British Fund Managers and the Gathering Storm: When Yesterday's Heroes Face Tomorrow's Markets

The Titans Are Struggling (And Perhaps They Should Be)

Active Investing v Passive Investing

Terry Smith and Nick Train—two names that, until recently, commanded the sort of reverence in British investment circles normally reserved for cricket legends or particularly successful bakers on the Great British Bake Off. These fund managers built stellar reputations through decades of consistent performance, disciplined stock selection, and an admirable resistance to following the herd. Their investment philosophies became gospel for thousands of retail investors who entrusted their ISAs and pensions to these apparent masters of the universe.

Yet as we progress through the 2020s, something rather uncomfortable is happening: these titans are struggling. Their funds underperform. Their strategies, once lauded as timeless wisdom, appear increasingly anachronistic. Their investors, having enjoyed years of outperformance, now face the awkward realization that past performance is not, in fact, a guarantee of future results—despite this warning appearing on every fund document they've ever signed.

This isn't schadenfreude (well, perhaps a little—we British do enjoy watching the mighty stumble). Rather, it's an important case study in how markets evolve, how investment environments shift, and how even the most successful strategies eventually face their reckoning when the world changes beneath them.

Terry Smith: The King of Quality Growth Meets Quality Stagnation

Terry Smith's Fundsmith Equity fund became one of the UK's investment success stories. Launched in 2010, it delivered approximately 500% returns over its first decade—extraordinary performance that made Smith a household name among investment enthusiasts and spawned countless imitators.

The Fundsmith Philosophy: Simple But Effective (Until It Wasn't)

Smith's approach was refreshingly straightforward, almost defiantly simple in an industry that loves complexity:

1. Buy good companies - High returns on capital, strong competitive advantages, quality management
2. Don't overpay - Reasonable valuations, not bargain-basement prices but not bubble valuations either
3. Do nothing - Low turnover, minimal trading, let compounding work its magic

This strategy focused heavily on consumer goods companies with strong brands, pricing power, and global reach: Unilever, L'Oréal, Microsoft, Philip Morris International. Companies that sold products people needed or wanted regardless of economic conditions, often with addictive properties (literally in tobacco's case, psychologically in others).

For years, this worked brilliantly. Smith's portfolio compounded steadily whilst others chased hot sectors and suffered accordingly. He was the tortoise winning through consistency whilst rabbits exhausted themselves on fashionable nonsense.

Then Reality Intruded With Unfortunate Timing

Several factors converged to undermine Fundsmith's previously reliable formula:

1. The Quality Premium Evaporated

During the 2010s, "quality" stocks commanded premium valuations because interest rates were zero and investors desperately sought companies with reliable cash flows. Quality companies could essentially charge whatever they wanted—not from customers, but from investors bidding up their shares.

By the early 2020s, these valuations reached stretched levels. When interest rates rose aggressively from 2022 onwards, the quality premium compressed violently. Suddenly paying 30x earnings for Unilever seemed less clever when government bonds yielded 4-5%.

2. Consumer Staples Struggled Against Inflation

Smith's beloved consumer goods companies faced a squeeze: input costs soared (energy, raw materials, labor), but consumers resisted price increases. Margins compressed, growth stagnated, and these companies—previously reliable compounders—suddenly looked rather ordinary.

Companies like Unilever, which Smith defended vigorously, faced activist investors questioning their entire strategy. When activists target your holdings suggesting management is incompetent, it's rather difficult to maintain the "quality company" narrative.

3. The "Do Nothing" Strategy Became "Do Nothing Whilst Underperforming"

Low turnover works wonderfully when your holdings perform. It looks rather stubborn when they don't. As Fundsmith's holdings stagnated, investors questioned whether Smith's refusal to adapt represented disciplined consistency or inflexible dogmatism.

The line between "patient long-term investing" and "bag-holding underperformers" is uncomfortably thin, distinguished primarily by whether your stocks eventually recover.

4. Geographic Concentration in Wrong Markets

Fundsmith's portfolio tilted heavily toward US and European consumer goods companies. While global in operations, these companies faced headwinds from shifting consumer preferences, emerging market competition, and regulatory pressures that weren't present during the fund's glory years.

The Performance Reality

After years of stellar returns, Fundsmith has delivered disappointing performance since 2021:

• 2021: Underperformed global equity indices
• 2022: Significant underperformance as growth stocks crashed
• 2023: Continued lagging despite market recovery
• 2024-2025: Persistent underperformance with no clear catalyst for improvement

Investors who piled in near the top (there's always a crowd that arrives late to success) have experienced flat to negative returns for years. The psychological impact is substantial: these investors chose Fundsmith precisely to avoid this sort of outcome.

Smith's Response: Doubling Down

To his credit (or perhaps detriment), Smith hasn't abandoned his philosophy. He continues arguing that quality companies will eventually reassert themselves, that his holdings are undervalued, and that patient investors will be rewarded.

This might prove correct—quality companies don't become terrible overnight. But markets can remain irrational longer than investors can remain patient, and "eventually" is a timeframe that pays no bills.

Lindsell Train: When Value Investing Meets Value Destruction

Nick Train's Lindsell Train funds represented another British investment success story, built on similar principles to Fundsmith but with notable differences: a value-oriented approach, significant UK exposure, and concentrated positions in companies Train believed possessed enduring competitive advantages.

The Lindsell Train Philosophy: Concentrated Conviction

Train's approach featured:

1. Extreme concentration - Typically 20-30 holdings, with top positions representing substantial percentages of fund
2. Long holding periods - Years to decades, not quarters
3. Focus on intangible assets - Brands, intellectual property, consumer loyalty
4. UK bias - Significant exposure to British companies, particularly media and consumer brands

Key holdings included Diageo, RELX, Unilever, London Stock Exchange Group, and notably, significant positions in British media companies like Pearson.

Where This Went Spectacularly Wrong

Lindsell Train's troubles exceeded even Fundsmith's struggles:

1. UK Market Structural Decline

The fund's significant UK exposure became an anchor as British equities underperformed global markets persistently. The UK market faced multiple headwinds:

• Brexit uncertainty and aftermath dampening business confidence
• Domestic political instability (five prime ministers in six years does create complications)
• Regulatory hostility toward profitable companies
• Persistent economic weakness relative to US and parts of Asia
• Brain drain and capital flight as talented people and money left for friendlier jurisdictions

Being overweight UK equities from 2016-2025 was rather like insisting on booking your summer holiday in Blackpool when everyone else has discovered the Mediterranean. Technically nothing wrong with Blackpool, but you might question the choice.

2. Media Holdings Collapsed

Train's significant positions in traditional media companies proved catastrophically ill-timed:

Pearson: The education publisher facing digital disruption, declining demand, and strategic uncertainty. Train maintained conviction whilst the share price collapsed, defending Pearson's "valuable intellectual property" even as students discovered free resources online and education markets shifted away from expensive textbooks.

This holding epitomized the challenge facing value investors: assets that appear cheap can get cheaper if the business model is genuinely impaired rather than temporarily out of favor.

3. Concentration Amplified Losses

When concentrated positions work, they generate spectacular outperformance. When they don't, losses are equally spectacular. As key holdings like Pearson and other media companies struggled, the fund's concentrated nature meant nowhere to hide.

Traditional diversification advocates enjoyed schadenfreude watching concentrated portfolio disciples suffer the consequences of their conviction.

4. The "Quality" Narrative Broke Down

Like Smith, Train emphasized quality companies with enduring advantages. But several holdings demonstrated that historical advantages don't guarantee future relevance:

• Strong brands matter less when consumers shop by price on Amazon
• Intellectual property loses value when information is freely available online
• Distribution networks become irrelevant when everyone has internet access
• Pricing power evaporates when competitors are global rather than local

The Performance Catastrophe

Lindsell Train's underperformance exceeded Fundsmith's struggles:

• The UK Equity Fund fell over 40% from peak to trough
• Persistent outflows as investors lost patience
• Multiple years of significant underperformance versus benchmarks
• No clear catalyst for recovery given portfolio composition

This wasn't mere underperformance—this was wealth destruction for loyal investors who believed in Train's philosophy.

Train's Response: Stubborn Consistency or Denial?

Train, like Smith, has maintained his investment approach despite terrible results. He continues arguing his holdings are undervalued, that quality will reassert itself, and that patient investors will be rewarded.

The question investors must ask: is this admirable consistency in the face of market madness, or is it refusal to acknowledge the world has changed?

The Broader Picture: UK Fund Management's Uncomfortable Reality

Smith and Train represent symptoms of broader challenges facing UK-focused investment management:

1. The UK Market Is Out of Favor (And Perhaps Deservedly So)

British equities have underperformed global markets for years. The FTSE 100, despite strong international exposure, has barely budged whilst the S&P 500 tripled. The FTSE 250, more UK-focused, has been even worse.

Why?

• Structural economic weakness: Productivity growth has been dismal
• Political instability: Constant government changes create policy uncertainty
• Regulatory hostility: Profitable companies are treated suspiciously; successful entrepreneurs leave
• Capital market dysfunction: IPO market essentially broken; companies prefer listing elsewhere
• Demographic challenges: Aging population, productivity decline, skills shortages
• Brexit aftermath: Whatever your political views, it created years of uncertainty and some genuine economic costs

International investors can access growth, innovation, and dynamism elsewhere. Why invest in the UK unless valuations compensate for these disadvantages? Currently, even cheap valuations haven't attracted capital.

2. The IPO Market: A Graveyard of Hopes and Share Prices

The UK's IPO market has been functionally broken for years. Companies listing on UK exchanges frequently experience the following:

The Depressing Pattern:

1. Company announces IPO with optimistic valuation
2. Shares price at top of range (or above) amid underwriter enthusiasm
3. First day of trading: immediate decline
4. Following weeks: continued decline
5. Within 6-12 months: trading 20-40% below IPO price
6. Investors who bought at IPO: seriously questioning life choices

Recent Examples:

Deliveroo (2021): Priced at £3.90, immediately crashed to £2.80, spent years trading below IPO price. Eventual takeover price barely exceeded IPO level—years of opportunity cost for zero return.

THG (The Hut Group) (2020): Priced at £5, briefly surged, then collapsed to under £1. Investors buying at IPO down 80%+. The founder's wealth, naturally, remained intact.

Moonpig (2021): Priced at £3.50, peaked around £4, then steadily declined to ~£1.50-2.00 range. Greetings card company listed during lockdown when everyone was stuck at home—turns out the business model faces challenges when people can leave their houses again.

Trustpilot (2021): Priced at £2.24, immediately fell, continued falling, eventually traded below £1. Review platform listed when everyone was obsessed with online reviews—then discovered the business model had limitations.

Why Does This Keep Happening?

Several factors explain the UK's IPO dysfunction:

1. Over-optimistic valuations: Bankers price offerings at levels that prove unsustainable
2. Weak governance: Founders often retain excessive control with dual-class shares
3. Poor transparency: Companies go public without proving sustainable business models
4. Retail investor exploitation: Aggressive marketing to retail investors who bear losses when institutions immediately sell
5. Lack of consequences: Bankers earn fees regardless of post-IPO performance
6. Comparative opportunities: Institutional investors can buy proven US tech companies instead of speculative UK IPOs

The result: UK IPO market has lost credibility. Companies with genuine quality increasingly list elsewhere (usually New York), leaving UK markets with second-tier offerings.

3. The Tech Acquisition Problem: Innovation's British Exit Strategy

When UK technology companies do succeed, they rarely remain British for long. A depressingly consistent pattern emerges:

The Cycle:

1. Brilliant British technologists found innovative company
2. Company grows, gains traction, shows promise
3. Company considers UK IPO
4. US tech giant makes acquisition offer
5. Company accepts, moves critical operations to US
6. British investors/taxpayers who supported early growth capture minimal benefit

Recent Examples:

Arm Holdings: Britain's most successful tech company, sold to SoftBank, briefly returned to London listing, then primarily listed in New York where valuations are higher. The UK gets crumbs; US investors get the feast.

DeepMind: Revolutionary AI company founded in London, acquired by Google before UK investors could participate meaningfully. Now a jewel in Google's crown; British contribution largely forgotten.

Autonomy: Acquired by HP in controversial deal, subsequent accounting scandal, but the pattern holds—successful British tech company absorbed by US entity.

Darktrace: Cybersecurity company that did list in London, but faced persistent acquisition speculation. Trading below IPO price for extended periods, it eventually went private in 2024.

SwiftKey: Brilliant keyboard software, acquired by Microsoft, now integrated into their products. British innovation, American profits.

Why This Matters:

UK fund managers, particularly those focused on UK growth companies, struggle to capture value from domestic innovation because:

• Companies exit before generating substantial returns
• IPO market dysfunction means public market investors enter at disadvantageous prices
• US acquirers can outbid British institutions using higher-valued equity
• Regulatory environment makes staying independent in UK increasingly unattractive

This creates vicious cycle: lack of successful public tech companies → less tech investment expertise in UK → harder for future tech companies to get support → more likely to seek US funding/exit

The Government Policy Disaster: Creating the Wrong Environment

British fund managers can't be entirely blamed for underperformance when government policy actively undermines investment:

1. Regulatory Hostility Toward Success

The UK government treats profitable companies and successful investors with suspicion bordering on hostility:

• Windfall taxes on successful energy companies (discouraging investment in domestic production)
• Increased capital gains tax making investment less attractive
• Hostile rhetoric toward wealth creators and entrepreneurs
• Planning restrictions preventing development and growth
• Employment regulations making hiring expensive and risky

The message sent: success is suspect, profits are vaguely immoral, and wealth creation requires justification.

This drives talented people and mobile capital elsewhere. Why build a business in the UK when you face higher taxes, more regulation, and political hostility? Why stay when Dubai, Singapore, or Portugal offer friendlier environments?

2. Short-Term Political Cycles Versus Long-Term Investment

Investment requires stability and predictability. The UK offers neither:

• Five prime ministers since 2016
• Multiple chancellors, each with different economic philosophies
• Constantly changing tax rules making long-term planning impossible
• Policy reversals within months (remember Liz Truss's minibudget?)
• No consistent industrial strategy or economic vision

Companies and investors struggle to make long-term commitments when governments change direction quarterly.

3. Brexit Aftermath: Ongoing Uncertainty

Whatever your views on Brexit's merits, it created years of uncertainty and some tangible costs:

• Trade friction with largest export market
• Labor shortages in key sectors
• Reduced foreign direct investment
• Financial services migration to EU
• Reduced UK attractiveness for multinational headquarters

These factors don't make UK investment impossible, but they reduce its attractiveness versus alternatives.

4. Infrastructure Underinvestment

Despite constant government promises, UK infrastructure remains inadequate:

• Transport networks creaking
• Housing shortage worsening
• Digital infrastructure lagging
• Energy infrastructure inadequate for future needs
• Water systems literally leaking and polluting rivers

Successful economies require functioning infrastructure. The UK's decay creates drag on productivity and growth.

5. Tax Policy Incoherence

Tax policy changes so frequently that long-term planning is nearly impossible:

• Capital gains tax rates and allowances constantly changing
• Pension tax relief modified repeatedly
• ISA rules altered
• Dividend taxation increased
• Stamp duty on shares making UK equities less attractive

Each individual change may be justifiable, but cumulatively they create environment hostile to investment.

What Fund Managers Are Missing: The World Has Changed

Smith, Train, and other struggling UK fund managers share a common failing: inability or unwillingness to acknowledge the world has fundamentally changed.

1. The "Quality" Definition Has Evolved

What constituted quality in 2010 differs from quality in 2025:

2010 Quality:

• Strong brands (Unilever, Coca-Cola)
• Established distribution (traditional retail)
• Pricing power from consumer loyalty
• Predictable cash flows
• Geographic diversification

2025 Quality:

• Platform businesses with network effects (Alphabet, Meta)
• Digital-native operations with minimal physical infrastructure
• Data advantages and AI capabilities
• Ability to adapt rapidly to changing consumer preferences
• Cloud-based, globally scalable business models

Fund managers clinging to 2010's quality definition miss 2025's opportunities.

2. UK Exposure Is a Bug, Not a Feature

Previous generations of fund managers treated UK focus as prudent home bias. In today's global, digital economy, geographic restrictions are handicaps:

• Best opportunities are increasingly global
• UK market represents ~4% of global market capitalization
• Technology leadership concentrated in US and China
• Innovation happening outside traditional UK strengths

Restricting portfolio to UK equities for retail British investors might have made sense in 1990 when international investing was complicated and expensive. In 2025, it's simply leaving money on the table.

3. Concentration Requires Correct Picks

Concentrated portfolios amplify both wins and losses. They work brilliantly when you're right; catastrophically when you're wrong.

Train and Smith's concentrated positions in struggling companies demonstrate that conviction isn't enough—you must be correct. Being wrong with high conviction is worse than being wrong with diversification.

4. "Do Nothing" Works Only When You Own the Right Things

Low turnover and patient holding periods are virtuous when applied to compounding winners. Applied to value traps and declining businesses, they're recipes for underperformance.

Both Smith and Train have shown admirable patience, but patience without reassessment is stubbornness. Markets are trying to tell them something; perhaps they should listen.

5. The Structural Shift to US Equity Dominance

US equities have dominated global markets for over a decade. This isn't temporary aberration; it reflects:

• Largest, most liquid capital markets
• Best corporate governance on average
• Most supportive regulatory environment for business
• Concentration of global technology leadership
• Dollar's reserve currency status
• Deep pools of venture capital and growth funding

UK fund managers betting on mean reversion—that UK/European markets will eventually catch up—have been wrong for over a decade. Perhaps the mean has shifted.

The Exceptions: UK Companies That Actually Work

Not all UK equities are doomed. Several sectors and companies offer genuine opportunities:

1. Rolls-Royce: The Phoenix Rising

Rolls-Royce represents UK engineering excellence that's actually delivering:

Why It Works:

• Near-monopoly in wide-body aircraft engines (alongside GE and Pratt & Whitney)
• Aftermarket revenue model: Sells engines cheaply, makes profit from maintenance over 25+ year lifecycle
• Recovering aviation: Post-COVID air travel recovery driving maintenance revenue
• Nuclear potential: SMR (Small Modular Reactor) technology could be transformative
• Defense applications: Secure revenue from government contracts

Recent Performance: Shares up dramatically from 2020 lows as restructuring and aviation recovery materialize. This demonstrates UK can produce winners—when companies have genuine competitive advantages and addressable markets.

2. AstraZeneca: Pharma Success

Britain's pharma giant demonstrates UK can compete globally in high-value sectors:

• World-class drug development
• Strong pipeline of potential treatments
• Global distribution and sales capabilities
• Successful COVID vaccine development (though profitability debatable)

3. BAE Systems: Defense and Technology

Defense company benefiting from geopolitical instability and government spending:

• Secure government contracts
• High barriers to entry
• Advanced technology capabilities
• Growing defense budgets globally

4. London Stock Exchange Group: Financial Infrastructure

Platform business with network effects:

• Critical financial infrastructure
• Data and analytics revenues growing
• Difficult to disrupt due to regulatory requirements and network effects😊
• 
  

5. Experian: Data Services

Credit reporting and data analytics:

• Global operations reducing UK dependency
• Recurring revenue model
• Data moats creating competitive advantages

The Pattern:

Successful UK companies share characteristics:

• Global operations and revenues
• Competitive advantages that can't be easily replicated
• Less vulnerable to UK-specific economic weakness
• Often in sectors with high barriers to entry
• Pricing power from necessity rather than brand loyalty

These are the companies fund managers should own—businesses that happen to be domiciled in UK but operate globally and compete on genuine advantage rather than historical brand strength.

What Investors Should Actually Do

The struggling performance of prominent UK fund managers offers several lessons:

1. Don't Worship Fund Managers

Past performance genuinely doesn't guarantee future results. Smith and Train were brilliant... during specific market environments that rewarded their approaches. Those environments changed; their strategies didn't.

No fund manager deserves blind loyalty. Regular assessment of performance, philosophy, and adaptation to changing markets is essential.

2. Understand What You Own and Why

Many investors bought Fundsmith or Lindsell Train because friends did, or media lauded them, without understanding the underlying strategies or holdings.

If you don't understand why you own something, you can't rationally decide when to continue holding versus when to exit.

3. Geographic Diversification Matters

UK-focused investing made sense in previous eras. Today, restricting yourself to 4% of global markets because you happen to live on a small island seems unnecessarily limiting.

Global diversification provides:

• Access to best companies regardless of domicile
• Protection against UK-specific economic/political problems
• Opportunity to benefit from growth in emerging markets
• Currency diversification reducing purchasing power risk

4. Markets Evolve; Strategies Must Too

Investment approaches that worked in low-rate, stable political environments may fail in higher-rate, uncertain times. Strategies that succeeded in growing economies may fail in stagnant ones.

The best investors adapt. They maintain core principles but adjust implementation as markets change. Rigid adherence to historical approaches is recipe for obsolescence.

5. Consider Low-Cost Index Funds

If professional fund managers with decades of experience, substantial research resources, and full-time dedication are struggling to beat markets, what chance do individual investors have picking stocks?

For most investors, low-cost global index funds provide:

• Broad diversification
• Minimal fees
• Tax efficiency
• No reliance on manager skill
• Historical outperformance versus most active managers
• 
  

This isn't exciting, but investing shouldn't be exciting—it should be effective.

6. If You Must Use Active Managers, Diversify Across Them

Don't concentrate wealth with single fund manager, regardless of past success. Multiple managers with different approaches provide diversification and reduce specific manager risk.

7. Pay Attention to Costs

Active fund fees of 0.75-1.5% annually might seem modest, but compounded over decades, they're enormous. If your fund manager underperforms whilst charging premium fees, you're paying for the privilege of losing money.

Conclusion: Respect the Market's Message

The struggles of Terry Smith, Nick Train, and other prominent UK fund managers aren't mere temporary setbacks—they're messages from markets about structural changes requiring acknowledgment.

The world has changed:

• Quality means different things than it did in 2010
• UK equities face genuine structural challenges
• Technology has shifted value creation to different sectors and geographies
• Consumer behavior has evolved in ways that undermine traditional business models
• Political and regulatory environments have become hostile to business and investment in UK

Fund managers must adapt or become obsolete:

• Strategies that worked brilliantly for years can fail when environments shift
• Conviction without flexibility is stubbornness
• Low turnover is virtue only when applied to correct holdings
• Concentrated positions amplify both wins and losses
• Home bias in global economy is handicap, not advantage

Investors must acknowledge reality:

• Past performance truly doesn't predict future results
• Geographic restrictions in investment are increasingly unjustifiable
• Active management costs must be justified by performance
• Diversification across managers, geographies, and strategies provides protection
• Sometimes the simple, boring approach (index funds) is actually optimal

The British investment industry has produced brilliant minds and generated substantial wealth for investors over decades. But industries and individuals that fail to evolve eventually become irrelevant.

Smith and Train aren't bad investors—they're investors whose moment has passed unless they adapt. The UK market isn't doomed—but it requires realistic assessment of challenges rather than nostalgic attachment to past glory.

For investors, the message is clear: respect what markets are telling you. When strategies persistently underperform despite previous success, when entire markets lag despite apparent value, when fund managers refuse to adapt despite mounting evidence—pay attention.

The world changes. Investment approaches must change with it. Those who adapt survive and potentially thrive. Those who don't become cautionary tales, examples of what happens when conviction becomes inflexibility and consistency becomes stubbornness.

British fund management can succeed—but not by doing tomorrow what worked yesterday. The industry needs new thinking, global perspective, willingness to abandon comfortable assumptions, and humility to acknowledge when approaches no longer work.

Until that happens, British investors might be better served looking beyond their shores, beyond familiar names, and beyond strategies that promise certainty in an uncertain world.

After all, as the British themselves might say: "Keep calm and diversify globally." Not quite as catchy as the original, but rather more useful for preserving wealth.