Terry Smith is the English fund manager behind Fundsmith, the London-based investment firm he founded in 2010 on one of the simplest formulas in finance: buy good companies, don’t overpay, and do nothing. Before Fundsmith, Smith spent decades in the City of London, rising to chief executive of two financial firms, and became one of Britain’s best-known financial commentators. His Fundsmith Equity fund went on to become one of the most successful UK retail funds of the 2010s, and his plainly written annual shareholder letters have earned him comparisons to Warren Buffett.
From accountant to City CEO
Smith was born in 1953 and trained as an accountant before moving into banking, joining Barclays in the 1970s and later working at UBS. He built a reputation as an outspoken analyst and commentator, but his highest-profile years were as a chief executive: first at the stockbroker Collins Stewart, and then from 2006 at Tullett Prebon, the interdealer broker. He left Tullett Prebon in 2010, and within months had launched Fundsmith, putting his own money alongside his clients’ in a single global equity fund.
That City career matters because it shaped his skepticism. Smith had watched the investment industry from the inside: high fees, constant trading, performance-chasing, and funds that hugged benchmarks to keep their jobs. Fundsmith was designed as the opposite of all of it. The fund charges a straightforward annual fee, trades as little as possible, and holds a small number of companies for years at a time.
Fundsmith’s founding philosophy
Smith’s entire philosophy fits in a sentence: “Buy good companies. Don’t overpay. Do nothing.” The first part means owning businesses with durable competitive advantages, high returns on capital, and reliable cash generation, the kind of companies that can compound for decades. The second means waiting for a sensible valuation rather than chasing momentum. The third, and the hardest, means resisting the urge to fiddle: once you own a great business at a fair price, the best action is usually no action at all.
The three-step strategy
Each year, Smith repeats the same three steps in his shareholder letter, and they read like an anti-industry manifesto. Step one, only invest in good companies, businesses that are hard to disrupt and throw off cash. Step two, try not to overpay, because even a wonderful company is a poor investment at the wrong price. Step three, do nothing, which means keeping portfolio turnover minimal so compounding, not trading, does the work.
He is ruthless about what the fund avoids. No banks, no airlines, no highly leveraged businesses, no companies whose profits depend on commodity prices or regulatory favors. Fundsmith Equity typically holds around 25 to 30 companies, concentrated in sectors like consumer goods, healthcare, and technology, businesses that sell products people buy repeatedly. When Smith sells a holding, it is news, because it happens so rarely.
A quality-growth, buy-and-hold investor
Smith’s style is best described as quality growth with a buy-and-hold temperament. He shares Buffett’s obsession with return on capital and durable moats, but he applies it to large, global consumer and healthcare businesses rather than hunting for bargains. He has little interest in deep-value turnarounds or in forecasting the economy; his letters openly mock attempts to time markets or predict interest rates. Find the good companies, buy them sensibly, and let time do the compounding.
For much of its first decade, the Fundsmith Equity fund delivered on that promise handsomely, building a record that made it one of the most popular funds in Britain and pulled in tens of billions of pounds in assets. That success made Smith something of a celebrity in UK investing circles, the rare fund manager whose annual letters are read for pleasure rather than duty.
Criticisms and risks
The fairest criticism is that concentration cuts both ways. Owning roughly two dozen stocks means a handful of poor picks, or a bad year for the fund’s favored sectors, can drag the whole portfolio. The fund’s strong early record has also been harder to repeat in recent years, a reminder that no strategy outperforms forever and that past returns are not a promise.
There is also the size question. A fund that once was nimble now manages tens of billions of pounds, and large funds can struggle to move in and out of positions without moving prices. Smith argues that his low-turnover style makes size less of a problem, but it is a constraint worth knowing about.
Finally, Smith’s approach demands patience that most investors don’t have. His philosophy only works if you can watch a concentrated portfolio fall and do nothing, the same discipline he preaches. For investors who can genuinely hold through the rough patches, his three-step formula is one of the clearest expressions of quality investing ever written. For those who can’t, it is a reminder that the strategy is the easy part; the temperament is the real investment.
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