Top UK fund manager reckons buying the dip and holding is broken

Deep in the jungle that is the global stock market lives a curious creature: the quality investor.

For generations, it has hunted the same way. It moves slowly, ignores the noise and waits patiently for exceptional businesses to become temporarily wounded.

When they do, it strikes, buying them at a discount before settling in for years - sometimes decades - as those companies quietly compound in value.

Evolution taught this creature one simple rule: never chase prey. Be patient. Eventually, the market comes to you.

But something has changed in the jungle... the fastest animals are no longer the strongest - they're simply the ones running with the herd.

Powered by passive investing, algorithmic trading and AI-fuelled momentum, the most tantalising of prey - the likes of Nvidia, TSMC and SK Hynix - have sprinted beyond the reach of the old hunter.

Meanwhile, quality companies that stumble aren't recovering as they once did. Instead, they often continue falling, while momentum favourites continue to pull further ahead.

The hunter adapts

Which brings us to the point of this article: one of Britain's most famous fund managers believes the laws of the jungle have changed — and the hunter must adapt.

For almost 16 years, Terry Smith has run Fundsmith — a firm managing more than A$45 billion — around three simple principles: 1) Buy good companies. 2) Don't overpay. 3) Do nothing. In a letter to investors that has since gone viral, Smith admitted the third rule has become a liability in today's momentum-driven market.

"In the current momentum driven market buying shares in companies which have hit a glitch is like trying to catch the proverbial falling knife. All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect," he says.

In response, Fundsmith will purge underperformers despite their strong fundamentals and embrace momentum investing — effectively choosing to be greedy when everyone else is, rather than when everyone else is fearful. It's a remarkable departure from one of Buffett's most famous investing principles.

This is huge. It may be one of the biggest philosophical shifts we've seen from a leading quality investor in years. And if that's true, every one of us should be asking the same question:

What if he's right?

The pressure to see results

Smith's decision to break one of his own investing commandments came after three years of frustrating underperformance.

This year alone, the Fundsmith Equity Fund — a concentrated portfolio of just 20 to 30 quality companies — fell 2.9%, while a simple passive MSCI World Index fund gained 11.2%, capping three consecutive years of underperformance.

It's a problem haunting active managers and investors around the world.

In Australia, S&P data shows around 70% of international equity managers underperformed their benchmark in calendar 2025, delivering returns of 9.6% compared with the index's 13.3% in Australian dollar terms.

Spend enough time interviewing fund managers, as we do at Livewire, and you'll hear a familiar refrain. Eventually, they say, markets come back to fundamentals. Valuations matter. Quality will win.

But Smith no longer believes investors can simply afford to wait.

"Sticking to our current approach may well fall foul of the adage that the market can remain illogical longer than we can remain in business. You should therefore expect that we will be more active in future," he says.

When the herd becomes the market

Despite changing course, Smith doesn't pretend momentum is sustainable — quite the opposite.

He points to a quantum and frequency of price moves that would have once seemed unimaginable:

• On 27 May, Snowflake closed as a US$60 billion company and opened the following day worth US$82 billion.
• The next day, Dell Technologies added almost US$70 billion in market value in a single session after its shares had already doubled in the months beforehand.

"I profess no insight into how or when this passive-led momentum market will end, other than to say badly," he writes.

"What we are surely seeing is that index funds, like other financial innovations, start with a good rationale but inevitably end up being taken to extremes, ultimately with dire consequences."

That's why Smith insists Fundsmith isn't abandoning fundamentals altogether.

Instead, it will look for companies exhibiting both strong fundamentals and strong momentum.

To that end, the fund has started building positions in AppLovin, TSMC, Uber, Netflix, Mastercard, GE Vernova and several other companies while exiting names including LVMH, Nike, Novo Nordisk, Unilever and Zoetis.

"The sales [of those stocks] were often driven by a complex mix of factors including lack of fundamental momentum, mismanagement and simple valuation," Smith says.

Views from Australia

Smith isn't alone in questioning some of investing's most sacred assumptions.

Marcus Padley, the British-born stockbroker who has spent decades investing in Australia, has also challenged the industry's obsession with "time in the market", arguing that investors have been conditioned to believe activity is the enemy.

"Successful investment requires you to exploit prices by acting and reacting. If you aren't doing that you have no value. If you have been told this is how to succeed, stop," Padley says.

He believes too many investors have confused patience with passivity.

"Investing requires work, not hope and faith. If you have fallen for the industry-serving brainwashing about long-term investment being clever and 'trading' being reckless, then you need to re-educate yourself – you can time the market."

Padley has oscillated between being 100% in cash and fully invested as market sentiment waxes and wanes. Today, he's holding 32.4% in cash after riding the AI momentum trade and taking profits in the Global X Semiconductor ETF (ASX: SEMI) as part of his actively managed MT20 portfolio.

While Padley and Smith come from different investing backgrounds, they're arriving at a surprisingly similar conclusion. Markets have changed, and blindly sticking to an investment philosophy simply because it worked in the past may no longer be enough.

"Some adjustment needed"

According to Wouter Klijn, Editorial Director at the Investment Innovation Institute, Smith's decision would have been almost unthinkable a decade ago.

"Changing your investment process, let alone your investment style, used to be a no-no. It was considered 'style drift' and could be a reason to terminate a manager's mandate," says Klijn, who has interviewed dozens of fund managers around the world.

The logic was simple. Investors hired fund managers for a specific style - whether value, quality or growth - and combined them to build diversified portfolios. If a manager suddenly changed style, it could leave investors with unintended exposure to a particular factor.

Today, however, Klijn believes markets have changed enough that investors are becoming more accepting of evolution.

"There are hardly any true deep-value managers anymore," he says. "Value has struggled for a long time and adhering to a narrow interpretation of it would have likely killed your business."

He says today's highly concentrated market, particularly in the US, has made life increasingly difficult for active managers trying to stick rigidly to one investment philosophy.

"If you look at the market now, then concentration makes it really hard to be an active equity manager, especially in the US. And so some adjustment is perhaps needed to survive."