Fundsmith年度股东大会2025年——实录（稳健复利）

Ian King: Ladies and gentlemen, good evening and welcome to the annual shareholder meeting of the Fundsmith Equity Fund. My name is Ian King, business presenter of Sky News. Our two guests are Terry Smith, Chief Investment Officer of Fundsmith, and Julian Robbins, Head of Research at Fundsmith.

When Terry sent out his annual shareholder letter, you were invited to submit questions. We get more questions than we can answer, but if your question isn’t asked, Fundsmith will reply to you personally. I sit down with Terry and Julian to review all submitted questions, then I choose the most pertinent ones. Terry and Julian have no say in this process. As a reminder, my interests are aligned with yours – I have money invested in the Equity Fund, as do all three of my children. The whole meeting is being recorded, so you’ll be able to watch it online in the near future. Without further ado, I’d like to welcome Terry Smith.

Terry Smith: Evening everybody, very nice to see you all here – so many familiar faces over many years. I think this is our 14th annual shareholder meeting. I’m going to do a short intro running over mostly familiar ground about what we’ve done and what we do, primarily for you to check whether we’re doing what we say we’re going to do. I only want to talk about two things: performance, which you’re obviously interested in, and investment strategy – what we actually do, what we’re trying to do, and are we walking the walk as well as talking the talk.

Taking you to Performance first – last year wasn’t our finest hour. We were up 8.9% in the T class in Sterling with dividends reinvested, while the market was up 20%, so we significantly underperformed. It’s been a run of three years, maybe four, that have not been so satisfactory. I’ll discuss what I think are the reasons behind that.

Obviously, I’d rather focus on the longer term. Since inception, we’ve annualized 15.2% per annum while the market has annualized 12.3%, so we’re about three points ahead. The Sortino ratio is important to focus on – it measures how much return you get for every unit of variability or volatility in the unit price, particularly downside movement. You get 0.87 of a unit of return for the fund compared to 0.6 for the index over the long term. High levels of volatility tend to affect us all, and things which are highly volatile can be injurious to your performance.

For 2024 attribution, our top five contributors were Meta Platforms, Microsoft, Philip Morris, Automatic Data Processing (ADP), and Stryker. Meta made a fantastic contribution. When we first bought in after the Cambridge Analytica incident, we received a tsunami of criticism, but it’s come good spectacularly. Microsoft is making its eighth annual appearance in our top five, extraordinary for a company of this size.

Philip Morris is the world’s biggest tobacco company but also the pioneer in heat-not-burn products and nicotine pouches through its acquisition of Swedish Match. ADP, the world’s leading provider of payroll processing and HR software, produces consistent high single-digit revenue growth year in, year out. Stryker, the medical equipment company with a leading position in orthopedic medicine, is bouncing back well from the downturn in elective procedures during COVID.

Our top detractors included L’Oreal – China, their biggest market, has problems. IDEXX, the world’s biggest manufacturer of veterinary diagnostic equipment, had a good pandemic as people adopted pets and is now coming off that high. Nike is problematic – we bought reasonably well during the pandemic, but management ignored the brick-and-mortar traditional channel and opened the door for competitors. They’ve since fired the CEO and replaced him. For Brown-Forman, we’ve retained this position because it’s a company with more premium spirits than some major suppliers, and if people drink less due to weight loss drugs, premium drinks may continue to perform. Novo Nordisk, the Danish company pioneering weight loss drugs, has had an interesting year with shares off about 45% at one point despite fantastic performance.

Market performance last year was dominated by the “Fab Five” technology companies. These five companies contributed 44% of the S&P return – an astonishing level of concentration. Nvidia alone was 21% of the index return. Unless you hold these companies in roughly their index proportion, you’ve got a problem. We don’t own Nvidia, we sold Apple, we do own Meta and Microsoft, and we sold Amazon. Regarding valuation, Nvidia was on 53 times earnings, Microsoft on 38, Amazon on 45, Meta on 24, Alphabet on 26, Apple on 32, and Tesla on 99 times. We bought Apple at half its current rating and sold it when the rating doubled during a period where sales grew by zero over two years.

This concentration isn’t just an American phenomenon. In the German DAX, SAP contributed 41% of the index return. Another factor affecting performance is the rise of so-called passive investing. During 2023, more than 50% of assets under management worldwide were in passive funds, creating distortions. John Bogle, the godfather of index investing, said in 2017 that at some point, when a certain proportion of assets are in index funds, it will lead to distortions because they’re invested without consideration of quality or valuation.

Index investing is only passive in that there’s no fund manager involved – it’s actually a momentum-based strategy. Money going into index funds is allocated based on market weight, meaning the biggest companies get most of the inflows, boosting their share prices further. It’s not just the percentage of assets in passive funds that causes distortion, but the flow between active and passive.

Some ask if this is the end of active investing. Betteridge’s Law states that any headline ending in a question mark can be answered with “no.” Active management is going through a difficult time for specific reasons, but any active manager worth their salt dreams of being the last one standing when all other money is invested without consideration of quality or valuation. The challenge is surviving long enough to reap those benefits.

Our investment strategy remains simple: only invest in good companies, try not to overpay, and do nothing. Looking at our portfolio metrics – return on capital employed was 32% last year, about twice the index level. Gross margin was 64% compared to about 40% for the index. Operating profit margin was 30%, again about twice the index. Cash conversion, historically around 100%, dropped to 88%, partly due to Novo Nordisk’s capital investments in manufacturing capacity and our IT companies’ spending on data centers for AI. Interest cover was 27 times versus 9 times for the index, showing these are very conservatively financed companies.

For valuation, we finished with a free cash flow yield of 3.1% versus 3.7% for the S&P 500, making us about 20% more expensive. But our companies’ free cash flow grew 14% last year, suggesting they’re high-quality businesses worth the premium.

For our “do nothing” strategy, portfolio turnover last year was 3.2%, costing us 0.02% (£447,000). We sold Diageo due to concerns about weight loss drugs on drinking habits, McCormick due to disappointing management of input cost inflation, and Apple because sales growth for two years was flat while the share price doubled. We started buying Texas Instruments, the biggest manufacturer of analog devices and embedded processors, and Atlas Copco, a Swedish company with long-term family control that makes compressors and vacuum equipment.

Ian King: To kick us off, a question from Kenneth Deil: How might Trump tariffs affect the portfolio given it has over 70% invested in US stocks?

Terry Smith: In 2017, at the height of the previous Trump tariff comments, it didn’t make a blind bit of difference to market returns. This time may be different, but we don’t do much about this for several reasons. We don’t know what he’s going to do, and many of our US companies have global businesses. Philip Morris International, for example, had zero sales in America until its recent acquisition of Swedish Match, with its largest markets being Indonesia, the Philippines, Russia, and Turkey.

We spend most of our time thinking about things that drive our companies – did you brush your teeth this morning, what are you drinking, what’s your medical condition, what are you using for everyday communications.

Julian Robbins: If we divided the room and asked one half to write down what makes a business successful over 50-100 years, and the other half to write what they think drives the stock market, there would be no overlap. One side would write about product quality, good management, and business economics, while the other would talk about interest rates, bond yields, tariffs, Donald Trump, AI, and exchange rates.

Texas Instruments is an American company with 20% of its sales coming from chips made in China and imported back to America. But the average selling price per chip is less than a dollar, so if tariffs increase the price to $1.10 or $1.25, it doesn’t make much difference in the context of these chips going into $30,000-50,000 electric vehicles. These products are typically designed into products with multi-year lifecycles, so they’re unlikely to be substituted for a small price increase. The company also uses dual sourcing and has significant cost advantages from the capacity it’s building in the US.

Ian King: Next question from Samuel Brammer: Do you think politicians are too worried about the financial market’s reaction to policy decisions?

Terry Smith: James Carville, Bill Clinton’s chief strategist, said: “I used to think if there was reincarnation, I wanted to come back as the president, the Pope, or a 400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody.”

In 1987, Julian and I were running the financial desk at BZW Investment Bank when a colleague wrote a piece titled “A Storm Warning for Markets” about the weakness of the US dollar and rising interest rates. On the day of the great hurricane, the US index went down 22%. Markets are quite important. Although individual market participants might just be interested in money, their collective intelligence often leads to the right decision. If anything, governments don’t take enough notice of markets. The bond market and foreign exchange market are important controls when governments try to borrow or trade internationally.

Julian Robbins: We’ve been reading about the success of large US tech stocks and the absence of such companies in Europe. You might expect politicians to examine whether their policy decisions make it too difficult to create and grow these companies. The EU strategy seems to be fining US tech companies.

The United States has 50 individual states that compete for capital and talent more dynamically than European countries. For example, the top state income tax in California is 13.3%, while Florida and Texas have no state income tax at all. This explains why capital and people are moving between states.

Ian King: Donald Trump seems obsessed with the S&P as a barometer of his success, but should he be looking at 10-year Treasury yields instead?

Terry Smith: Yes, he should. The bond market creates an insuperable headwind or tailwind depending on conditions. Looking at Elon Musk heading the Department of Government Efficiency, the federal government definitely has an expenditure problem. The US added $1 trillion to government income since 2007 but $3 trillion to expenditure.

Ian King: We have three questions about weight loss drugs: How do they impact drink and consumer goods companies? Is Novo Nordisk able to sustain its competitive edge? And why is Terry dumping alcohol stocks like Diageo?

Julian Robbins: The obesity market is currently $31.6 billion, but estimates range from $100-350 billion. There are at least 400 companies working on weight loss drugs. Novo Nordisk and Eli Lilly are the first incumbents and chose their specific molecules because they believed they were the best. Currently, we have injectable weight loss drugs, but the market will evolve to include oral options, and “weight loss” drugs will become “weight management” drugs taken daily like statins or aspirin.

Terry Smith: We bought Novo Nordisk about six years ago before weight loss was mentioned, based on their drug discovery process. They now have about two-thirds of the market, which won’t persist with competition, but the market will be 3-10 times larger. Their advantages include patents, manufacturing efficiency (making these drugs is non-trivial – we’re talking about 31 amino acids in sequence), and capacity (they bought three manufacturing plants for $10 billion).

They’re also gaining additional treatment labels beyond weight loss – for cardiovascular function, kidney function, liver function, Alzheimer’s, autoimmune conditions, and various forms of addiction. One executive in the field said, “I think they’ve invented the elixir of life.”

Regarding selling Diageo: Data from 150,000 US households shows alcoholic drinks are among the first consumption areas reduced by people on weight loss drugs. Marijuana legalization is also affecting alcohol sales – look at what’s happened to marijuana and hemp-infused drinks. Generation Z is the “sober curious generation” with lower alcohol consumption than previous generations.

Julian Robbins: Marijuana is now legal in 24 states recreationally and 39 states medically. In Connecticut, I’m allowed to cultivate six marijuana plants, though only three can be mature – something I didn’t know before researching this.

Terry Smith: We try to take a long-term view, but if we can see a period of uncertainty ahead, there’s no point in hanging around. We’ll stick with IDEXX despite its pandemic-related challenges because we think it has many years of growth ahead, and it’s not very liquid – we got in because of specific circumstances and don’t think we could get back in again.

Ian King: From Way Chen Ding: Do you have concerns about cloud providers like Microsoft and Alphabet heavily investing in infrastructure?

Julian Robbins: Yes. Capital expenditure for Alphabet, Amazon, Meta, and Microsoft has increased from $64 billion in 2018 to nearly $210 billion in 2024, forecast to reach $281 billion by 2026. This is just capex, not including R&D or hiring tens of thousands of people.

Three possible outcomes: either it works out quickly and justifies the spending, they cut back (which won’t be good for companies like Nvidia), or they keep going, which will dampen returns. They need to generate substantial new revenue and profit from AI services to justify these investments – probably around $100 billion of additional cash flow. If history is any guide, there will probably be a period where it doesn’t work, everyone panics, and then eventually it does work – but not on the first attempt.

Ian King: From Guy Merill: What are your views on management incentive structures? What does good look like?

Terry Smith: Charlie Munger said, “Show me the incentive and I’ll show you the outcome.” We vote on every proxy ourselves, not using outside agencies. We’ve voted against about half of remuneration policies because the incentives won’t produce outcomes we want.

Julian Robbins: Companies create peer groups for comparing performance that often exclude their real competitors. Nike’s peer group includes American Express, Coca-Cola, Kimberly Clark, and Walt Disney – not Adidas or Puma. Estée Lauder’s includes Johnson & Johnson and Kimberly Clark – not L’Oreal. When asked why, they claim it’s “difficult to get information on European executives.”

Terry Smith: Setting the wrong incentive produces bad outcomes. Tesco had steady growth in earnings per share while their return on capital employed dropped from 18-20% to 10-12%. They were investing capital at lower returns to generate earnings growth based on management incentives.

A good company needs both high returns on capital and growth. If it has low returns but high growth, it destroys value. For management incentives to earn our approval, they need to include both growth and return measures, not just one or the other.

Julian Robbins: Unilever has a good structure: 40% based on organic sales growth, 30% on adjusted EBIT growth, and 30% on free cash flow growth short-term, with return measures for long-term incentives. They’ve also made sensible changes – 80% of incentives are now based on hard currency rather than what they call “fake money metrics,” and they’ve included restructuring costs in their remuneration metrics.

Church & Dwight tells all employees that 25% of their remuneration is based on gross margin – if you can make products for less, you get paid more. This gives middle and lower management incentives that directly affect what they do.

Ian King: We woke up to news that Hein Schumacher, Unilever’s CEO, has left after only 18 months. What do you make of this?

Terry Smith: We spoke to the chairman of Unilever this afternoon and met with Fernando, the replacement CFO, last week. I think it’s good news, not because we had anything against Hein Schumacher – he was focusing on the right things for the business rather than saving the world. But the board thought they had someone better, and so do we. The CFO who is taking over is an Argentinian who is dynamite, especially in understanding operations in depreciated currency environments.

Nobody ever achieved anything by being reasonable – you have to be unreasonable. If you realize something is possible, you become totally unreasonable until it happens.

Julian Robbins: It’s disappointing how few truly impressive CEOs we come across. Our heroes include Jean-Paul Agon (L’Oreal), Kevin Lobo (Stryker), Carlos Rodriguez (ADP), Jonathan Jaques (IDEXX), and Dr. Udit Batra (Waters). I think Fernando Fernandez will join that group – this guy is fantastic.

Ian King: From Catherine James: In the FTSE 100 index, there are stocks with very high dividend yields. Would the fund ever consider these to boost distribution?

Julian Robbins: If you’d bought Vodafone in February 2015, you would have paid 231p with a dividend yield of 5-6%. Since then, you’d have received 105p in dividends, but the current dividend is 9p (forecast to drop to 5p), and the share price is now 69p. Half your money went to dividends, and most of the rest has been lost.

When we first bought Visa in 2012, they were paying a 13-cent dividend that’s now over $2. Stryker’s dividend has gone from 63 cents to over $3. Domino’s wasn’t paying a dividend at all when we bought it, and now pays over $6 a share. But at the entry point, these dividend yields wouldn’t have satisfied people looking for high yields.

Terry Smith: Berkshire Hathaway paid one dividend in 1967 of 10 cents per share, totaling $10,755. Had that money not been paid out and kept in Berkshire, the $11,000 would now be worth $3.1 billion.

People who run income funds insist dividends are the way to make money in equities, but it’s about compounding in value. This happens most effectively when companies retain money and invest it at high returns. When a company pays out dividends, that’s money coming out of the equity market just as surely as if you sold a portion of your holding.

Ian King: From Felix Mersy: Beyond concentration in tech stocks, are there aspects of the fund’s approach that might need adaptation to thrive in increasingly tech-dominated markets?

Julian Robbins: It’s easy to disrupt a market, but not so easy to disrupt the real world. We’re not balancing at all – if something disrupts prevailing quality, then the definition of quality changes.

If we had started the fund in the mid-1980s or mid-1990s, the portfolio would have looked very different. In 2010, we had 62% in consumer staples, which has come down to 18% today. Companies or sectors that barely existed when we started are now eminently investable. Fortinet had $325 million in revenue in 2010; today it and Palo Alto Networks both have market caps of around $100 billion.

Companies like Campbell Soup, General Mills, and Kellogg’s were once quality investments but aren’t today as eating habits have changed. Quality companies change over time.

Ian King: From Damiano Cupone: Which is the name in your portfolio around which there’s been most debate, and will it be the same in 2025?

Julian Robbins: Philip Morris International has been controversial. In 2017, it had revenues of $28 billion with 7% growth, 64% gross margins, and 52% return on invested capital. By 2024, 40% of revenue comes from non-traditional sources versus 15% in 2018. Their acquisition of Swedish Match has been successful, and after a period of stagnation, the total return since we started is now 579%.

Terry Smith: For 2025, I think Novo Nordisk will be most controversial. It has revenue growing at 25%, 85% gross margins (versus our portfolio average of 64%), 44% operating margin, and 69% return on capital (versus our portfolio average of 30%). It trades at a P/E of 28 and a free cash flow yield of 27%. The obvious comparator, Eli Lilly, has lower margins and returns but trades at 75x earnings. With emerging competition and ongoing concerns about drug trials, Novo will continue to be controversial, but we’re holding it.

Ian King: From Henry Goble: How are you reconciling your long-term approach with concerns about the US market being overvalued?

Julian Robbins: The opportunity set in the US technology sector is significantly larger than Europe. The US has three trillion-dollar companies, while in Europe the largest is SAP at $348 billion. The largest UK tech company is Sage at $16 billion.

When comparing similar companies across markets: AstraZeneca trades at 16x earnings while Pfizer is at 8.7x; BP is somewhat cheaper than Exxon; BAE Systems and Lockheed Martin are similar; Barclays is cheaper than Bank of America; Diageo and Brown-Forman are similar; Experian and Equifax are both around 31-32x; InterContinental Hotels is actually more expensive than Marriott; and International Airlines Group is slightly more expensive than American Airlines.

Large US stocks like Walmart and Costco trade at eye-watering multiples, but for regular large and mid-cap names, the differences aren’t as great as commonly believed.

Terry Smith: Doesn’t mean the S&P is cheap, but when people say you must buy the FTSE because it’s cheaper, a lot of the FTSE 100 isn’t high quality and should be lowly rated. Once we compare similar companies, the US isn’t that much more expensive.

Even if we concluded the market was expensive, we would still remain fully invested in high-quality companies. If you want to try timing the markets, feel free, but that’s not what we do – we have no clue how to do it, which I think is an advantage.

Ian King: From Alex Geraldin: Which of the shares in the portfolio do you think will perform best this year?

Julian Robbins: In 2022, our favorite was Meta; in 2023, it was Meta again. Last year we changed to Unilever and should have stuck with Meta. Philip Morris International is up nearly 30% year-to-date, but with the new Unilever CEO and the discount to its peer group, I’ll say Unilever.

Terry Smith: I agree with Julian – Unilever.

Ian King: Thank you, ladies and gentlemen. If your questions weren’t asked tonight, fear not – you will be getting a response from the Fundsmith team. We appreciate you joining us at this event. God willing, we’ll see you all next year. Please thank Julian and Terry.