Deep Dive into Fundsmith’s 2024 Shareholder Letter

Terry Smith is a well-known fund manager and the founder of Fundsmith, one of the biggest funds in the United Kingdom. He launched the Fundsmith Equity Fund in 2010 with a straightforward approach: buy high-quality businesses, avoid paying too much, and hold those businesses for a long time. Over the years, this strategy has generally worked well. Since the fund’s start, it has produced annual returns of around 15%, compared to about 12% for the MSCI World Index.?

In early 2025, Fundsmith published its annual letter for 2024. The letter addresses recent performance, new buys and sells, and broader investment themes like AI and market concentration. Many investors had concerns, since the fund underperformed its benchmark (by a lot) in 2024. This article summarizes the key points of this letter.?

Bought to you by: Stock Unlock.?

Read Past Newsletters

Fundsmith’s 2024 Results

The annual letter shows that Fundsmith gained about 9% in 2024, while the MSCI World Index returned around 21%. Although the fund faced some short-term setbacks, the letter points to Fundsmith’s performance since inception: about 15% per year versus 12% for the index. As we say, you can’t outperform every year. Even Warren Buffett had years of underperformance. In 2024, a handful of giant tech stocks (the Mag 7) drove most of the global market’s gains, which makes it difficult for a more broadly invested portfolio to outperform.

What Caused the Underperformance?

A major theme in the 2024 market was that a small group of tech names delivered the majority of the gains: Nvidia, Apple, Microsoft, Meta, and Amazon. Unfortunately, the funds that did not hold enough of these names, or held them at lower weights than the index, typically lagged behind. Long story short, this is exactly what happened. For some years, if you are not in the best performing ideas, you will underperform. A topic not often talked about. Which is why it is important to diversify intelligently when you invest in stocks.?

The letter also points to similar concentration effects in European markets. In Germany, for example, around 40% of the DAX’s entire return for the year came from one stock (SAP). Fundsmith does own some large technology and consumer names, but not all of them, and not always at the same level the index does. That mismatch explains part of the majority of the underperformance in 2024.

Five Biggest Losers in 2024

Apart from the underweight in tech, the fund had some companies with issues. The annual letter highlights five holdings that dragged results:

1. L’Oréal: The French cosmetics giant struggled when China’s economy slowed. The letter notes that L’Oréal depends on Chinese consumers for a sizable chunk of sales. Weaker demand meant lower growth, and the earnings continued to suffer. However, Fundsmith’s view is that L’Oréal has overcome such challenges in the past and when the Chinese economy recovers, the company will be able to show significant growth.
2. Idexx Laboratories: This company provides veterinary diagnostics and equipment for pets. During the pandemic, many people adopted pets, and vet visits soared. In 2024, the surge tapered off, which impacted Idexx’s revenue growth. In overall, just a temporary cyclical problem that ill be fixed in the coming quarters. The letter states that Idexx is a great company and still has strong market leadership, so the fund prefers to stay patient.
3. Nike: During the pandemic, Nike’s management team pushed direct online sales aggressively, which clashed with traditional brick-and-mortar retailers. With hindsight, this move was not great. Competitors gained ground in physical stores and Nike’s sales declined. Terry Smith says that with the new CEO (appointed in 2024), the company could get more market share, because the brand is still huge, and Fundsmith expects Nike to adapt.
4. Brown-Forman: The maker of Jack Daniel’s whiskey 1) saw strong demand during the pandemic, then demand collapsed, which had an impact on sales; and 2) faces risks if new weight-loss drugs reduce alcohol consumption. Fundsmith sold another beverage holding, Diageo, but decided to keep Brown-Forman, partly due to its premium drinks focus and family ownership structure. Wait and see, but the future is not rosy.
5. Novo Nordisk: This Danish pharmaceutical firm leads in weight-loss medications, including Wegovy, but the share price tumbled by about 10% late in the year. The sad part is that the stock price was leading in the industry, until the end of the year and all the gains evaporated. In this industry, expectations are high, and Fundsmith believes Novo Nordisk retains a strong advantage.

Top Five Winners in 2024

The letter also names five holdings that boosted performance:

1. Meta Platforms: Once the most “hated” stock in the portfolio, Meta soared after its price had collapsed in 2022. The business is just getting better and more efficient. The letter notes that Meta’s user base and advertising reach remain massive. So the opportunity is huge in the future.
2. Microsoft: A longtime favorite in the fund. Microsoft continues to post growth in areas like cloud services and productivity software. The definition of “not cutting your flowers”.
3. Philip Morris: A repeated bright spot for the fund, despite being a tobacco company. Innovation in heated tobacco products helped drive returns.
4. ADP (Automatic Data Processing): A payroll and HR software provider that delivers steady earnings. The letter calls it “metronomic” in performance: not a big roller coaster, but reliably growing.
5. Stryker: A medical device maker benefiting from a backlog of elective surgeries postponed during the pandemic.

The letter highlights how some of these names—Meta and Microsoft—have appeared on the top contributors list multiple times. As Terry Smith likes to say, “You make money with old friends”. Meanwhile, others like L’Oréal and Novo Nordisk have often been top contributors in past years but ended up among the laggards in 2024.

Core Strategy: Buy Quality, Don’t Overpay, Do Nothing

Fundsmith’s annual letter restates the three-part investment philosophy that it has championed for years:

1. Buy Good Companies

• The fund wants to invest in firms with high returns on capital, strong profit margins, and solid free cash flow. Many are global brands with a long history. The letter shows that, on average, these companies have higher returns on capital and wider gross margins than most large indexes.

2. Don’t Overpay

• This principle aims to avoid stocks with extreme valuations. However, some critics argue that Fundsmith’s holdings now trade at a higher overall multiple than the market. The letter’s response is that quality warrants a premium. Terry Smith also believes some short-term factors depressed free cash flow for certain holdings, making valuations look more stretched.

3. Do Nothing

• The fund typically keeps turnover low. In 2024, there were only three sales and two buys. This reduces trading costs and follows the idea that, if a business remains strong, a long holding period can produce good results.

Recent Transactions

Recent Buys:

• Atlas Copco: A Swedish industrial firm focusing on compressors and vacuum equipment. The letter highlights the company’s capital-light approach, decentralized structure, and family-controlled stake that encourages long-term thinking. A potential compounder in the future.
• Texas Instruments: One of the largest makers of analog chips. The letter says the company has a long record of anticipating upturns in the semiconductor cycle. Texas Instruments prioritizes free cash flow per share and could benefit from positive trends and AI-related chip demand.

Recent Sells:

• Apple: Initiated two years earlier when it was cheaper, Apple’s share price climbed faster than its underlying sales growth. The letter says that the price-to-earnings ratio ended up about 50% higher than the market average, so the fund sold. A good reminder to exit a position when the valuation is just too high.
• Diageo: The letter cites weaker business in Latin America and a potential threat from weight-loss drugs impacting alcohol sales.
• McCormick: Management fell behind in passing on input cost inflation, hurting margins. The fund also saw fierce competition in the spice market.

AI Hype, Index Funds, and Future Risks

A section of the letter discusses the ongoing excitement around AI. Terry Smith is quite skeptical when it comes to Nvidia. Yes, earnings improved a lot, but the demand? for GPUs is still cyclical. A few large data-center builders make up a big share of Nvidia’s sales, so any pullback could hit hard. Definitely something to monitor for everybody.?

More than half of all equity assets are now in passive ETFs that weight stocks by market cap. This trend can drive a self-feeding cycle: large companies get bigger inflows when markets rise. But the opposite scenario is true. If those same companies disappoint in earnings, the entire index may fall harder. So underweighting some mega-cap firms might limit damage if a large market drop occurs. The risk with this portfolio management is underperformance, as we saw with Fundsmith in 2024.

Conclusion

At the end of the letter, Terry Smith reiterates that Fundsmith wants a “high likelihood of a satisfactory return,” rather than chasing spectacular but risky bets. Though 2024 was disappointing, the fund still believes its core approach will hold up over many years. Stocks like L’Oréal or Novo Nordisk can go through dips, but it sees these as short-term setbacks for strong businesses.

After all, this investing strategy has a track record of about 15% annual returns since 2010. Each underperformance phase is part of a long journey, and patience is key. Time will tell whether 2025 is a rebound or not. For now, the letter is a clear reminder of Fundsmith’s guiding ideas: focus on high-quality companies, avoid paying sky-high valuations, and stay calm through market noise.

Author

This Newsletter's Author

This newsletter was written by Christophe Nour. You can find him via YouTube, LinkedIn, view his portfolio on eToro, and join his investing coaching program on Skool.

Additionally, if you have any questions about this newsletter, you can send him an email at: [email protected]

Disclaimer

Stock Unlock's newsletter is not a recommendation to buy or sell stocks. Stock Unlock does not provide financial advice, and we are writing this newsletter to help share ideas and teach you more about stock analysis. Please do not buy or sell stocks we discuss without doing your own research and/or consulting with a professional.

Feedback

In addition to providing education around investing fundamentals we are exploring adding value through sending our members stock ideas and analysis. Please let us know if you enjoy this type of newsletter or have any feedback.

Let us know what you think by emailing [email protected]

Our newsletter archive will dramatically improve your investing, and includes in-depth stock analysis, investing tips, and investment education. You can find our newsletter archive here! (https://stockunlock.com/content/newsletter)

And if you haven't yet, make sure to subscribe for FREE to get our future newsletters delivered straight to your inbox.