What is Terry Smith's investing strategy?

Smith's Fundsmith framework: 'buy great companies, don't overpay, do nothing.' The strictest scorer of the seven by design. ROCE above 20% (hard floor), gross margin above 45%, FCF conversion above 95%, almost no debt, revenue CAGR above 7%. No banks, no cyclicals, no commodity producers: they fail the quality floor. Smith has beaten the global index by approximately 5% annualized over 15+ years.

What is ROCE and why is Smith obsessed with it?

ROCE = Return on Capital Employed = Operating Profit / (Total Assets − Current Liabilities). Smith calls it 'the single most important number in investing.' A 20%+ ROCE sustained for 5+ years means the business earns far more on each dollar deployed than it costs to fund: the mathematical definition of a compounder. Smith refuses any business below the floor.

How does Smith's framework differ from Buffett's?

Smith is stricter on quality (ROCE 20% vs Buffett's 15% ROE) but more flexible on valuation (P/E up to 35 vs Buffett's typical 15). Smith also explicitly excludes whole sectors (banks, utilities, miners) that Buffett occasionally owns. The 'do nothing' discipline is more aggressive, Smith's portfolio has roughly 10% annual turnover, vs Berkshire's 5% but higher than Buffett's stated ideal of zero.

What returns has Fundsmith achieved?

Fundsmith Equity Fund has compounded at approximately 14% annualized since inception in 2010, roughly 5% per year above the MSCI World Index. £10,000 invested at launch became approximately £55,000 by 2024. The fund's track record is the strongest single proof point that Buffett-Munger quality investing still works for a modern public fund manager.

Modern compounder framework (Fundsmith)

Terry Smith's Investing Strategy

Terry Smith's Fundsmith framework, 'buy great companies, don't overpay, do nothing.' Modern proof that the value-investing playbook still works: Smith has beaten the global index by ~5% annualised over 15+ years running Fundsmith. The strictest scorer of the seven by design. No banks, no cyclicals, no commodity producers: they fail the quality floor.

Last reviewed: January 1, 2026

The framework, in plain English

ROCE ≥ 20%, Smith's hard floor. Sustained 5-year ROCE ≥ 18%.
Gross margin ≥ 45% AND operating margin ≥ 20%, pricing power that survives a downturn.
FCF / Net income ≥ 95%, Smith's 'owner earnings = reported earnings' rule.
Net margin ≥ 15%, real bottom-line profitability, not accounting.
Almost no debt: net debt / EBITDA ≤ 1.5×.
Revenue CAGR ≥ 7% and EPS CAGR ≥ 10%: the business is still compounding.
P/E ≤ 35, pay up for quality, but not at any price.

From Fundsmith Annual Shareholder Letters (2010–) and Smith's Investing for Growth (2020).

Top 10 stocks scoring high on Terry Smith

#1	5274.TWO	100/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 11/12 criteria met.
#2	HACK.ST	100/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 11/12 criteria met.
#3	LUG.ST	100/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 10/12 criteria met.
#4	8313.SR	99/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 10/12 criteria met.
#5	2059.TW	98/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 11/12 criteria met.
#6	ICICIAMC.NS	97/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 10/12 criteria met.
#7	TPL	97/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 11/12 criteria met.
#8	ICICIAMC.BO	97/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 10/12 criteria met.
#9	278470.KS	97/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 10/12 criteria met.
#10	PME.AX	96/100	Strong Smith fit: ROCE bar cleared, margins durable, FCF = earnings, no debt. 9/12 criteria met.