What caught my eye this week.
The formerly fêted fund manager Terry Smith has had a few rough years in the markets, but last year was a doozy.
The UK investors who once poured money into his flagship Fundsmith vehicle saw their domestic market deliver nearly 26% in 2025.
A global tracker – a better comparison for the free-roaming Fundsmith – delivered roughly 14%.
But Fundsmith managed just a 0.8% return.
Barely there, and handily outpaced by cash in the bank.
Never mind the returns, feel the quality
Now Terry Smith is a big and famously acerbic boy who has rained on many a parade over his long career. While the schadenfreude must be positively Wagnerian in some quarters and it’s never nice to kick a man while he’s down, he doesn’t need me defending him.
I will just a tad though.
Like Nick Train [1] – another once-loved but now seemingly reviled fund manager 1 [2] – Smith invests exclusively in ‘quality’ type shares.
This doesn’t (just) mean ‘quality’ the way a car salesman might quip about that vehicle you’re eyeing up.
The quality factor describes a particular kind of company [3] that boasts – among other things – high returns on equity, strong profit margins, and the ability to turn most of its profit into cash.
And since the reset of 2022 [4], these kinds of companies have been in the doghouse. I know because I favour them with my stock picking myself [5]. Although happily my returns in 2025 were an order of magnitude better than Smith’s. (But now I’m doing the schadenfreude dance…)
Of course, Smith and Train didn’t exactly call out the tailwinds that boosted their returns during the low interest rate era.
Worrywarts like me [6] saw ‘bond proxy’ companies increasingly owned by weak hands who would rather be invested in bonds, and which were thus primed for a fall when interest rates rose.
Train in particular dismissed [7] such concerns, while Smith just continued to talk like you’d need a lobotomy to own anything other than his favoured firms.
But when the reckoning came, those multiples duly corrected – and the share prices went south.
The evils of indexing
The fact that even good investors suffer when their style is out of favour is of course another of the many arguments for passive investing.
I’m one of diminishing band who still believes both Smith and Train have skill. But I also think most people should invest the bulk of their money in index funds [8], rather than bet their net worth on either the jockey or the horse they’re riding.
However Smith has continued to lend his voice to the chorus warning that those same index funds are part of a wider problem.
In his letter to investors this week, he recapped the now-common argument that the growing share of money invested in index funds is distorting the market, concluding [9]:
…even if we are right in diagnosing this move to index funds as one of the causes of our recent underperformance and it is laying the foundations of a major investment disaster, I have no clue how or when it will end except to say badly.
He would say that, wouldn’t he? He’s an active fund manager.
Well no. The greatest active investor of all-time, Warren Buffett, cheerily urges people – including his wife – to put their money into tracker funds.
For my part, I am not sure exactly what I think.
It’s a 6-7
While Smith’s recap in his letter on the perils of excessive indexing is uncharacteristically muddled, I’ve read more persuasive arguments as to why the weight of money in index funds is distorting prices. At least at the margin and especially for the biggest companies. (Here’s the latest [10]).
I’ve also read comprehensive counters too.
Now you may wonder why someone who has been writing a blog about both active and passive investing for 20 years cannot be more definitive about this?
The truth is the maths is non-trivial and it’d take a good chunk of time to separate theoretical outcomes from any real-world implications. So I’m leaving it to the investing titans to argue it out.
With that said, I’ve mentioned to my co-blogger The Accumulator that, on a gut level, I suspect indexing becoming mainstream will have some kind of downside. Apparent free lunches in investing always do.
But whether they will be enough to make any meaningful difference – let alone be something that should prompt everyday investors to return to paying the known cost [11] of active investing – is another matter altogether.
On a practical level, if I was a passive investor I might favour equal-weighted funds a bit more, though that’s been a losing bet for years. Then I’d wait to see what happens!
There’s no world in which index funds crash while a preponderance of active funds soar, that’s for sure.
Remember, active funds basically are the market [12]. 2 [13] If passive and index investing has been unduly inflating prices, then beyond the edge cases it’s doing it for all investors.
Have a great weekend.
From Monevator
The Slow & Steady Passive Portfolio Update: Q4 2025 – Monevator [14]
The 10 eternally true steps to financial freedom – Monevator [15]
From the archive-ator: How gold is taxed – Monevator [16]
News
UK construction hit by worst run since the global financial crisis – Guardian [17]
Average UK house price fell £1,789 in December – Yahoo Finance [18]
Weight jabs affecting Greggs, boss says – BBC [19]
UK credit card borrowing rises at fastest annual rate in almost two years – Guardian [20]
AI layoffs a corporate fiction masking a darker reality, says Oxford Economics – Fortune [21]
The Saudi stock market is opening up to all – Semafor [22]
Rent control law to ‘knock £11bn’ off commercial property – City AM [23]
Why Polymarket is not paying bets on the US invading Venezuela – Forbes [24]
Europe’s leaders watch silently as Trump torches UN climate treaty – Politico [25]
[26]
UK to pass population tipping point in 2026, says think tank – Bloomberg via Yahoo [27]
Products and services
Disclosure: Links to platforms may be affiliate links, where we may earn a commission. This article is not personal financial advice. When investing, your capital is at risk and you may get back less than invested. With commission-free brokers other fees may apply. See terms and fees. Past performance doesn’t guarantee future results.
Halifax, HSBC, and Barclays cut mortgage rates in new year boost for borrowers – This Is Money [28]
Why cancelling your credit card might not stop fraud – Which [29]
Lloyds Bank switch offer: £250 and Disney+ – Be Clever With Your Cash [30]
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link [31]. Terms apply – Charles Stanley [31]
Top holiday booking hacks – Be Clever With Your Cash [32]
Is 2026 a good time to buy an annuity? – Which [33]
Get up to £3,000 cashback when you open or switch to an Interactive Investor [34] SIPP. Terms and fees apply, affiliate link – Interactive Investor [34]
NS&I cuts interest rates on fixed bonds: how to respond – Which [35]
Why secondhand is better than new – The Honest Broker [36]
Homes for sale with soaring ceilings, in pictures – Guardian [37]
Comment and opinion
Very modest optimism about UK housing in 2026 – Propegator [38]
Is Britain back? – CNBC [39]
Why some lives feel rich and others only look it – The Root of All [40]
Andrew Ross Sorkin on why the 1929 [41] market crash still matters – Sherwood [42]
More evidence that short-term market forecasts are phooey – Behavioural Investment [43]
Don’t trade where you tweet – Tim Harford [44]
A Q&A with Cullen Roche about Your Perfect Portfolio [45] – Abnormal Returns [46]
Are buy-to-let landlords dying out? – Guardian [47]
Winning the lottery [US but relevant] – We’re Gonna Get Those Bastards [48]
The ‘great broadening’ in the US stock market – Chart Kid Matt [49]
New ways of working mini-special
How Britain is embracing the ‘workation’ – Guardian [50]
Microshifting – Guardian [51]
Naughty corner: Active antics
Michael Cembalest’s widely read outlook: 2026 edition [PDF] – JP Morgan [52]
Buybacks shouldn’t matter, but they do – Klement on Investing [53]
The $2.5 trillion investment opportunity in sports [PDF] – Apollo [54]
Funds that win long-term win short-term, too – Basis Pointing [55]
Artificially inflated [PDF] – GMO [56]
Japan’s bank revival – Verdad [57]
The hidden risks of leveraged single-stock ETFs – Alpha Architect [58]
The stocks that drove the US market gains in 2025 – Morningstar [59]
Kindle book bargains
How to Own the World by Andrew Craig – £0.99 on Kindle [60]
Zero to One: Notes on Startups by Peter Thiel – £0.99 on Kindle [61]
The Four-hour Work Week by Tim Ferriss – £0.99 on Kindle [62]
How to Break Up With Fast Fashion by Lauren Bravo – £0.99 on Kindle [63]
Or pick up one of the all-time great investing classics – Monevator shop [64]
Environmental factors
What will 2026 look like for the UK’s electric vehicle market? – The Conversation [65]
Christmas trees to be replanted to boost sea defences – BBC [66]
Germany’s dying forests are losing their ability to absorb CO2 – Guardian [67]
Project to return wild elk to UK moves forward – BBC [68]
The spread of invasive plants and animals across Europe, in pictures – Guardian [69]
Robot overlord roundup
Artificial intelligence and the human condition – Stratechery [70]
Putting the AI boom(let) into perspective [Paywall] – FT [71]
Copywriting R.I.P. – Blood in the Machine [72]
Gmail’s first lunge at stabbing email to death with AI – Spyglass [73]
AI capex: built on options, priced as certainty – Dave Friedman [74]
nVidia’s autonomous tech enables other carmakers to challenge Tesla – Sherwood [75]
Not at the dinner table
What’s behind Starmer’s notable shift on closer ties to Europe? – BBC [76]
Donald Trump wants you to forget 6 January happened – The Atlantic [77]
We are the bad guys: the US threat to global stability – How Things Work [78]
Our ‘just take it’ era – Riskgaming [79]
Neo-royalism and the emerging international system [Research] – Cambridge Press [80]
America’s export controls are working – Noahpinion [81]
The politicised US economy is not in great shape – The Bulwark [82]
New you mini-special
Oliver Burkeman: the secret to happiness in 2026 – Guardian [83]
The myth of willpower – BBC [84]
So you wanna de-bog yourself – Experimental History [85]
The leaf leafs anyway – Of Dollars and Data [86]
How to meet your future self – White Coat Investor [87]
Off our beat
A great British toilet revolution could be on the way – Guardian [88]
Autonomous killer drones have come to Ukraine – NYT [89] [h/t Abnormal Returns [90]]
Climate change and migration – Grist [91]
Why smaller houses can lead to happier lives – WSJ via MSN [92]
How a sudden winter storm in 1617 sparked Norway’s deadliest witch hunt – Smithsonian [93]
The Score [94] is a warning about the gamification of everyday life – Guardian [95]
And finally…
“I have come to understand that if successful property investing is all about ‘location, location, location’, success in equity investing is all about ‘execution, execution, execution’.”
– Lee Freeman-Shor, The Art of Execution [96]
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