Fundsmith年度股东大会2026年2月——实录（稳健复利）

Introduction

Ian King: Good evening, ladies and gentlemen, and welcome to the annual shareholders’ meeting of the Fundsmith Equity Fund. I’m Ian King, your MC for this evening. Lovely to see so many of you here. Thank you for turning up on a chilly February evening.

Those of you who’ve been here before will know the ground rules, but I’ll set them out anyway. When Terry sends out his annual letter at the beginning of the year, you’re invited to put questions for this meeting. Terry, Julian, and the team then go through the questions with me, and I choose the ones that I think I would like to hear answers to and that you would like to hear answers to. My interests are very much aligned with yours — all of my family are investors in the fund. So I’m just as keen to hear what Terry and Julian have to say as you are.

We have more than 200 questions this year. We only have time for around 10 this evening. If your question hasn’t been chosen, don’t blame Terry and Julian — blame me. I’m the one that decides what questions are put up. And if your question hasn’t been put to the guys tonight, Fundsmith will be getting back to you. You will get an answer. I’m reliably informed that a lot of those answers may already be out and with you. So you will get an answer even if your question hasn’t been raised this evening.

Without further ado, I would like to welcome to the podium your chief investment officer, Terry Smith.

Fund Performance

Terry Smith: Nice to see so many of you, as it always is. I’m going to run through the usual stuff and a few other things as well, and then Ian’s going to bowl the questions for us, as you know. That’s the format.

The one word I would use to describe the last 12 months is “poor.” I thought about a lot of words to use in relation to it and I came up with “poor” — because it seemed to me if we keep going like that, we will all become poor. We don’t really want to do that, do we?

The critical point I make in relation to the slide is that people say five years of underperformance. I don’t wish to split hairs — that’s not the way to address this subject — but you know, five years ago we did 22% for one year, and if you do 22%, who cares what the market does?

I want to talk about the background to that, and I want to do it because I think you should be informed. One of the many things that irks me is the commentariat who, when we talk about the reason why our performance has diverged significantly from the index for the last few years, say that we’re making excuses or that we’re trying to blame something. We’re not making any excuses. We’re not trying to blame anyone or anything. Blame me if you want to blame anyone.

We’re just trying to give you an explanation because I think that explanation is provided in order to do something we’ve tried to do from the very beginning with Fundsmith: give you the information to make an informed decision about what to do about this. That’s what we’re here for — not trying to make excuses, trying to give you some information.

The only other thing I would say about the actual performance is the key words on the slide which I would emphasize are “so far” — because probably what will determine the outcome in terms of whether we’re poor or not is not what’s happened in the last 12 months but what we do in the next 12 years. And I and the team are committed to carrying on in a manner which we’ll describe as we try and deal with the issues that we’re talking about now.

Top Performers and Detractors

First, what worked and what didn’t last year, because this gives you some insight into what’s happening.

Our top five performers: the best performer was Alphabet — Google, old money as they say. This is a company which, if you read the outpouring of commentary at the beginning of 2025 about AI, you would see that people were saying Gemini, their large language model, was a failure — it was disastrous, wasn’t working very well. By the time we got to the end of the year, it was all a success, and that’s all very good because we own them and I welcome that. But it does make me think how quickly things can change in this particular area of human endeavour, which I don’t like very much, actually.

IDEXX, our second best performer. This is our veterinary diagnostic equipment company that we’ve owned for a very long time. It had a great pandemic as pet adoption soared. It had a comedown after the pandemic when vet visits trailed off as some of those pets were given back, and it’s now back on a growth trend again, I’m pleased to say.

Philip Morris. This is our only remaining tobacco stock, which we don’t actually own because of the tobacco element. It’s because they are the leader in reduced-risk products — heat-not-burn and more recently the nicotine pouch products. This has really been a great success for the company, and we’re very pleased that it’s actually started to show through in the share price over time.

Meta, the old Facebook, and old money. As you probably know from previous remarks, this was a very difficult share for us. We bought it and received a barrage of criticism, and it’s actually been a very strong performer.

And Microsoft, last but not least. If Microsoft is still in that position in 2026, it will be the 11th year.

Now the detractors. Novo Nordisk, which has moved from a triumph to a tragedy, I think, in terms of the company. We bought it in 2016. We thought it was different to other drug companies in terms of the drug discovery process. We proved to be right — they came out with the first weight loss drug, actually released initially as a diabetic drug, a drug that’s got any number of other indications, some of them now labelled for conditions which it helps. And they managed to snatch defeat from the jaws of victory in the core US market by playing it very badly against their competition, Eli Lilly, and their other competition in terms of people who compound the drugs, often illegally.

I think it’s important to learn things from mistakes. Making mistakes is something we absolutely all do — the main question is what are you going to do about it. In this particular case, if you went back to the beginning of Fundsmith, any of the meetings that you attended, people often asked us, “Why don’t you own drug companies? You ought to own drug companies.” We always said we won’t own a drug company. We really don’t like the uncertainty of the drug discovery process. We don’t like the fact that unlike branded goods, if somebody comes up with a more efficacious product, you’re dead. You’re relying upon legal protections. The legal protections are often quite faulty. You’re not relying upon moats — competitive moats designed as a result of branding, marketing, distribution — you’re relying upon legal protection, and it doesn’t work. So I think the thing we’ve learned is we were right first off: don’t own drug companies. That’s what we’ve learned from that one.

Automatic Data Processing, the world leader in payroll and HR processing through software. Obviously suffering a bit from what people have now called the “SaaS apocalypse” — people thinking that all the traditional software providers are going to be wrecked by AI. Maybe they are. I think one of the things that protects companies like this very probably is the fact that they have an awful lot of our data which they use. I have been a user of ADP products in companies that I’ve run over time. Also, what they’re providing is non-trivial — it’s pretty mission-critical and incredibly complex. If you take the United States of America, they’re dealing with 50 different states in terms of employment legislation and taxation. That’s non-trivial.

Church & Dwight. This is a bit of a surprise entrant for us here. It’s a consumer goods company — the one where the chief executive said, “If you believe me and buy my stock, it’s your problem.” It makes brands which are secondary brands, discount brands — like Arm & Hammer toothpaste, OxiClean detergent, which you probably never heard of. Typically a company where you benefit from economically difficult circumstances as people trade down into the products. Guess what? They’re not.

You’ve probably heard the expression “the K-shaped economy.” People at the top of the K are doing very well and they don’t buy Church & Dwight products. And people at the bottom of the K are doing very badly and they’re trading down to own-label, or nothing at all in some cases. It’s actually illustrating what’s going on with the bottom of the K in the economy. We’re not selling it. It will come right. I think this is a company which is very well set up to handle the fact that people at the top of the K will probably be trading down at some point. But we will wait for that.

And there must be something in the water in Denmark — I apologize to anyone who’s Danish in the audience. Coloplast, which is also one of our detractors, is a Danish medical company. It makes catheters, tubes that go into the human body. Then it made a couple of acquisitions — one that provides devices for the aftermath of throat surgery, throat cancer in particular, and wound care. They acquired a company that uses cod skin, believe it or not, for advanced wound care, and that’s not a joke. They really do use it for a variety of reasons, not least that there’s never been a case of any transmission of any infection between a cold-water fish and a human being, so you don’t have to irradiate it before you use it. Very clever.

Nothing wrong with the two acquisitions. They forgot to apply for US approval for one of the products, which is pretty silly, but that was it. What it does mean is they took their eye off the ball and the operating performance has become poor in the original business to a degree. They’ve fired the chief executive, as has Novo Nordisk. We’re awaiting the new chief executive before we decide what we think about that.

And last but not least, Fortinet, maker of cybersecurity devices, routers which secure your network. They’re in a two-way fight with a company called Palo Alto Networks in this area, roughly. They had a wonderful pandemic — a lot of us worked from home, we needed a router so we wouldn’t compromise the security of our network. They sold twice as much as they normally do. After the pandemic, they came down from that high. The share price came down even more and we bought our stake. It’s done very well for us overall, but last year a bit of a negative. I think what’s driving that is the view that there could be some form of software replacement for the router. For what it’s worth, from people in the industry I talk to, having a separate physical device with its own software is an integral part of network security and is likely to remain so. So we’re still there.

What’s Going On?

If you read our annual letter, you’ll have seen some of these slides. We’ve got a strategy of investing in quality growth companies, which performed very well for 10 years and then has performed increasingly badly for the last four or five years. What’s going on? Is it just that we’ve got it wrong? Is it that the strategy no longer works at all? It clearly hasn’t worked during this period — that’s not even a matter of debate.

I think what’s going on is a couple of things. The gray bars show the proportion of the S&P 500 in the market capitalisation of the top 10 companies. You see they’re 25% there and they’re 34% by the time we get over there. And then, rather more importantly, the percentage of the index performance they provide — you can see they’re starting to provide two-thirds of the performance of the index. So it’s very concentrated. If you don’t own some or all of those companies, you’re going to struggle in terms of performance.

You can look back over a hundred years and see when it was last like that — about 1929. What happened next? Yeah. Okay.

The Rise of Index Funds

This is one of the things driving it: the switch into index funds. Increasingly, money has been placed in index funds. They’re called passive funds, but they’re not really passive. Whether we’re talking about an index fund — an open-ended fund or an ETF to track an index — they’re outperforming people like us, and therefore the money is flowing from people like us into the index.

If you go back to roundabout the dotcom era, you can see that the proportion of money in index funds was around 10%. In 2023, it went over 50%, and it’s still going up. It is a momentum strategy. It’s not a passive strategy. There may not be a fund manager making choices for you, but it’s not a passive strategy.

When you go out of here tonight and decide that I’ve got this completely wrong, and you sell your Fundsmith units and put it in the index, it will definitely give momentum to Nvidia. Why? We don’t own any Nvidia. So we won’t be selling any Nvidia to fund the redemption, and you will definitely be buying more of Nvidia than any other company in the index when you do that.

This is a momentum strategy. Momentum strategies can be very legitimate. Julian and I worked over the years with some very good analysts who analysed things for momentum strategies and did very well with them. It’s a perfectly legitimate methodology. But if you’re going to engage in it, do not become confused about what you’re doing. That’s my advice.

If you’re going to run a momentum strategy, buy things because they’re going up, and when they’re not going up, sell them. That’s it. Don’t buy things because they’re going up and then decide that you understand the market for GPU processors and so you’re going to hold on to it even though it goes down. No, that’s not a momentum strategy.

The best people we’ve worked with on momentum strategies were sometimes so good at it that they almost seemed to be in league with the devil in predicting where prices were going to go. But their methodology was very particular. You could show them a chart of a price movement — a company, a commodity, a currency — and you needed to show them the volume figures. They always needed to see the volume for the movements because that told them how important the movement was. And they were very good. If you ever told them what the chart was, they weren’t so very good.

And that’s what you’re basically engaging in with passive funds — a momentum strategy.

The Inelastic Markets Hypothesis

There’s a paper called “The Origins of Financial Fluctuations: The Inelastic Markets Hypothesis,” which I’d imagine not a lot of people here have read. It’s quite interesting. I think it’s been largely overlooked.

The original thesis of perfect markets is that if you take a dollar or a billion dollars out of one company’s stock and put it in another, it doesn’t make any difference to the valuation. If I go and sell Microsoft this evening and put it all into PepsiCo tomorrow, it doesn’t affect the valuation of either Microsoft or PepsiCo. Unaffected.

However, these people have looked at the data and discovered that the actual market impact for a dollar going from one security to another in recent years has been a multiplier of somewhere between three and eight times. So when you took your money out of us and the dollar went into Nvidia, the effect on the Nvidia price was somewhere between $3 and $8, on average $5.

That’s a startling number. The reason for it is the inelastic market — because when you take the dollar out of our fund and put it in the passive fund, it works providing there are people in a position to take the opposite view. If you think something is vastly overvalued by being driven by the momentum of index funds, it can be brought down to earth by people running active funds who will sell it or even short it in the case of hedge funds.

What they’re pointing out is there are increasingly fewer of those people because of the rise of index funds. There are increasingly fewer active funds to do that. And even within those active funds, there are an awful lot of people who’ve become closet index trackers — running an active fund but staying pretty close to the index for survival reasons. And frankly, I can’t blame them where I am at the moment.

It feels quite an interesting thing to do from time to time to say, “Well, the hell with it, why don’t we just buy what’s in the index?” Because that’s almost the point: when people talk about our performance and the rise of the Magnificent 7 and then AI and index funds, our negative differential in performance has not come about because we couldn’t work out what to do.

From somewhere around two and a half years ago, it was blindingly obvious that that bunch of companies were going to go up, and if you wanted to be anywhere near the index, you needed to own them. You may not like this very much, but we have quite deliberately stuck to what we said we’re going to do. And it’s been costly, and it may continue to be costly, but we’re not proposing to change it.

We’re not not owning those companies because we couldn’t quite figure out that they might go up. We’re not owning those companies because we think there are actual problems and dangers in owning them, which in the long term we think will come into play. And we want to still be here running this money in the way that we said we would at the end of it coming into play.

By way of illustration, the effect of this market inelasticity — these are some price movements from the last quarter of last year and first couple of months of this year. The size of movements is extraordinary. These are movements in a day: Magnum Ice Cream spun out from Unilever, down 16% in a day. We own Novo, down 70% — it’s done that twice. We own IDEXX, up 15%. EssilorLuxottica, the eyeglass company, up 13%. These are big movements in a day for pretty big companies — a €145 billion company, a $215 billion company.

How about this one? Oracle goes up 36% in a day and becomes worth $933 billion — nearly a trillion-dollar company in a single day. When Julian and I were first working together in broking, a company that moved 20% in a year in share price terms was the subject of considerable interest. Now we’re talking about exceeding that in a day in trillion-dollar companies.

Something’s not right. And what’s not right goes back to that paper. There isn’t an elastic market out there. When Oracle announced that they had $400 billion of commitments to purchase hyperscale data centre capacity over the coming years — by the way, from a company that hasn’t got any money, OpenAI — the share price went up 36% because there were just not enough people with the assets and the mandate on the other side to take the opposite bet and sell the shares. That’s what it’s telling you, and it’s not very healthy, in my view.

I suspect the flows into ETFs in particular are not just driving the index fund performance in terms of the large companies that we don’t own in some cases. It’s driving other things as well. Look at the Bitcoin price — the SEC agreed you could own Bitcoin in an ETF, and there’s the Bitcoin price. I suspect the ease with which people can own things makes a considerable difference to whether or not they will do so, particularly when they get fear of missing out because they read about it going up.

The cautionary tale, bearing in mind our strategy and how it differs from what the index is doing, is that this works exactly the same in the opposite direction. The Bitcoin price has roughly halved once it started to turn. Momentum, remember — I’ve said it’s a legitimate strategy, but try to remember that you don’t have a fundamental view. When it starts going down, you sell it.

It’s probably also partly behind gold as well. The gold price and the ETF flows — which way around it is, is difficult to determine. But it is an interestingly highly correlated chart.

Enough of performance. That’s what I wanted you to know about what we’ve done, where it came from, where we made mistakes — which we did — what’s happening in the wider world out there and how we view it. And how we view it is: with adjustment, we’re going to stick to what we do.

Investment Strategy

We talk about this just for a few minutes, if you would indulge me, because I think you should know whether we’re doing what we said we’re going to do. Three steps: only invest in good companies, try not to overpay, try and do nothing.

Only Invest in Good Companies

There’s the look-through table. These are the companies in our portfolio over the years with five performance metrics to tell you how they’re performing.

Return on capital employed last year was 31%, down very slightly but not very much, and very significantly higher than the 17% on the index. Good. Our companies are making 31p or cents for every dollar or pound of their capital.

Gross margin — the difference between cost of sales and revenues — our companies have 62%, again down very slightly, versus 43% on the index. Our companies make stuff for four and sell it for 10. People in the index make stuff for about 5.50 and sell it for 10. That’s what it’s telling you in English.

Take out the other costs and you get to operating margins: 28%, down slightly last year. Beginning to get a theme here — nothing to write home about, but a bit on the weak side. Not just for us — this is not particular to this group of companies. Maybe a little bit of a trend for corporations as a whole.

Cash conversion. We always used to have sort of high 90s, and we had a bit of a downturn caused by the pandemic. When the supply chain started to seize up, people bought stuff when they could get their hands on it — they weren’t worried about the size of their stocks, they were worried about whether they could get the components and ingredients. We thought that would recover, and they started to recover, and then we had a little bit of a downturn with the starting of the amazing capex spending by the large technology companies.

It has recovered notwithstanding the fact that those large technology companies are still very big spenders, partly because we’ve cut our exposure to them over that period. Again, we’re a bit better than the index, which is where we like to be.

Interest cover: 29 times. So the profits of these companies cover 29 times their annual interest. They are incredibly conservatively financed. They’re going to see us through whatever kind of crisis we next have — therefore there will be one. And they’re much better financed than the market, which is on eight or nine times interest cover.

Don’t Overpay

How about their valuation? We use free cash flow yield — the cash the company generates divided by its market value to give you a yield, like you get on a bond. Last year we closed with a free cash flow yield of about 3.7%. The starting number, which is what I’d have presented to you when I stood up last year, was 3.1%. So the valuation improved, the yield went up, they got a lot cheaper. Not all that surprising when you consider they didn’t perform very much.

What’s really interesting is this: they’re now a lot cheaper than the S&P 500. I’m not worried about the FTSE — there are only a handful of companies in the FTSE that would qualify for our fund. But they are now cheaper than the S&P 500.

Before I move on — the free cash flow grew 16% last year. That’s a hell of a growth rate for these companies. I think it’s rather exceptional because they were recovering from the squeeze on cash flows I was talking about earlier. But nonetheless, that’s a pretty interesting clip for these things.

If you look at the history: I’ve stood up here in front of you for 15 years and have said we own a bunch of very good companies, they are more expensive than the S&P 500, but they are justified by the quality which they bring in terms of returns on capital, profit margins, and cash generation.

I can now tell you we own a bunch of companies which are better than the S&P 500 and significantly cheaper. That’s the first time I’ve been able to say that to you. Basically the nearest I would have got would have been at the first annual general meeting. Other than that, nope. We’ve been sitting here with our valuation below the S&P. We’re now above it. Doesn’t mean they’re cheap, but it does mean they’re relatively cheap. And that may be quite interesting a bit later on when things develop.

Do Nothing

We try to do nothing. It never works — there’s always something to do — but we don’t do a lot.

We sold two stocks last year. We sold PepsiCo and Brown-Forman. PepsiCo, drinks and snacks — we’d had several years of worrying about lack of free cash flow growth at the company. Then on top of that we have the whole weight loss drug phenomenon. Novo Nordisk may not actually be a great success, but I assure you the weight loss phenomenon is here to stay. And snacks are actually in the crosshairs of that — one of the products that’s absolutely in the crosshairs of it.

Brown-Forman — you might recall we sold Diageo the year before. We hung on to our Brown-Forman partly because we wanted to make sure that the effects we were seeing were genuinely the case with regard to weight loss drugs and alcoholic drinks. As time went on, we became more convinced that there are several factors impacting the drinks companies negatively: not just weight loss drugs, but also Generation Z drinking habits (or lack of drinking habits), the legalisation of marijuana, and — I’m shocked by this — the number of people in my generation who’ve stopped drinking. Shocking sobriety has called on.

We hoped that Brown-Forman’s family ownership would lead them to perhaps find a course through all this that a company subject to quarterly earnings influences wouldn’t be able to. But it’s not. For us to own a drinks company again, we need somebody to come along and say, “We accept that there’s a problem with Generation Z, weight loss drugs, and marijuana, and what we’re going to do is this.” We haven’t heard that from anyone yet, and that’s what we need to hear.

What did we buy? We bought back into Intuit, accounting and tax software. You might recall we sold it a few years ago when they made an incredibly bad acquisition of a marketing company called Mailchimp, where we thought they paid three times the right price and that it wasn’t in their area of expertise. The shares — this is a moral tale of our time — went up initially because they were going to be an “AI beneficiary.” They’ve now cratered and we’ve started buying them. The acquisition is sufficiently bad that they’ve now started reporting numbers ex-Mailchimp. That’s how bad it is. We’d like to believe they’ve learned their lesson.

We started buying Zoetis, the biggest veterinary pharmaceutical company in the world. Quite an interesting complement to IDEXX. We like this area. The company has struggled a bit with side effects of a drug. We asked our veterinary consultant — who’s here tonight, and also happens to be my daughter — what she thought about it. She said she knew about the side effects and would prescribe it. So we bought it.

EssilorLuxottica, we started buying. We’ve followed it since inception. World’s biggest maker of eyeglasses — frames and lenses. A consolidator within that industry. An industry with a secular tailwind in terms of people who don’t have vision correction in the world who need it and will get it eventually, and people in the developed world who continue to trade up in terms of designer frames or multiple pairs of glasses. And of course they’ve got a hit at the moment with the smart glasses partnered with Meta.

It’s a great leap forward in terms of product, because up to now the glasses were the ones provided by Google, which made you look as though you’re at the dentist having a wisdom tooth extracted and cost $1,000. These ones are a pair of Ray-Bans and cost $300. I think there’s a chance they are part of the development of a new product that we haven’t seen since the smartphone, really, in terms of how we will get and interact with computers.

Yes, there will be competition. Apple has announced that they’re going to do some smart glasses. I’m amazed by the commentary in the stock market continually, which is, “So you thought there’d just be one company doing this, did you?” No, of course there’ll be competition over time.

We just started buying Wolters Kluwer. It’s a Dutch company which has a database of publications — medical papers, legal materials — which are used for things like precedents for legal cases and contracts, developing surgical procedures and drugs. They are one of the companies slated as being wiped out by AI. I think it’s unlikely.

My current joke comparison: we’ve got this company here with all of this peer-reviewed, genuine research on medical, legal, and other matters sitting there — versus the former chief constable of the West Midlands who decided that he would ban an Israeli club coming to play in Birmingham because of violence at a West Ham match with an Israeli team, which he got from AI, and of course it was hallucinating. There’d never even been a game. So I don’t think I really want people to research medical procedures they use on me by that method. I’d like them to go and have a look at a paper written by some actual doctors.

Last but not least, Magnum Ice Cream. This was spun out from Unilever. It’s pretty good business, actually. I think it just didn’t fit very well within Unilever. I see Nestlé are contemplating something pretty similar. The supply chain for ice cream is completely different to the remainder of the food business. We’re hanging on to it for the moment. I think it may have some mileage in terms of self-help to improve its performance over the years.

All of that activity didn’t cost an awful lot. There was slightly higher turnover than usual — 12.7% is the highest in these periods, but that’s still very low by industry standards. The actual cost was £1.7 million, so 0.009%. A slightly bigger turnover — I think that’s a reflection of the times, and it may continue to be — but it didn’t cost us a lot of money.

Q&A With Terry Smith and Julian Robins

Question 1: Why Aren’t the Magnificent 7 All Good Companies?

Colin Simpson asks: Terry says in his letter that the seven major tech companies are not all good companies of the sort we seek to invest in. Can you explain the thinking behind this view?

Julian Robins: Evening, all. I should add that for those of you whose questions have not been answered, they will be answered by human as opposed to AI — even though the human might use AI.

What we are looking for from our companies is decent returns, predictable returns, and growth. We’ve got two slides on this. If you go to the last two columns, you’ve got the average return on capital and the standard deviation, which is basically a measure of volatility.

With Alphabet, you’ve got 22% return on capital employed, which is a decent number — a little bit below our average. The standard deviation is 6%, so these are predictable returns.

Amazon — you’ve got 11% returns, which are low. The fact that the standard deviation is 5% unfortunately means they’re predictably low.

Apple — returns are good, and I wouldn’t worry too much about that 14% standard deviation because they’re somewhat volatile around a very high number.

Meta — returns are good and they’re quite predictable.

Microsoft — very good and quite predictable.

Nvidia is obviously interesting because over what’s admittedly a long period of time, we’ve gone as low as minus 4%. We’ve been at 13% as recently as 2016, 12% as recently as 2023, and we’re currently at 126%. So the average looks great, but these are obviously not particularly predictable.

And Tesla — the returns are either negative or extremely low, with the exception of one year. The average is negative and they’re extremely unpredictable.

Just to say one thing on the investable universe — there is a fractional element at the moment where, if we did not have Nvidia in the investable universe and people asked us about it, and we just said “it’s not in our investable universe so we can’t really comment,” I think that would come across as slightly lame. The other thing is there could be a moment — as there was in 2002 with some of the companies that fell sharply after the dotcom bubble burst — where some of these companies look interesting, or whether they get cheap enough that we don’t need to be able to forecast them out decades. So that’s another reason we cover them.

If we move to the next slide — this is basically the companies’ free cash flow going back to 2010. If you go back to 2015, so 10 years, you can say that Alphabet’s free cash flow has gone up four or fivefold alongside decent and predictable returns. Amazon — those numbers are all over the place. You might recall we did have a brief dalliance with Amazon in 2021 and 2022, because we correctly thought that the 2023 number of $32 billion was actually quite interesting and was on its way to something quite attractive. Unfortunately, AI then got in the way.

Apple is interesting because it’s a very big number — $98 billion in 2025 — but it was actually $70 billion 10 years ago. Meta during that period has gone from $6 billion to $46 billion, and in the intervening period was $54 billion. Microsoft has trebled from $23 billion to $71 billion. Nvidia has gone up 600-fold. And Tesla is now positive, but it’s a pretty small number.

When I go back to what I said before — decent returns, predictable returns, and a measure of growth — we think we’ve got those in five of those companies. We own three. We’ve included Nvidia as well because of the reasons I said. And we do not have Tesla in our investable universe.

Terry Smith: I agree with him.

Question 2: The Attention Economy — Fundamental Shift or Classic Bubble?

Christian Croen asks: Is the attention economy a fundamental shift in how we define value, prioritising liquidity and reach over cash flow, or is it just a modern justification for a classic bubble?

Terry Smith: We both lived through the dotcom bubble and were running a broking business at that time, in which we were using a fundamental valuation tool called Quest, owned by Canaccord. The head of Quest, Jimmy Cotton, is here today.

It’s got a lot of similarity to the way that we look at companies. Unsurprisingly, we were incredibly skeptical during the dotcom boom.

These are some quotes from that period. “Traditional valuation metrics like P/E ratios don’t apply to internet companies. It’s about market share and future potential.” That was expressed by serial analysts over the period.

Mr. Gilder, the author and tech prophet: “The internet is not just a new technology. It’s a new world. The old metrics of valuation are as obsolete as the horse and buggy.”

And Mary Meeker, Morgan Stanley’s “Queen of the Net,” in 1999: “We are in a new era. The old rules of valuation are gone.”

Well, maybe. I don’t think we’ve entered an era where the rules of valuation in terms of returns on capital and growth are not going to be applied anymore. At the moment, they’ve just been suspended because people are increasingly uncertain about the outcome of AI investment.

Julian Robins: One of the interesting things is that the four most people wouldn’t doubt as beneficiaries of the attention economy are Google in search, Amazon in e-commerce, Facebook/Meta in social media, and Apple in providing the device that enabled you to interface with the internet all the time as opposed to just when you’re at your desk.

If you think about when those companies came in — Facebook wasn’t even invented during the dotcom bubble, came into being in 2004, and was still pretty small 10 years later. Amazon was going then but was mainly, as I recall it, still a bookseller, competing with Barnes & Noble. Google was started in 1998, was absolutely tiny at the time of the dotcom bubble, didn’t go public until a few years after that. And the iPhone didn’t come in until 2007.

So one of the lessons of all of this is that the people who actually benefited from what the dot bubble produced — i.e., the internet — were actually very unclear at the time that this was all going on.

Terry Smith: Even if this is a fundamental change in the way that we work and assimilate and process information, taking that precedent, it seems to me unlikely that we know who the winners are right now.

Question 3: Is AI the Largest Speculative Craze in History?

Graham Heddle and Harmeet Chadha ask: With $500 billion sunk into AI and profitability still theoretical, is this the largest speculative craze in history? Specifically, at what point does the declining ROCE and margin pressure from this AI arms race disqualify even the tech giants from your high-return investable universe?

Terry Smith: There have been lots of these episodes in economic history where there have been major developments. Canals, railways. I particularly like the communications one — the telegraph: put some wires up alongside a railway and use Morse code to communicate. The telephone, connect a telephone to the wire so you could speak. Radio, so you could speak without wires or broadcast. Of course, TV and the internet. Airplanes. And now AI.

Speculative bubbles existed around all of these things, basically all of them. The radio boom of the 1920s was dominated by a company called RCA, Radio Corporation of America, which notwithstanding the universal take-up of radio lost 98% of its stock value.

All of these benefited us, changed the way we work, changed the way we live — but they don’t always have benefits for investors, sometimes not at all. Airplanes is the classic. The Wright brothers took to the sky at Kitty Hawk in 1903 with the first powered controlled flight. The great Warren Buffett said the right thing for any investor present to do would have been to shoot them down, because nobody’s ever made any money out of operating airplanes in the meantime.

There’s an awful lot of precedent for these things existing in the past. What we’re living through — we always have this great recency bias and live in the moment. I suspect that history does have quite a lot to tell us.

The actual question was about scale, though. These are the capex numbers that the hyperscalers have declared for 2026. In the case of Microsoft, it’s 87% of their cash flow. Meta, 91%. Alphabet, 97%. Amazon, where Julian already highlighted the rather low free cash flow, it’s more than 100% — so they’re going into debt. Oracle, it’s twice their free cash flow, so they are going significantly into debt. And the winner on the podium is CoreWeave, where the commitments for 2026 are 567% of free cash flows — or as we call it in analytical terms, “a lot.”

One of the things that scares me is that since we’re clearly in an arms race, some of these people have enough money to keep going. That’s one of the problems. They probably will keep going — they won’t walk away because they’re financially constrained. They’ll have to have some demonstrable sign that they can’t get the kind of return on capital from these products that they’re funding.

Is it the largest speculative craze in history? We’ve tried to do some work for you. The top five AI hyperscalers’ combined market value is $11.2 trillion. The top five semiconductor businesses are $8.8 trillion. So call that about $20 trillion between them. The dotcom bubble — the NASDAQ at its peak was $12 trillion total capitalisation. That’s interesting.

We’ve done some work with inflation statistics, which are totally imperfect, to estimate that the Dutch East India Company had a valuation of $8 trillion — having the major advantage of running India, or most of it, at the time. The Mississippi Scheme was $6.5 trillion, and the South Sea Bubble was $4.3 trillion.

The short answer to the first part of the question would seem to be yes. It is the biggest.

Here’s some other evidence: statistics back to 1964 looking at how the largest 50 stocks have compared with the Russell Midcap index. You can see the dotcom peak, and here’s where we are now.

An awful lot of what people say is, “You’ve got to be wrong, because all these companies are doing this, and Satya Nadella is a very clever guy, and Larry Ellison and Mark Zuckerberg.” Yes, they are. But they’re rather like us — they’re not exempt from making mistakes.

This is Larry Ellison talking about cloud computing. When the cloud began, he said: “What is it? It’s complete gibberish. It’s insane. When is this idiocy going to stop?” As a result, he completely missed out on the cloud. He’s now number four in a two-and-a-half horse race, the others being Amazon, Microsoft, and Google. I think as smart as he is, that’s affected how he’s approached AI — that’s why the earlier slide shows him spending 200% of his cash flow on this. He’s not missing the cloud twice.

But before we think that’s good — he doesn’t always get things right. In 2022, they announced the acquisition for $28.3 billion of a company called Cerner. Cerner was a transformational system to reduce the administrative burden on doctors and nurses by using AI to analyse patient data and eliminate data fragmentation. We’ve not heard anything since. I’ll leave it to you to decide whether we’ve not heard anything because it’s such a wild success that he’s embarrassed, or because it hasn’t actually worked. I know which way I’m betting.

Julian Robins: When I was looking at some facts for this — if you’d seen the Wright brothers, I think it was their fourth attempt during the day, and it flew for 852 feet. If somebody had said to you, “It’s going to change the world,” and you said, “Well, it can only fly for 852 feet for 12 seconds and can only carry one person” — obviously 100 years later you’d have looked pretty stupid.

But I’ve heard the phrase that’s already come in about people being “AI deniers.” We’re not AI deniers. We’re just trying to say—

Terry Smith: I want you to make money out of it.

Julian Robins: How the hell do you make money out of it? Or not only how do we make money out of it, but who are the people who will make money over the long run?

Terry Smith: And we haven’t got a clue. And in aerospace, it wasn’t anyone called Wright.

Question 4: How Do You Handle Redemptions?

David Cox asks: When people withdraw money from the fund, how do you decide what companies to sell?

Terry Smith: It depends, really. Sometimes the decision is kind of made for us over time. We’re subject to concentration rules, which are hardwired into the OEIC regulations — we can’t have more than 10% of the fund in one company, and we can’t have more than 40% of the fund in companies which are over 5%.

As things move about, we do get close to those rules being breached. We don’t breach them, but we get close. So quite often what we’re selling is something to prevent a breach in those rules, and that provides liquidity for redemption. If we’ve got something about to go over 5% and join the other companies and breach the 40% limit, we might sell that — or we might have one that’s about to go over 5% that we don’t want to sell, so we’ll sell something bigger and take it down. I did some today, in fact — I’m selling on this basis.

Outside of that, we think about things along the lines of valuation, fairly obviously. If something’s sitting on 40 to 50 times earnings and we’ve got other things on sub-20, it doesn’t automatically mean the higher valuation one is the one to sell — because sometimes low valuations are a trap rather than an indicator — but it certainly starts us thinking about which way we go.

Sometimes it’s about coming out of sectors because we just think they haven’t got as good prospects as the remainder, like the drinks companies.

Question 5: Why Was Microsoft Reduced?

Stephen Hall and Marc Weisberger ask: Microsoft has recently dropped out of the fund’s top 10 holdings. Can you confirm if this position was reduced due to concerns over rising AI capex and its impact on free cash flow? If so, what was the scale of the reduction?

Terry Smith: We roughly halved the holding in Microsoft, Meta, and slightly less so in Alphabet. Yes, we did so because of concerns about what we’re seeing in terms of the spending — $600 billion, I know not exactly the same group of companies, but four companies spending $600 billion per annum going out.

If we’re looking for a 30% return on capital, those companies are going to need to generate $180 billion of new cash flow — not from the things they’ve already got, not by cannibalising what they already have — to justify that in terms of return on capital, per annum. That’s quite a lot, actually.

And at the moment, we’re not really paying for AI mostly. We are users of it, and we are paying, but not to anything like a degree that could possibly justify that. We’re probably unusual in paying, because we’re a business — most consumers are probably not paying at all.

There have been models historically where people have given you things, got you hooked on them, and then later on told you the price is and started to make lots of money. But they’re relatively unusual, and they do usually involve the person who manages to accomplish that achieving a dominant position in the industry.

And at the moment, if you think you can spot somebody who’s going to achieve a dominant position in the AI industry, please let us know who it is and why, because at the moment it looks to us like anybody’s choice in terms of who might be the winners, if any. Will it even be a company in the West? I don’t know.

I don’t see the justification coming from a dominant player or players emerging who are able to charge, able to get that incremental cash flow to build returns that would justify the kind of spend we’re seeing here.

The other way of doing it, which people have done historically, is to get you hooked on something and then not charge you directly but sell you something — advertising, your data, et cetera. Facebook, Google, and so on. But again, in order to accomplish that, you need a dominant position. You can’t do it if there are myriad competitors.

Taking all that into account — yes, we did become quite pessimistic about whether the big tech companies we have owned that have been very successful, like Meta, Microsoft, and Alphabet, can continue to be the kind of companies we want to own. If you look at the businesses they were, we’re talking about companies with very high returns on capital, and they were very capital-light businesses mainly. These are not going to be capital-light businesses. This is going to fundamentally change the characteristics of those companies in a way that we don’t like. So yes, we sold them for that reason.

Ian King: Are any of the leaders of these companies making a good fist of explaining to the market why they’re making these investments?

Terry Smith: I think at the moment they’ve had the luxury of really not having to. We obviously listen to analyst calls and read reports. They’re not being asked, mainly.

Julian Robins: People are not asking them, which I find quite shocking.

Terry Smith: Could you tell us how it gets to make a return?

Julian Robins: Only a year ago Google was seen as a loser from AI because AI was going to replace search. Since then the price has more than doubled. One of the key reasons it’s more than doubled is simply because they’ve announced how much money they’re going to spend.

Terry Smith: Which leads us to want to sell the shares in those.

Julian Robins: Just to give you a few numbers in terms of the way things move. This time last year, we were sitting here with 5.2 million Microsoft shares, and that constituted 7.4% of the portfolio. By August, we’d actually sold over 10% of those, but the stock had gone up 25%, so it was nearly up to 10% of the portfolio. And now we’re actually down to under 2 million. So we’ve had to sell over two-thirds of our holding, but the fund size has gone down by 30% as well. There’s a lot of moving parts.

Question 6: The Psychology of Underperformance

Augusto Ramos asks: Is the most difficult part of underperforming a benchmark the psychological pressure of doing something different to catch up?

Terry Smith: Yes, is a simple answer. The great John Maynard Keynes — and at the moment we’re not succeeding, so it’s not exactly a great quote — said it’s better in career terms to fail conventionally than it is to succeed unconventionally. Because even if you’re successful — you saw during the 10 years when we were doing very well in the lead-up to this — the amount of criticism that we got then for doing something different. And now it’s just easier to criticise because you’re doing something different and it doesn’t work.

But yeah, the psychological pressure is considerable. This is the NASDAQ versus the S&P Value and the S&P Quality sub-indices running up to the dotcom peak — the last two years, 1998-99, into 2000. You can see the quality and value portions of the index here, and there’s the whole NASDAQ. Trust me, during that bit, the psychological pressure is intense.

One of my old clients when I was a broker, who then became a very successful fund manager and then very wisely retired — a guy called Andy Brown who ran a very successful fund called Cedar Rock — used to talk about the mental health aspects of running money. Before I did it myself, I didn’t quite fully understand what he meant.

There are great cautionary jewels — there was a guy who I think was the Morningstar Fund Manager of the Decade in the 1990s called Robert Sanborn, who ran the Oakmark Fund and owned a lot of so-called “old economy” stocks. I remember in February of 2000, he was on the front page of the Wall Street Journal. He said he was getting hate mail, and his children were being bullied at school because of his performance.

But look, that’s what you pay us for, believe it or not. Obviously you might think you pay us for performance, and you do. And we intend to deliver that. So it’s only “so far,” remember — the performance on that chart. But it’s also having some degree of emotional stability to stick to what we think is right.

When you look at what happened next with regard to that chart of the NASDAQ versus quality and value — the previous one ended at the beginning of 2000, in about March. Here’s what happened next: there’s the NASDAQ going down, and there’s quality and value. The problem with these things is, most likely, if we are right here, what we will do is lose money for you more slowly than other people at some point.

But hopefully in a way where you understand what it is we own — that we still own an awful lot of very good things which not only won’t lose their value because there is a real business there with great returns and growth, but also will become increasingly undervalued and bounce and produce the sort of performance that came out of these kinds of stocks post-2003, post-2009. And I think we’ll do again at some point.

But yeah, it’s a tough old place to be. That’s what we get paid for.

Question 7: When Will This Regime Break? How Is the Portfolio Positioned?

Diego Scur and Pat Shroff ask: In your 2026 letter, you warned that index funds are paving the way for a major investment disaster. Beyond patient holding, what specific indicators would signal that this irrational regime is finally breaking? Furthermore, if we see a prolonged exodus from passive funds, how is the portfolio positioned to capitalise on that reversal rather than just weathering the storm?

Terry Smith: I’m not being facetious in this next bit. I really believe that events move like this in life and in markets.

I was head of research at UBS before I managed to famously get myself fired. When I was there, a gentleman who ran UBS Phillips & Drew Fund Management was a guy called Tony Dye. Tony was very vociferous about the fact that he thought the dotcom boom was a sham and that it was going to burst and cause catastrophes. He stuck with the old blue-chip stocks.

When I left UBS, I kept in touch with Tony for quite a long time as a client. He used to have lunch with me from time to time because we were kind of like-minded souls, and he’d say, “Terry, do you think I’m mad?” And I said, “No, you’re not mad, Tony, but your timing is quite likely going to be your undoing.”

On the 1st of March 2000 — reported on the 2nd — Tony Dye was fired. “UBS Asset Management confirmed departure of Tony Dye’s chief investment officer of its UK fund manager Phillips & Drew, and signalled the retirement of Gary Brinson, chairman of UBS’s US counterpart Brinson Partners.”

And that date is the same day marked on the NASDAQ chart. There you go.

It’s not a coincidence. People who study the psychology of investment will tell you that you can’t have the end to certain types of market until the last hope has given up. And that was it.

I presume after that, the entire UBS funds were switched into something which tracked the NASDAQ index, bought those things, and — oh dear, there we are.

Which brings me on to more of this subject. “When to fire a manager” — this is quite topical for us. This is data from Cambridge Associates looking at when to fire managers. If you look at managers’ performance for three years before the change — the ones who were hired outperformed 4.8%. In the last year before the change, 7.2% for the stars, minus 3.7% for the ones you fired. “You’re fired, you’re hired.”

And now the guys who were doing 7.2% underperform, and the ones who were underperforming outperform — and so it is on one year and on three years. The time to fire us, were you going to do so, was about 2021.

You might say, “Terry, why didn’t you tell us that?” A couple of reasons. One is, it’s not my job, actually. That’s either your investment adviser’s job or your job. I run a fund and I’ve told you what it does and it will continue doing it — it’s up to you to decide that.

And you may have noticed this data was from 2003 — so it’s a bit out of date. Let’s get more up to date. Here’s data from Research Affiliates using Morningstar data — funds sorted by quintiles based on past three-year returns. The losers managed that kind of performance, and the winners in the best quintile managed that kind of performance. And here’s what they were like in relative performance after. The time to fire a fund manager is when he’s doing very well. Anyway, that’s my pitch.

Julian Robins: The second part of the question — how is the portfolio positioned to capitalise on a reversal?

The answer is threefold. First, if you think back to the dotcom bubble, Amazon crashed and presented a great opportunity in 2002, 2003, 2004. That is one thing we would look to do.

Second, we’ve had a slight live-firing exercise here — because this wasn’t an exodus from passive funds, but in 2020 during COVID, we happened to own the two biggest cleaning stocks in the world: Reckitt, which owns Lysol, and Clorox. We were able to sell those after they’d done rather well and move into several stocks, notably Nike and LVMH, which at least for the first few years did extremely well. So we’ve got course and distance in terms of doing that sort of stuff.

And the third thing is the reason why we maintain an investable universe — to have a roster of stocks that we are at any moment in time wanting to own if we could only own them at the right price. In the event of a big fallout in terms of an exodus from passive funds, the babies probably get thrown out with the bathwater, and so it’s possible or quite likely that those would come into range.

Question 8: Dollar Exposure and De-Dollarisation

Howard Rosen asks: With the dollar falling, likely to continue, does it make so much sense to be so overweight dollar equities? Brendan Andrews asks: Is de-dollarisation occurring? And if so, how would it impact the fund?

Terry Smith: I think the two questioners are talking about two somewhat different concepts which are often conflated. The fall in the value of the dollar has occurred and is not entirely surprising. We’ve thought from the outset that the Trump administration’s policies of trying to correct the trade balance and get interest rates down were antithetical to a strong dollar. So that’s not a shock, but that’s not the same as de-dollarisation. They’re two different things.

The de-dollarisation bit is people moving to use other currencies. People talk all kinds of things — the renminbi, the euro, stablecoins, other forms of digital currency. I think it’s a little unlikely. I understand the impetus for de-dollarisation. I imagine that the Russians would very much like to be able to sell their oil for another currency that they could convert. But you can’t.

It’s really quite difficult because America is an enormously big economy and the alternatives are not great. The second biggest economy in the world is China. The renminbi is not a convertible currency. If you want to own renminbi, there is only one way to do so — you have to open an account at the Bank of China. Good luck.

There’s an impetus to it caused by the tensions with China and Russia, but the likelihood that there’s anything out there capable of taking over to that degree is not very likely.

But the value of the dollar is a somewhat different concept. We may or may not be getting de-dollarisation — I think probably we’re not — but what we have had is a fall in the value of the dollar that may continue. If you look at the chart since 2008, the recent move is not that big compared to other moves we’ve had in either direction. The trend, notwithstanding the rather large moves, would seem to me to be clear, and it’s not the dollar going down.

Part of the problem though is this: 69.9% of our companies by weighting are listed in the United States, because it’s the world’s biggest capital market. But it’s only 47% of their revenue — it’s a lot less.

But if the questioner says, “Shouldn’t you be diversifying?” — it’s not as easy as you think. The US economy is larger than the combined economies of Brazil, Canada, Russia, Italy, France, the UK, Japan, and India. Unsurprisingly, you’re going to find companies with an awful lot of revenues in that bit, even if they’re listed elsewhere.

Unilever is a UK-headquartered, UK-listed company. Its two biggest markets are India and America. You might want to own Sage rather than Intuit to diversify from America — 45% of Sage’s revenues are in America.

Julian Robins: If we had the market cap of Nvidia in that pie chart, it would actually be the second biggest piece of the pie — bigger than India and Japan.

We tend to have a bias towards investing in certain types of company because they tend to produce the characteristics we look for. Technology is 36% of the S&P 500. It’s only 10.9% of the stocks in Europe, and I’m actually surprised it’s that big. In terms of payment processors — in the US we have Visa and Mastercard and even companies like PayPal. In Europe, you have Adyen.

In medical equipment, we’ve got $200 billion-plus of market cap in big global leaders in the US. In Europe, you’ve got very fragmented, much smaller firms. Eight of the top 10 medtech companies are basically US.

If you want to be invested in certain areas — consumer technology, medical equipment and devices, certain aspects of industrials — it’s difficult not to invest in America. You can see the problems in terms of the currency, but it doesn’t mean it’s easy to find a way to deviate from investing in the United States given the size of the economy and the type of companies it’s developed.

Terry Smith: If you went back 20, 30, 40, 50 years and wanted to invest in a different type of business — a bank in the 1980s, probably the place to be was the UK or Europe. Insurance companies, it’s different. Chemical companies, it’s different. But in terms of the sectors that we tend to prefer to invest in, we find most of what we need in the US. And we don’t prefer them just because it’s caprice — we prefer those sectors because historically they’ve produced some of the very best returns out there.

Ian King: Just to go back to the de-dollarisation issue — you made the case why the renminbi is not going to displace the dollar as the global reserve currency anytime soon. A lot of people would say, “What about the euro?” The eurozone’s a big, rich bloc with a similar number of people to the United States.

Terry Smith: I would doubt the euro, personally. There isn’t actually the same structure in terms of support for either the bank or the bond market. Bear in mind, it is the Federal Reserve Bank, and it has the power. What makes the dollar so powerful? An enormous economy, a great tax base, and — let’s not beat about the bush — an enormous nuclear arsenal with which to defend the whole thing.

None of the above is true about Europe. The European Central Bank does not have any ability to rely upon government taxing the individual countries in order to support it in its mandate. There’s one currency and one central bank, but it stops there. There isn’t anything else behind it.

Other places have currencies which, because of the fiscal and monetary policies they pursue, probably make them pretty attractive — like Switzerland, Singapore. But they’re just too small. There just isn’t enough capacity for them to become the marker for global trade in oil and coffee and anything else, given the lack of size of the currency concerned.

Question 9: The “Doing Nothing” Concern

Michael Young asks: The “doing nothing” part is my concern. I think a lot could have been improved on in the last few years, as the Fundsmith price indicates. Of course, if and when the crash comes, it might be a pretty solid bet. But until then?

Terry Smith: I think it’s a fair point. We said in the letter this year that we very much like the Charlie Munger mantra. We like a lot of his mantras actually — the late Charlie Munger’s mantra that any period when you don’t tear up one of your long-held beliefs is a wasted period.

The one we singled out in the letter was “only invest in a business that can be run by an idiot, because sooner or later they all are run by an idiot.” What the Novo thing has painfully taught us is that there aren’t very many businesses that can be run by idiots, and they can cause a lot of damage when they do it. So that’s one that’s definitely torn up.

Alongside that — another view, not really a mantra, but one an awful lot of people hold when they’re talking about investment — is engagement. Engagement with companies, in our humble opinion, is a waste of time. We almost never get them to change what they’re going to do, even when it’s disastrous — like when Adobe tried to buy Figma, or when Intuit bought Mailchimp. They just carry on. So actually the only way to handle it is to run away and sell the stock.

But I think he’s right about the “do nothing.” You’ll see that we’ve done more in the last year, and I suspect the times are such that we will continue to do a little more — not to the same degree as other fund managers — because there are things causing change. It’s not just AI, though it’s easy to rely on AI because it is the topic du jour. There are plenty of other things: weight loss drugs, the impact across the food and drink industry, and probably wider than that over time in terms of other aspects of healthcare.

I think the questioner is absolutely right that we will actually do some things which we wouldn’t perhaps have done historically, but we’re not about to become traders. It’s not our expertise, it’s not what the strategy is about. We are trying to do things in advance of the downturn. We’re shifting out of those large technology companies into the EssilorLuxotticas, the Wolters Kluwers, the Zoetises of this world, which we think — as much as it will be painful for everybody the day this all happens, because it always is — they will be the ones which survive and prosper better. So we are working on that.

Julian Robins: Reference the earlier price chart about the volatility of stocks and the movement in a day — that’s just the movement in a day. Think of the movement in the space of… there’s a stock in the US called SanDisk which is a big company, and I think it’s up 20-fold since last August.

When you see movements of this magnitude — Alphabet has doubled in the last year — and we’re pursuing our return of 12-13-14%, and prices go up 5% one year and 20% the next and average out about the sort of number — but we’re now seeing such volatility that sometimes you just have to be more active.

Terry Smith: You have to take more action than you ideally would like to.

Question 10: Most Admired CEO

Peter Harris asks: Of the companies in the current Fundsmith portfolio, which company’s CEO do you admire the most?

Julian Robins: I’m going to name Dr. Udit Batra at Waters. When a new chief executive comes over, there’s generally a fairly well-choreographed series of events. First, the corporate jet is fired up and there’s a world tour where he or she surveys their domain. Next, an army of consultants come in. Then some snappily named “Project Galactica 2040” is invoked and rolled out. And then generally absolutely nothing happens.

Dr. Batra came in to Waters in September 2020. This was a company we had owned under the previous-but-one chief executive, when it had been quite successful, and then throughout the tenure of the immediately previous chief executive, when it had been much less successful.

He was very numbers-based. He didn’t put out any snappy-named plans. He just went to people and said, “Why don’t we try something a little bit different?” The results were extraordinary in an incredibly quick period of time. He’s still there today, it’s one of our top holdings, and we are very optimistic.

They’ve just made a major acquisition of a business from Becton Dickinson in flow cytometry, which fits quite well with what they do, and we trust them to get this one right — one of the things that helps is they’re buying it from Becton Dickinson, a company we once owned and sold, and there’s never been a day I regretted selling it.

Terry Smith: If I were going to put up an alternative, it would be Kevin Lobo, the chief executive of Stryker. Stryker is a leading company in orthopedics, a number of areas of medical equipment — defibrillators, stents, things used to remove clots in arteries — but orthopedics is their big thing. Replacement hips and knees and other bits of your body that wear out and get damaged.

A couple of things about it. They made an acquisition of a surgical robotics company a few years back called Mako. At the time, there was absolutely no way it worked on the numbers, and he basically said, “Trust me.” He was right. It’s become the go-to surgical robotic system for orthopaedic surgery. And if any of you are about to have — I’m not allowed to give medical advice — but I would say ask them if they’ve got a Mako robot if you’re going in for any of this stuff.

What Julian said about Udit Batra at Waters — he didn’t do anything grand. It’s not about great thoughts and strategy plans and consultants. It’s very simple things, like finding out where the equipment is, how long they’ve had it, and “don’t come back and be very proud that they’ve had it for 25 years — sell them a new one.”

And I think what distinguishes Stryker from other companies in the industry — we watched Johnson & Johnson buy a company called Synthes, which did trauma equipment, and turn it into a disaster. In Stryker’s case, I think it’s because they grasp the reality that these things need to be sold. To get your knee or your hip in there and used by the medical practitioner, somebody actually has to turn up and do a proper sales job.

It doesn’t sell itself. Whoever said, “If you build a better mousetrap, the world will beat a path to your door” is an idiot. No, they don’t. You’ve got to actually go and sell them the mousetrap. And Kevin and the Stryker team have shown great form with that.

Question 11: Naming a Child After a Holding

Mark Atkinson asks, on behalf of his grandson: Dear Terry, like you I am a long-term investor. I was born on 9th July 2025 and have been an investor in Fundsmith most of my life. My parents named me Otis, partly in the hope I will go up in the world. Otis is also, at the time of writing, a fund holding. If you were to name a child after one of your holdings, which would it be and why? Kind regards, Otis Sample.

Terry Smith: I suppose if I were going to name a child after a company, it would become “L’Oréal Smith.” It doesn’t really trip off the tongue, does it?

It so happens that I do now have a son. I didn’t name him after one of our portfolio companies. I’m something of a movie buff — I love the movies, and I would say I’ve financed a couple, though “finance” is the wrong phrase. “Given money to people in the movie industry” would be closer to it.

I’m very keen, and I think there’s an awful lot that we can learn from the movies. Julian sends us daily, when something happens in the world, the clip from Casablanca where the gendarme says, “This place is closed! I’m shocked — shocked — to hear there’s been gambling!” and the waiter goes, “Your winnings, sir.” We quote these things to each other all the time.

I wanted him to have the same initials as me, which coincided with the fact that I was able to name him after my favourite movie. So he’s called Thomas Crown Smith, and I hope he’ll forgive me. It does mean I’ve got lots of things like cufflinks with my initials on that I can give him — none of which he’ll want, of course. But never mind, he’s going to get them.

Ian King: Thanks again for the question. That concludes this year’s meeting. If you put in a question and it wasn’t answered, you will be getting a response from Fundsmith. I hope you’ve enjoyed it. Please give your thanks to Terry and Julian for a great presentation.

Terry Smith: Thank you, Ian, for once again guiding us through this, which is much appreciated. And thank you all for coming tonight and for your continued interest and support. Thank you.