I’ve held the Fundsmith Equity investment fund in my Self-Invested Personal Pension (SIPP) for many years. And over the long run, it’s made me quite a bit of money. However, the fund’s been underperforming the broader market. This has got me wondering whether I should dump it and buy a S&P 500 tracker fund instead.
Underperforming the market
It has been a while since Fundsmith beat the market on an annual basis. The last time was in 2020 when it returned 18.3% versus 12.3% for the MSCI World index.
I’ve put the returns since then in the table below. As you can see, it’s lagged the MSCI World index significantly since 2022.
Year
Fundsmith
MSCI World index
2021
22.1%
22.9%
2022
-13.8%
-7.8%
2023
12.4%
16.8%
Jan to Oct 2024
6.9%
15.5%
Source: Fundsmith
This underperformance is disappointing. Especially when you consider the fund has ongoing charges of 0.94% on Hargreaves Lansdown (my broker).
The problem
The issue here’s pretty clear – Fundsmith’s an underweight mega-cap technology stocks and this is hurting its performance. In recent years, these stocks have generated huge returns. And Fundsmith hasn’t fully participated in the rally.
It does have large positions in Microsoft and Meta Platforms, has a growing position in Alphabet and a small holding in Apple. But it doesn’t have exposure to Amazon (it did buy this stock a few years ago but sold it at the wrong time), Nvidia, or Tesla.
More tech exposure
Buying an S&P 500 tracker fund like the Vanguard S&P 500 UCITS ETF (LSE: VUSA) would solve this issue.
This product would give me a ton of exposure to mega-cap tech stocks such as Apple, Nvidia and Amazon as these kinds of stocks have large weightings in the S&P 500, as the table below shows:
Source: Vanguard
And I’d get them all for a low ongoing fee of just 0.07%. Additionally, my platform fees with Hargreaves Lansdown would be lower.
New risks
Having said that, buying this ETF would expose me to new risks. For starters, there would be more geographic risk. With an S&P 500 tracker, 100% of the product’s allocated to the US market. With Fundsmith – which is a global equity product – the US represents about 73% of the portfolio currently.
It’s worth noting here that the US market has had a huge run over the last two years and it now looks quite expensive. So there’s a chance we could see some volatility at some point in the near future.
There would also be more technology sector risk for me. I already own shares in five of the ‘Magnificent 7’ directly, so if I were to buy this ETF, my portfolio could take a big hit if the tech sector had a meltdown (which seems to happen every few years).
In theory, holding on to Fundsmith should provide me with some protection against a US market or Tech sector meltdown. But there are no guarantees here, of course.
My move now
For now, I’m going to hold on to Fundsmith. I like the fund’s focus on quality stocks and I see it as a good hedge against mainstream market risks.
That said, I will be watching the performance closely. For the fees I’m paying, it needs to start delivering again.
The post Should I dump my holding in Fundsmith and buy an S&P 500 tracker instead? appeared first on The Motley Fool UK.
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Edward Sheldon has positions in Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool UK has recommended Alphabet, Amazon, Apple, Hargreaves Lansdown Plc, Meta Platforms, Microsoft, Nvidia, and Tesla. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
