Terry Smith warns index funds could lay foundations for disaster

Terry Smith warned that a large shift into passive index funds could lay the foundations for a major investment disaster, after his Fundsmith Equity returned 0.8% in 2025 versus the MSCI World's 12.8%.

Terry Smith, manager of the Fundsmith Equity Fund, has warned that the growing move into passive index funds could set the stage for a major investment problem. The comment followed a year of weak performance for his fund, which returned 0.8% in 2025 while the MSCI World rose 12.8%. Smith pointed to the dominance of a small group of large tech stocks and to momentum effects linked to index investing as potential sources of market distortion. He also noted that a weaker US dollar reduced the sterling value of the fund's holdings. Key points: - Terry Smith said the large shift into passive index funds risks amplifying momentum and market concentration. - Fundsmith Equity returned 0.8% in 2025 compared with the MSCI World's 12.8%. - The fund holds three of the largest tech firms rather than the full set dominating index weightings and avoids sector bets. - Smith cited dollar weakness as a drag on sterling returns and said he will continue the fund's existing, concentrated approach. Summary: Smith warned that index-fund dominance could increase market concentration and create vulnerabilities, but he offered no timetable for any correction. Undetermined at this time.