Terry Smith Warns Against Chasing AI Fads

In a recent interview with AJ Bell, Terry Smith of the Fundsmith Equity Fund addressed a period of relative underperformance with his characteristic long-term perspective.

He identified a series of headwinds, noting, “When rates go up… our type of companies suffer in share price terms.”

This dynamic was followed by the concentration of market gains in a handful of stocks. Smith explained, “Then in 2023… suddenly the phrase was coined… The magnificent seven… really went away. And we own some of them but we don’t own all of them.”

The subsequent AI boom presented a similar challenge, yet Smith’s commitment to his investment philosophy remains firm. He stated, “The short answer is we stick to our principles. We’re not going to go and buy things because it’s going up.”

This discipline extends to his cautious approach towards the most hyped AI plays, preferring companies with diversified and resilient revenue streams.

He contrasted his holdings with more speculative names, saying, “The difference between them and say something like Nvidia is… our Microsoft and our Meta and our Alphabet have all got other businesses.”

When considering potential market stresses, Smith believes his portfolio is well-positioned. He argued, “if there were an economic downturn, then yeah, I’m pretty sure that Proctor and Gamble and Church and Dwight… will fare an awful lot better than than the highly valued high-tech.”

Despite acknowledging that downturns are inevitable, Smith finds a silver lining in the current climate of anxiety. He observed, “It typically you don’t get the downturn when everybody’s saying, ‘Oh, I’m really worried’… it usually happens when we’re all sitting here being fat and happy.”

The core of the Fundsmith strategy, as outlined in the interview, is patience and a focus on high-quality businesses. Smith champions this approach by invoking Charlie Munger, concluding that if you own companies making exceptional returns on capital, “you will gravitate towards [that] return if you own it for a long time.”

For Terry Smith, superior long-term performance is not about chasing trends, but about steadfastly holding quality assets.

You can watch the entire interview here: