Fundsmith Semi-Annual Letter to Shareholders 2024
Fundsmith is the fund firm Terry Smith ("Britain's Warren Buffett") founded in 2010, with a discipline of radical simplicity — Buy Good Companies, Don't Overpay, Do Nothing: a concentrated book of 20-30 high-ROCE global consumer, healthcare and tech franchises with near-zero turnover. His annual shareholder letters are famous for wit and common sense; peak AUM topped £25bn.
In plain words
This is a letter from star fund manager Terry Smith to his shareholders. His fund returned 9.3% in the first half of 2024, lagging behind the global stock market index (up 12.7%). The reason? Market gains were extremely concentrated in a few tech giants, with chipmaker Nvidia alone accounting for 25% of the index's return. Smith refuses to buy stocks whose future is too unpredictable. He prefers dependable companies like Novo Nordisk (the weight-loss drug maker) and Microsoft. For ordinary investors, the message is clear: don't chase hot stocks just because you're underperforming in the short run. Sticking with quality, predictable businesses and staying diversified can pay off over time.
Fundsmith’s July 2024 report indicates that its Equity Fund achieved a total return of 9.3% in the first half of the year, underperforming the MSCI World Index’s 12.7%. This was primarily due to market returns being concentrated in a handful of stocks: the S&P 500 Index returned 17%, with Amazon, Ap
Theme and Background
This chapter is the opening of Fundsmith’s letter to investors for the first half of 2024, primarily reviewing the performance of the Fundsmith Equity Fund during this period and comparing it with major market indices. The report notes that although the fund achieved a positive return of 9.3%, it still lagged behind the MSCI World Index, as market returns were highly concentrated in a small number of technology stocks.
Core Thesis
The author’s core investment argument is that the fund’s underperformance is not due to stock selection ability, but rather the extreme concentration of market returns. The author believes that the three “Big Five” stocks held by the fund (Apple, Meta, Microsoft) contributed positive returns, but the absence of Nvidia was the key factor behind the relative underperformance. The author adheres to the investment philosophy of only investing in highly predictable companies, and Nvidia currently does not meet this criterion.
Key Arguments and Data
- Fund Performance: Total return of +9.3% in the first half of 2024, cumulative return of +610.2% since inception, and annualized return of +15.4%.
- Benchmark Index: The MSCI World Index returned +12.7% in the first half, with a cumulative return of +369.6% since inception and an annualized return of +12.0%.
- Market Concentration: The S&P 500 Index returned +17% in the first half, with just five companies (Amazon, Apple, Meta, Microsoft, Nvidia) contributing 46% of the return, and Nvidia alone accounting for 25%.
- Fund Holdings: The fund holds three stocks—Apple, Meta, and Microsoft—but Apple’s position is small, and Nvidia is not held.
- Top Five Positive Contributors: Novo Nordisk (+3.4%), Meta Platforms (+2.7%), Microsoft (+2.0%), Alphabet (+1.0%), Stryker (+0.8%).
- Top Five Negative Contributors: L'Oréal (-0.7%), IDEXX (-0.6%), Nike (-0.6%), Brown-Forman (-0.5%), Waters (-0.5%).
- Costs and Turnover: Portfolio turnover rate of 3.7% in the first half, voluntary trading costs of 693,032 GBP (0.003%), and total investment costs (Ongoing Charges + trading costs) of 1.05%.
The Fundsmith Equity Fund returned 9.3% in the first half of 2024, with a cumulative return of 610.2% since inception and an annualized return of 15.4%; over the same period, global equities returned 12.7%, UK bonds returned -2.2%, and cash returned 2.6%
Companies/Assets Involved
| Company/Asset | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Novo Nordisk | Largest positive contributor | +3.4% | Bullish (“old friend”) |
| Meta Platforms | Second largest positive contributor | +2.7% | Bullish |
| Microsoft | Third largest positive contributor | +2.0% | Bullish |
| Alphabet | Fourth largest positive contributor | +1.0% | Bullish |
| Stryker | Fifth largest positive contributor | +0.8% | Bullish |
| Apple | Held but small position | No specific contribution provided | Bullish (waiting for stock price to reflect current trading) |
| Nvidia | Not held | Contributed 25% of S&P 500 return | Bearish (unpredictable outlook) |
| L'Oréal | Largest negative contributor | -0.7% | Neutral (issues stem from China’s economy) |
| IDEXX | Second largest negative contributor | -0.6% | Neutral (issues stem from reduced pet visits) |
| Nike | Third largest negative contributor | -0.6% | Neutral (issues stem from China’s economy) |
| Brown-Forman | Fourth largest negative contributor | -0.5% | Neutral (issues stem from China’s economy) |
| Waters | Fifth largest negative contributor | -0.5% | Neutral (issues stem from China’s economy, and management may be problematic) |
The top five positive contributors in the first half were Novo Nordisk (+3.4%), Meta Platforms (+2.7%), Microsoft (+2.0%), Alphabet (+1.0%), and Stryker (+0.8%); the top five negative contributors were L'Oréal (-0.7%), IDEXX (-0.6%), Nike (-0.6%), Brown-Forman (-0.5%), and Waters (-0.5%)
Investment Insights
- Avoid Chasing Market Hype: The report implies that investors should not blindly buy stocks like Nvidia, which have high valuations and uncertain prospects, simply due to short-term underperformance. Sticking with high-quality, predictable companies can still outperform the index over the long term (the fund has an annualized return of 15.4% since inception vs. the index’s 12.0%).
- Watch for Concentration Risk in Holdings: The extreme concentration of market returns in a few stocks means that index fund investors are effectively taking on very high single-stock risk. Active management funds can reduce this concentration risk through diversification (e.g., holding Novo Nordisk, Stryker, etc.).
- Beware of Macroeconomic Drag: The negative impact of China’s economic slowdown on consumer companies (e.g., L'Oréal, Nike, Brown-Forman) is real, and investors should monitor the China exposure of related companies.
- Low Costs Are a Long-Term Advantage: The fund’s total cost of just 1.05% in the first half is far lower than many active management funds, providing an advantage for long-term compounding.