Terry Smith: Reeves must drop tax hikes to attract UK investment

Star fund manager Terry Smith has called on Chancellor Rachel Reeves to cancel her tax hikes to make investment in the UK more attractive.

Smith, who runs the £20bn Fundsmith Equity fund, argued that to boost the quality of UK companies the government should “reverse a lot of the policies that are in place with regard to taxation and regulation”.

“[That] would be my starting parameters for [attracting investment], which is almost certainly diametrically the opposite of the current policy,” he told the BBC.

In last year’s October Budget, Reeves raised the tax burden in the UK to its highest level in history, which is predicted to reach 38 per cent of GDP by the end of the decade.

Smith added that capital markets in the UK needed “better companies” for investors to buy, stating: “There are only a handful of companies that I would regard as okay for me to invest in.”

“There are large swathes of the UK market in things like oil and gas and banking and utilities that I just don’t regard as of the quality required.”

UK listed equities have continually struggled from underperformance in comparison to US markets, with international investors showing little interest in British markets.

Smith also emphasised his long-term buy and hold strategy, after his fund has fallen almost 10 per cent in the last three months amid turmoil from US president Donald Trump’s tariff regime.

“We have been running money for 15 years, and over that period we have been successful in so far as we made a big positive return,” said the manager.

“Let’s imagine that we managed to do that for another 15 years, which I sincerely hope that we do, and we look back and say what were the top factors in what we achieved here?”

“Was it selecting good companies, not overpaying for them, being steadfast and not trading too much and incurring costs, or was it predicting what happened with the Trump tariffs? I think it’s unlikely it will be the last factor.”

Fundsmith’s performance

Fundsmith earned its reputation as one of the UK’s top-performing funds thanks to the stock picking skill of Smith, after having grown 555 per cent since he started running it.

But recently the fund has come under fire for registering its fourth consecutive year of relative underperformance, growing 8.9 per cent in 2024 compared to 20.8 per cent for its benchmark.

While Smith does hold some growth-focused companies in his top ten, like Microsoft and Meta, the manager’s decision not to include trailblazers like Nvidia ultimately dented performance.

Smith has also been criticised for the lack of turnover in his portfolio, buying and selling just a handful of stocks over the last few years.

The other issue for Smith is size; as one of the largest investment funds in the UK and holding only between 20 to 30 stocks, Fundsmith is limited in its ability to buy positions in smaller companies without shifting the market.

At the end of last year, Fundsmith was overtaken as the largest investment fund in the UK by St James’s Place for the first time since March 2019.