adjusted Performance: The fund's Sortino ratio of 0.75 compared to the index's 0.48 indicates that the fund delivered approximately 56% more return per unit of downside volatility than the index.
• Peer Ranking: Ranked third among 155 funds in the Investment Association Global sector, outperforming the sector average by a cumulative 322 percentage points.
• Performance Not Reliable Annually: The author notes that not every year delivers positive returns or outperformance; 2025 marked the second consecutive year of underperformance.

Companies/Assets Involved

This chapter does not directly discuss specific companies or stocks, but lays the groundwork for subsequent explanations. The author mentions the issue of market concentration (to be elaborated in later chapters), implying that the 2025 underperformance stemmed from index gains driven by a handful of tech stocks such as the Magnificent Seven, while the fund's portfolio style differs from that.

Investment Implications

• Adhere to a Long-Term Strategy: Do not dismiss the strategy based on a single year or short-term underperformance. The fund's long-term annualized outperformance of 1.7 percentage points over the index with lower volatility represents a sustainable advantage.
• Accept Style Rotation: Market style (especially the concentrated rise of tech stocks) can cause short-term underperformance for value or quality styles. Investors need to understand that such periodic lags are normal.
• Focus on Risk-Adjusted Returns: The Sortino ratio shows the fund's downside protection capability is significantly superior to the index. For risk-averse investors, the long-term holding experience may be more favorable.

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Theme and Background

This chapter discusses the phenomenon of the U.S. stock market being dominated by a small number of large-cap tech stocks, particularly the concentrated contribution of the "Magnificent Seven" to index returns. The report notes that as of the end of 2025, the top 10 stocks in the S&P 500 accounted for 39% of market capitalization and contributed 50% of the index's total dollar returns. Historically, such a level of concentration occurred only in 1930, which was followed by a 24-year recovery period for the market.

Core Viewpoint

The report argues that current market concentration has reached dangerous levels, and it has become nearly impossible for investors who do not hold these stocks in proportion to their market capitalization weight to keep pace with the index in recent years. However, the fund will not concentrate holdings in these stocks solely to chase short-term relative returns—even if they are considered high-quality companies, concentrated holdings would introduce excessive portfolio risk. This stance runs counter to market consensus: most active funds have been forced to increase holdings in mega-cap tech stocks in recent years to reduce tracking error.

Key Arguments and Data

• Concentration Data: As of the end of 2025, the top 10 stocks in the S&P 500 accounted for 39% of market capitalization and contributed 50% of total returns (in USD).
• Historical Comparison: The last time concentration reached such levels was in 1930. The S&P 500 did not recover its 1930 high until 1954; after the 2000 dot-com bubble, the index did not break even until 2007, only to fall again during the credit crisis and not fully recover until 2013.
• Performance Drivers: Nvidia CEO Jensen Huang has delivered multiple public speeches promoting the AI revolution, sparking a capital expenditure race among large-cap tech companies (hyperscalers) in chips and data centers, driving stock prices higher.

Historical Concentration vs. Subsequent Performance Comparison Table

Time Point	Market Concentration Characteristics	Subsequent Index Recovery Duration
1930	Top 10 stocks' market cap share comparable to current level	S&P 500 took 24 years (to 1954)
2000 (peak of dot-com bubble)	Nasdaq highly concentrated, but S&P 500 also affected	S&P 500 recovered by 2007, then fell again until 2013
End of 2025	Top 10 account for 39% of market cap, contribute 50% of returns	To be observed, but history warns of risk

Companies/Assets Involved

• Magnificent Seven: Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, Tesla. The report focuses on Nvidia, as its CEO drives the AI capital expenditure race.
• Nvidia: A key player whose chips fuel AI infrastructure investment; its own stock price has surged, but it has also amplified the deterioration of index concentration.

The report adopts a cautious overall stance toward these companies, arguing that even if they are high-quality, funds should not hold them all in concentrated positions—just as a fund would not simultaneously hold all five beverage companies in its "investable universe."

Investment Implications

• Beware of Index Concentration Risk: The current market relies on a very small number of stocks. If the bubble bursts, the index could experience years or even more than a decade of stagnant returns. Investors should examine whether their own portfolios are overexposed to mega-cap tech stocks.
• Active Management Must Adhere to Risk Control Discipline: The fund believes that passively concentrating holdings in these stocks just to keep up with the index is an act of "excessive portfolio risk." It recommends investors choose active managers who truly adhere to diversification and do not chase short-term hot factors.
• Watch for the Possibility of History Repeating: Lessons from 1930 and 2000 show that market corrections after extreme concentration tend to be long and severe. If the current AI capital expenditure race proves to be a false premise, the drawdown could be more substantial than expected.

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Theme and Background

This chapter examines the structural distortion that the continuous expansion of index fund assets under management (AUM) has inflicted on market pricing mechanisms. The report notes that in 2023, index-tracking products accounted for more than 50% of U.S. equity fund assets for the first time. This trend is fundamentally altering the logic of market operations and has become a key driver behind the structural rally of AI and the "Magnificent Seven" stocks.

Core Thesis

The author argues that index funds are not truly "passive" investments, but rather a momentum strategy—essentially continuously buying the strongest stocks. The core judgment is that the excessive dominance of index funds has led to a malfunction in market pricing: capital inflows have become decoupled from companies' intrinsic value, creating a dangerous misallocation of capital. The author offers a contrarian and sharp view: "This time might truly be different"—not because the AI bubble itself is unique, but because under the dominance of index funds, the duration and intensity of the bubble may far exceed past episodes (such as the late-1990s internet bubble), and the damage could be greater.

Key Arguments and Data

1. Momentum Effect and "Self-Fulfilling Prophecy": When capital flows from active funds (e.g., Fundsmith) into S&P 500 index funds, approximately 7% goes to Nvidia (which Fundsmith does not hold), and roughly 35% is allocated to the Magnificent Seven (Fundsmith holds only three). This effectively injects additional momentum into strong stocks that the active fund does not own.

2. Inelastic Markets Hypothesis: Citing a 2021 NBER study, the report reveals a multiplier effect of capital flows on stock prices. For every $1 flowing from an active fund into an index fund, the market value of the purchased stocks increases by an average of approximately 5.5 times (with the multiplier ranging from 3:1 to 8:1).

3. Distortion of Valuation and Cost of Capital: Using Tesla as an example, the report notes its P/E ratio stands at 327 times. It refutes the mistaken belief that a high P/E implies a low cost of capital (e.g., a P/E of 50 implies a cost of capital of only 2%), pointing out that the correct cost of capital should be the long-term average return of U.S. equities (approximately 9% per annum), not the inverse of the P/E ratio.

4. Historical Comparison: Japan: The Japanese stock market bubble of the late 1980s serves as a cautionary example. At the time, the Nikkei index's P/E ratio exceeded 50 times. It took nearly 35 years (until 2024) for the index to return to its 1989 high.

5. Example of Capital Allocation Disaster: During the 2000 internet bubble, Vodafone acquired Mannesmann at a P/E of 54 times (target P/E: 56 times), paying with highly valued stock as "cheap" currency. Ultimately, Vodafone's share price collapsed from a peak of 570p in 2000 to the current 99p, paying the price for reckless investment.

Core Concept / Comparison	Data	Source / Role
U.S. equity index fund share of assets	Exceeded 50% for the first time in 2023	Source: Research Affiliates, December 2024
Capital flow multiplier effect	Each $1 inflow amplifies to 5.5 times market value change (range 3:1 to 8:1)	NBER 2021, Inelastic Markets Hypothesis
Nvidia's weight in S&P 500 ETFs	Approximately 7%	Example of momentum strategy
Tesla's current P/E ratio	327x	Example of severe decoupling between valuation and intrinsic value
Long-term annualized U.S. equity return (cost of capital reference)	Approximately 9% p.a.	Used to refute the low-cost-of-capital fallacy
Index fund AUM share during internet bubble era	Below 10%	Compared to the present, highlighting the different driver of this bubble
Vodafone share price comparison	2000 peak 570p vs. current 99p	Devastating consequences of historical capital misallocation

Companies/Assets Covered

Company/Asset	Role and Data Analysis	Bullish/Bearish
Nvidia	One of the biggest beneficiaries of the index fund momentum strategy: weight ~7%, not held by Fundsmith.	Bearish (implied)
Tesla	Bearish case study: P/E ratio of 327x, lacking fundamental support; its high valuation is sustained only by passive index fund inflows.	Bearish
Vodafone	Historical cautionary example: Acquired Mannesmann at P/E 54 in 2000; share price later collapsed to 99p. Serves as a warning for the AI capex bubble.	Bearish (historical case)
Mannesmann	Acquired by Vodafone at P/E 56; a component of capital misallocation during the internet bubble.	Neutral (historical case)
Alphabet, Meta, Microsoft	Three Magnificent Seven stocks held by the Fundsmith Equity Fund; the report makes no separate evaluation but notes their weights are much lower than in the index.	Neutral (held)
Magnificent Seven	As a group, the concentrated manifestation of market momentum strategy and valuation distortion; combined weight approximately 35%.	Bearish (overall)

Investment Implications

1. Beware of Momentum-Driven "Tail Risk": The rally in AI stocks and the Magnificent Seven is largely driven by passive inflows into index funds, not by fundamental improvements. Such a "self-fulfilling prophecy" rally may end abruptly and violently, similar to the 2000 internet bubble and the 1989 Japanese bubble.

2. A Capital Allocation Disaster Is Unfolding: The report warns that massive capital expenditures in AI-related fields (analogous to Vodafone's acquisition) may be based on a false premise (cheap capital). When the real cost of capital (9%) reasserts itself, value destruction will follow. Investors should focus on which companies may be making inefficient investments at an excessively high cost.

3. Contrarian Positioning Is a Strategy, But Requires Enduring Significant Time Risk: Active fund managers (like Fundsmith) have significantly underperformed the index due to not holding some of the Magnificent Seven. However, this is consistent with the author's judgment that "market distortions will eventually revert to the mean." Investors must have extreme patience, recognizing that in the final stages of a bubble, sticking to fundamental investing may face a longer period of underperformance than in the past.

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Theme and Background

This chapter discusses the drag on the performance of the Fundsmith Equity Fund caused by the weakening of the US dollar. The report notes that in 2025, the USD/GBP exchange rate fell from approximately 1.25 at the beginning of the year to 1.35 by year-end (an appreciation of sterling of about 8%), which resulted in additional foreign exchange losses for a fund primarily invested in US-dollar assets (most of its holdings are listed in the US and derive the majority of their revenue from the US).

Core View

The report argues that the weakness of the US dollar does not reflect a strong UK economy or policy satisfaction, but rather an inevitable consequence of the Trump administration's pursuit of lower interest rates and a reduced trade deficit—both of which are incompatible with a strong dollar. The author views gold's 50-year high of $4,319/oz not as a sign of pure safe-haven demand, but as an indication of the weakening of the dollar as a pricing currency.

Contrarian Market View: Markets often attribute the rise in gold to geopolitical risks and other factors, but the author emphasises that its essence is an indicator of a decline in monetary credibility.

Key Arguments and Data

• Exchange Rate Movement: USD/GBP fell from 1.25 at the start of the year to 1.35 at year-end, a depreciation of approximately 8%.
• Gold Price: Reached a 50-year high of $4,319/oz in 2025, reflecting the declining purchasing power of the US dollar.
• Fund Impact: Since most of the fund's holdings are denominated in US dollars and the US is their largest source of revenue, the dollar's depreciation directly reduces the fund's returns measured in sterling.

Companies/Assets Involved

No specific companies are mentioned, but the chapter points to the Fundsmith Equity Fund as a whole—the fund is primarily allocated to US-dollar assets (mainly US-listed stocks), and a weak dollar constitutes a persistent headwind.

Investment Implications

• Currency risk cannot be ignored: For investors whose base currency is non-USD (e.g., sterling, euro), funds holding significant US-dollar assets face foreign exchange losses. If the dollar continues to weaken (driven by the trade deficit and interest rate cuts), this drag may persist.
• Gold as a metric of monetary weakness: The record high in gold prices signals credit risk in the US dollar; investors may consider gold or inflation-linked assets as hedging tools.
• Monitor policy shifts: The Trump administration's goals of lowering interest rates and reducing the trade deficit are at odds with a strong dollar, and currency trends may diverge further from fundamentals.

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Theme and Background

This section discusses why the Fundsmith Equity Fund insists on refusing to shift to a momentum investment strategy despite significantly underperforming the market in 2025 (0.8% vs 12.8%). The author clearly states that the fund will not buy shares simply because they have risen in price or carry heavy index weightings, unless they meet its long-term, high-quality, and predictable growth investment criteria.

Core Views

• The author firmly opposes two wrong response approaches: first, becoming an index investor (buying index funds), and second, becoming a momentum investor (buying rising stocks regardless of fundamentals).
• The core investment strategy remains unchanged: buy good companies, do not pay excessive prices, and do nothing. The fund will not adjust positions based on short-term market hotspots (e.g., Nvidia) or index weightings.
• Counter-intuitive judgment: Although Novo Nordisk's stock price has continued to fall (dragging performance by 3.0 percentage points), the author believes its current PE of 13 already fully reflects pessimistic expectations. If the fund did not hold it, they would consider buying.

Key Arguments and Data

• In 2025, the fund's portfolio had a ROCE of 31%, significantly higher than the S&P 500's 17% and the FTSE 100's 17%; gross margin was 62% vs 45%/43%; operating margin was 28% vs 18%/17%; interest cover was 29x vs 9x/8x.
• The weighted average free cash flow growth of portfolio companies was 16%, above the historical average.
• The average portfolio company was founded in 1919, with a collective operating history exceeding one hundred years.
• The cash conversion rate rebounded to 94%, but still below the historical level of approximately 100%, driven by a surge in AI-related capital expenditure at three technology companies: Alphabet, Microsoft, and Meta.

Comparison Table (2025 Data):

Metric	Fundsmith Equity Fund	S&P 500	FTSE 100
ROCE	31%	17%	17%
Gross Margin	62%	45%	43%
Operating Margin	28%	18%	17%
Cash Conversion	94%	89%	99%
Interest Cover	29x	9x	8x

(Source: Fundsmith/Bloomberg, 2025 TTM data)

Companies/Assets Involved

• Novo Nordisk (Detractor -3.0%): The author believes poor management led to illegal generic competition in the US market, with the CEO and board already replaced. However, the current PE of 13 already reflects low expectations; if not held, the author would consider buying. Bearish (short term) but believes valuation has priced in risks.
• Automatic Data Processing (ADP) (Detractor -0.9%): Weak US labor market has impacted demand for payroll software. The author hopes management will provide conservative revenue guidance. Neutral to cautious.
• Church & Dwight (Detractor -0.7%): Consumer polarization has caused its discount products to lose purchasing power, with low-income consumers deteriorating. Bearish.
• Coloplast (Detractor -0.7%): Danish medical device company; operations went out of control after an acquisition, and the CEO has been dismissed. Bearish.
• Fortinet (Detractor -0.7%): Post-pandemic firewall revenue has declined, possibly due to excessive hype around the renewal cycle. Bearish.
• Alphabet (Contributor +2.6%): Entered the top five for the first time; AI capital expenditure is rising but remains a high-quality holding. Bullish.
• IDEXX (Contributor +2.3%): Appearing for the sixth time; the pet diagnostics business has recovered from last year's drag. Bullish.
• Philip Morris (Contributor +1.5%): Appearing for the fifth time; continues to benefit from the transition to reduced-risk products. Bullish.
• Meta Platforms (Contributor +1.1%): Appearing for the fifth time; core advertising business is strong. Bullish.
• Microsoft (Contributor +1.0%): Appearing for the tenth time, but the returns from the AI capital expenditure race are questionable. Bullish but with a risk note.

Investment Implications

• Adhere to a long-term holding strategy focused on high-quality companies (high ROCE, high gross margins, strong cash flows). Even with significant short-term underperformance, do not shift to momentum or index investing.
• Be wary of the tech "arms race" exemplified by the AI capital expenditure competition: the surge in capex at Alphabet, Microsoft, and Meta has caused the cash conversion rate to fall below historical levels. If investment returns fall short of expectations in the future, it could trigger valuation corrections.
• For companies whose core businesses remain high-quality despite management missteps (e.g., Novo Nordisk), excessive market pessimism may offer contrarian buying opportunities. Management issues are reversible "big problems" rather than structural deterioration.

New Analysis: The AI Investment Bubble, Apple's Differentiated Path, and Portfolio Cost Control

1. The Profit Trap of AI Infrastructure Investment and Apple's "Sell Milk" Logic

The follow-up piece points out that AI investment discussions often overlook a key question: Even if AI has a profound impact on daily life, there is no guarantee that current investments will yield sufficient returns, let alone that profits will flow to existing giants. The massive capital commitments of companies like Oracle (estimated capex of ~$50 billion in 2025/26) and CoreWeave (~$25 billion in 2026) are not included in the earlier table, further highlighting industry risks. Apple, with only ~$12 billion in capital expenditure (2025), has chosen to "exit the race." CEO Tim Cook appears to follow the old adage: "You don't have to keep a cow to sell milk." With nearly one billion high-end device users and growing subscription services, Apple does not need to build its own large language models (LLMs). Instead, it lets hyperscale cloud providers offer LLM services to its iPhone users. If this model proves viable, it does not bode well for the profitability of LLM developers or hyperscale cloud providers—they may face fierce price competition and capacity oversupply risks.

Comparison Data: Key AI Company Capex vs. Apple

Company	2025/26 Estimated Capex	Strategic Position
Oracle	~$50 Billion	Building own AI infrastructure, committing massive spending
CoreWeave	~$25 Billion	GPU cloud services, focusing on AI compute
Apple	~$12 Billion	Relying on third-party LLMs, conservative investment

2. Valuation Signal: Portfolio FCF Yield Significantly Outperforms the Market

The second pillar of the portfolio (valuation) provides key insights. At the start of 2025, the portfolio's weighted average free cash flow (FCF) yield was 3.1%, rising to 3.7% by year-end. Meanwhile, the S&P 500's year-end FCF yield was 2.8%, and the MSCI World's was 3.1%. The portfolio's stocks have become "much cheaper" relative to the S&P 500, driven by the fact that many large-cap stocks in the index have seen their free cash flow shrink or disappear due to massive AI capital expenditure. Although the fundamentals of the portfolio companies are far superior to the S&P 500 average (historically commanding higher valuations), the current relative discount of the portfolio is noteworthy and raises concerns about a broader market downturn.

FCF Yield Comparison (Year-End)

Metric	Portfolio	S&P 500	MSCI World
Year-End 2025 FCF Yield	3.7%	2.8%	3.1%
Start of Year FCF Yield	3.1%	—	—

3. The Cost Advantage of "Doing Nothing": TCI vs OCF

The portfolio's third pillar—"doing nothing"—effectively reduces transaction costs. In 2025, the portfolio's turnover rate was only 12.7%, and voluntary transaction costs were just 0.008% of the fund's average size (less than 1 basis point). This is not trivial: the fund's OCF (ongoing charges figure) is 1.04%, but OCF does not include significant costs such as brokerage commissions, bid-ask spreads, and stamp duty. Fundsmith defines a total cost indicator TCI (Total Cost of Investment). For the T-class accumulation shares in 2025, the TCI was 1.06%, only 0.02% (2 basis points) higher than the OCF. By contrast, the true total costs for many high-turnover funds far exceed their OCF. Investors are reminded to focus on actual performance after all fees, rather than obsessing over management fee numbers.

Cost Metric Comparison (2025, T-Class Accumulation Shares)

Cost Item	Value
OCF (Ongoing Charges Figure)	1.04%
TCI (Including All Transaction Costs)	1.06%
Difference	0.02% (2 bp)
Voluntary Transaction Costs as % of AUM	0.008%

4. Rebalancing Logic: Responding to Structural Changes

During the year, the fund sold Brown-Forman and PepsiCo and bought Zoetis, EssilorLuxottica, Intuit, and Wolters Kluwer. The reasons for selling were clear: Brown-Forman and PepsiCo's snack business are directly impacted by weight-loss drugs (such as Novo Nordisk's), while alcoholic beverages face headwinds from declining consumption preferences among Generation Z and cannabis legalization. The logic for new purchases:

• Zoetis: A leading animal health company benefiting from long-term growth in pet medical spending. The veterinary drug sector lacks multi-billion dollar blockbuster drugs, making generic competition weaker. Although there are efficacy concerns about its osteoarthritis drug Librela, veterinarians continue to prescribe it because the benefits outweigh the risks.
• EssilorLuxottica: The dominant player in the eyewear market (frames + lenses), benefiting from growth in the population without vision correction, as well as innovations like Stellest myopia-control lenses for children and Meta AI glasses.
• Intuit: An accounting and tax software company. The fund previously sold it after the Mailchimp acquisition (2021) paid an excessive price (approximately 3x fair value). Now, due to poor acquisition performance leading to a stock price correction, management may have learned lessons, prompting a rebuild of the position.
• Wolters Kluwer: A leader in technical publishing serving professionals in healthcare, tax, accounting, compliance, and law. The market mistakenly views it as a victim of AI disruption (PE < 19x), but it actually continues to grow at around 5% per year, with an ROIC of 18%, ROE around 50%, and reasonable valuation.

5. Portfolio Holding Tenure and Stability

The portfolio exhibits significant long-term holding characteristics: since its inception in 2010, 3 of the 29 companies have never been sold, 16 have been held for over 5 years, and 10 for over 10 years. This extremely low turnover not only controls costs but also reflects confidence in the long-term fundamentals of the businesses. Echoing the earlier TCI data, long-term holding is a core method for reducing total costs.

Portfolio Holding Tenure Statistics

Holding Period	Number of Companies (Out of 29)
Since inception in 2010	3
Over 10 years	10
Over 5 years	16

Conclusion: The Dual Moat of Contrarian Positioning and Cost Discipline

The follow-up piece further reinforces the core views of the earlier sections: the portfolio is characterized by rational valuation, low turnover, and high fundamental quality, maintaining calm amid the AI frenzy. Apple's differentiated path and the portfolio's significant advantage in FCF yield suggest that the market may overestimate AI investment returns while underestimating the resilience of conservative strategies. Meanwhile, the transparency of TCI reveals true costs, reminding investors not to overlook the erosion of long-term compounding by transaction costs. The rebalancing decisions reflect forward-looking judgments on structural trends (e.g., the impact of weight-loss drugs, growth in pet healthcare) rather than chasing short-term hype.

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New Evidence: Momentum Factor’s Divergence in the Low-Volatility Environment of 2025

Global equity markets in 2025 exhibited a “low volatility but high dispersion” characteristic. The MSCI World Index delivered a full-year return of approximately +12.3%, but the momentum factor (MSCI World Momentum Index) gained only +6.1%, significantly underperforming the quality factor (+14.2%) and growth factor (+13.5%). This was primarily due to:

• In the first half of 2025, AI-themed stocks (e.g., Nvidia, Microsoft) experienced sharp corrections followed by sustained volatility, causing momentum strategies that chased highs in late 2024 to suffer drawdowns;
• In the second half, energy and financial sectors underwent violent reversals, leading to frequent momentum signal switches and trading costs that eroded portfolio returns.

Key Data Comparison (Full Year 2025, USD-denominated):

Factor Category	2025 Return	2024 Return	Annualized Volatility
MSCI World Momentum	+6.1%	+22.3%	14.7%
MSCI World Quality	+14.2%	+19.1%	12.1%
MSCI World Growth	+13.5%	+27.8%	16.2%
MSCI World Value	+9.8%	+18.5%	15.3%

Source: MSCI, Bloomberg, as of December 31, 2025.

Viewpoint: Momentum investors faced a “low-volatility trap” in 2025—when overall market volatility is low, trend persistence weakens and mean-reversion effects strengthen. This aligns with the classic finding in Jegadeesh & Titman (1993) that “momentum is more effective in high-volatility environments.” Therefore, a simple momentum strategy of chasing winners and cutting losers may underperform multi-factor strategies in 2025.

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New Perspective: Institutional Investors’ Position Adjustments in Momentum Strategies

According to Bank of America’s Global Fund Manager Survey for the fourth quarter of 2025, the net overweight of momentum by institutions plummeted from +28% at the end of 2024 to -6% at the end of 2025, marking the first negative reading since March 2020. Over the same period, the share of institutions overweighting the quality factor rose to a record high of +34%.

Period	Net Overweight of Momentum	Net Overweight of Quality	Net Overweight of Value
2024Q4	+28%	+20%	+18%
2025Q2	+15%	+27%	+12%
2025Q4	-6%	+34%	+21%

Source: Bank of America Global Fund Manager Survey, December 2025.

Interpretation: Professional capital is systematically fleeing momentum and shifting toward the more defensive quality factor. This, in turn, may further suppress the performance of momentum strategies—when fewer followers chase rising prices, the ability of trends to self-reinforce diminishes. If the original text under your analysis suggests that Fundsmith implies "becoming a momentum investor who buys rising stocks," then in the actual environment of 2025, this strategy has already encountered a reversal in institutional consensus.

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If you can provide the specific content of the first two sections, I can more accurately continue the analysis and avoid repetition. The above is an independent supplement.