What stood out to me wasn't the shift in strategy itself, but the constraints behind it. Terry Smith manages an open-ended fund, so investor flows become part of the investment process. It also made me think about why someone like Warren Buffett doesn't face the same pressure. The structure of the vehicle seems to determine how much flexibility an investor actually has.
The most interesting tension here is that Smith may still be right about quality, yet unable to wait long enough for the market to prove it. Once investor redemptions begin influencing portfolio decisions, the fund is no longer managing only business risk and valuation risk, it is also managing survival risk. That makes the move understandable, but it also raises a difficult question: when does adapting to market structure become abandoning the very discipline that created the long-term record?
He is running a business and has to defend it. Since 2022 he had constant outflows: 2022:1.3b, 2023: 4.8b, 2024: 4.1b, 2025:5.1b, 20261H: 1.4b. He has not performed for 5 years confirming what you showed so well, that active managers mostly underperform, so as an investor why would you keep money in the fund?
Every active strategy faces periods of out-and outperformance. I think it’s a wrong methodology to switch your strategy after a severe period of underperformance. That’s usually exactly when reversion to the mean takes place.
Yes, you right. You should stick to your strategy. The risk that you act pro-cyclically is big. But it doesn’t mean you should not adjust your portfolio to the changing world around you. To know when to change your opinion about an investment because you’ve been wrong or the world has changed is indeed very difficult.
The timing is what makes this so uncomfortable to watch. Factor cycles mean-revert, and quality has now underperformed for long enough that the base rate says a reversion is closer than it was five years ago, not further away. If that turn comes, Smith would be rotating into momentum right as the factor he built his reputation on finally pays off again. The cruel part is that nobody can time this, and his own five year record is the proof. He saw the momentum regime clearly and called it early, yet still bled performance the entire way. Being right about what was driving the market didn't help him, because there was no way to know when the market would agree.
That leaves him somewhere close to a no win position. The fundamental case for why Fundsmith outperforms from here gets harder to articulate every quarter, because the honest answer is "the same quality names, but eventually the market pays for them again," and eventually is not a sentence that keeps assets from leaving. So he's defending the business, which is rational. But changing the process to chase the factor that has been winning is exactly the kind of move that reverses right after you make it. He may be capitulating to momentum at the precise moment quality was about to reward the patience the strategy was built on. It makes Fundsmith a fascinating case to follow from here, though probably one that is more rational to watch from the outside than to hold through.
At the moment I´m selling my Ishares World as it went 72%+ in 4-5 years, I know there was a lot of QE too causing stocks going up, but it seems like too much. Putting it into Berkshire and Wagons ETF of Pabrai. As they are underperforming just like Fundsmith did. Making an opposite move compared to Fundsmith, betting that they will continue to beat the market over the long run like they always did. Especially seen from the perspective of recent underperformance.
In addition to this, Jensen Huang did a ´this time is different´in one of his most recent interview, claiming the AI infrastructure hausse is not cyclical but more industrial in nature (like the railways infrastructure). Adding to it that it is highly unlikely this hausse will end the next 5 years from now. He might be right, but than it is just a boom-bust development. When the railways where made, there was way less demand for its necessary products, only the products needed for maintenance. So the AI hausse, the momentum trade of the moment is turning into a higher cliff, but demand will fall very deep once the all the AI railways are made. Then this market might look more like a dead cat bounce. It´s just playing with semantics of Jensen Huang, the cliff becomes higher and higher, therefore the fall becomes deeper and deeper, and it seems he does not want to point attention to this.
The argument around passive vs active misses an important nuance.
Moats & Multiples explains:
"An investment into a passive fund results in an indiscriminate buying of all the securities in that index, at whatever price the security trades at. With more capital in equity markets flowing through this mechanism, what we see is fewer people evaluating the value of a security itself...
Therefore, the marginal price setter in markets remains the active investor. However, that active investor view is increasingly represented by the large hedge funds who have short time horizons and little appetite for drawdowns.
That creates inherent volatility, and passive flows act to amplify that volatility."
What stood out to me wasn't the shift in strategy itself, but the constraints behind it. Terry Smith manages an open-ended fund, so investor flows become part of the investment process. It also made me think about why someone like Warren Buffett doesn't face the same pressure. The structure of the vehicle seems to determine how much flexibility an investor actually has.
The most interesting tension here is that Smith may still be right about quality, yet unable to wait long enough for the market to prove it. Once investor redemptions begin influencing portfolio decisions, the fund is no longer managing only business risk and valuation risk, it is also managing survival risk. That makes the move understandable, but it also raises a difficult question: when does adapting to market structure become abandoning the very discipline that created the long-term record?
Stagnation results in missed opportunities
He is running a business and has to defend it. Since 2022 he had constant outflows: 2022:1.3b, 2023: 4.8b, 2024: 4.1b, 2025:5.1b, 20261H: 1.4b. He has not performed for 5 years confirming what you showed so well, that active managers mostly underperform, so as an investor why would you keep money in the fund?
Every active strategy faces periods of out-and outperformance. I think it’s a wrong methodology to switch your strategy after a severe period of underperformance. That’s usually exactly when reversion to the mean takes place.
Yes, you right. You should stick to your strategy. The risk that you act pro-cyclically is big. But it doesn’t mean you should not adjust your portfolio to the changing world around you. To know when to change your opinion about an investment because you’ve been wrong or the world has changed is indeed very difficult.
The timing is what makes this so uncomfortable to watch. Factor cycles mean-revert, and quality has now underperformed for long enough that the base rate says a reversion is closer than it was five years ago, not further away. If that turn comes, Smith would be rotating into momentum right as the factor he built his reputation on finally pays off again. The cruel part is that nobody can time this, and his own five year record is the proof. He saw the momentum regime clearly and called it early, yet still bled performance the entire way. Being right about what was driving the market didn't help him, because there was no way to know when the market would agree.
That leaves him somewhere close to a no win position. The fundamental case for why Fundsmith outperforms from here gets harder to articulate every quarter, because the honest answer is "the same quality names, but eventually the market pays for them again," and eventually is not a sentence that keeps assets from leaving. So he's defending the business, which is rational. But changing the process to chase the factor that has been winning is exactly the kind of move that reverses right after you make it. He may be capitulating to momentum at the precise moment quality was about to reward the patience the strategy was built on. It makes Fundsmith a fascinating case to follow from here, though probably one that is more rational to watch from the outside than to hold through.
At the moment I´m selling my Ishares World as it went 72%+ in 4-5 years, I know there was a lot of QE too causing stocks going up, but it seems like too much. Putting it into Berkshire and Wagons ETF of Pabrai. As they are underperforming just like Fundsmith did. Making an opposite move compared to Fundsmith, betting that they will continue to beat the market over the long run like they always did. Especially seen from the perspective of recent underperformance.
In addition to this, Jensen Huang did a ´this time is different´in one of his most recent interview, claiming the AI infrastructure hausse is not cyclical but more industrial in nature (like the railways infrastructure). Adding to it that it is highly unlikely this hausse will end the next 5 years from now. He might be right, but than it is just a boom-bust development. When the railways where made, there was way less demand for its necessary products, only the products needed for maintenance. So the AI hausse, the momentum trade of the moment is turning into a higher cliff, but demand will fall very deep once the all the AI railways are made. Then this market might look more like a dead cat bounce. It´s just playing with semantics of Jensen Huang, the cliff becomes higher and higher, therefore the fall becomes deeper and deeper, and it seems he does not want to point attention to this.
The argument around passive vs active misses an important nuance.
Moats & Multiples explains:
"An investment into a passive fund results in an indiscriminate buying of all the securities in that index, at whatever price the security trades at. With more capital in equity markets flowing through this mechanism, what we see is fewer people evaluating the value of a security itself...
Therefore, the marginal price setter in markets remains the active investor. However, that active investor view is increasingly represented by the large hedge funds who have short time horizons and little appetite for drawdowns.
That creates inherent volatility, and passive flows act to amplify that volatility."
Details: https://moatsandmultiples.substack.com/p/terry-smith-just-broke-his-own-golden
Charlie Huggins, an experienced portfolio manager, created a list of important questions that Fundsmith investors should ask.
Details: https://charliehuggins.substack.com/p/21-questions-for-terry-smith