>> Good evening, ladies and gentlemen, and welcome to the annual shareholders meeting of the Fundsmith Equity Fund. I'm Ian King, I'm your MC for this evening. Uh lovely to see so many of you here. Thank you for turning up on a on a chilly February evening. Those of you who've been here before will know the ground rules, but I'll just set them out anyway. When Terry sends out his annual letter at the beginning of the year, you were 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, understandably, for around 10 for 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. And I'm I'm reliably informed that a lot of those answers may already be be out and with you. So, you will get an answer even if your question hasn't been raised this evening. Without further ado then, I would like to welcome to the podium your Chief Investment Officer, Terry Smith. Nice to see so many of you, as it always is. Um I'm going to run through the usual stuff that I run through, 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. Uh we've had Ian, we've got me. That's the disclaimer. I won't make the usual joke about the disclaimer. You've all heard my joke on that one by now, I think. So, I'll move straight on to this. What I'm going to talk about now, not in the questions, but now, is performance and the investment strategy. And I'll go straight into it. The word I would use to describe it for the last 12 months is poor. Um and 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. Um we don't really want to do that, do we? Um And the critical point that I've made in relation to the slide is is it's a people say five years of 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 we 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 about the background to that and performance. One of the 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. Um we're just trying to give you an explanation because I think that explanation is provided in order to try and do something that we've tried to do from the very beginning with Fundsmith, which is to give you the information to make an informed decision about what to do about this. That's what we're here for. We're not trying to make excuses, trying to give you some some information. The only other thing I would say about the actual performance of the slide, I mean, obviously, I could point to the long term, but you know I I won't be doing that, is the the key words on the slide, which I would emphasize, are those words there. So far. Because probably uh 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 doing that. We're to carrying on in a manner which we'll describe as we try and deal with the the issues that we're talking about now. First of all, what worked and what didn't last year because this gives you some insight into what's happening, what we did and didn't do right. Our top five performers and our top five detractors. The top five performers, the best performer was Alphabet, Google in old money, as they say. Um 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 that Gemini, their large language model, was a failure. It was disastrous, wasn't working very well. And by the time we got to the end of year, it was all a success. And that's all very good because we own them, and I welcome that. Um but it does make me think how quickly things can change in this particular area of human endeavor, which I don't like very much, actually. Um Idexx, our second best performer. This is our veterinary diagnostic equipment company that we've owned for a very long time. We had a great pandemic as pet adoption soared. It had a come down after the pandemic when pet visits trailed off as some of those pets were given back. And it's now back on a 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. And this has really been a great success for the company, and and we're very pleased that it's actually started to show through in the share price over time. Uh Meta, the old Facebook in old money. This is, you probably know from previous remarks, 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. Um what didn't work? Novo Nordisk, which has moved to a fast from a tragedy, I think, in terms of the company. We bought it 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, uh the Wegovy, actually Ozempic when it was released as a as a diabetic drug. A drug that's got any number of of other indications, some of them labeled now 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. And um I think the thing that we it's important to learn things from mistakes. Uh it's making mistakes is something we absolutely all do. The main question is, what are you going to do about it? And in this particular case, if you went back to the beginning of Fundsmith and any of the meetings that you attended where people often asked us things like, "Why don't you own drug companies? You ought to own drug companies." and so on, 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." Um that you're reliant upon legal protections. The legal protections are often quite faulty in terms of protecting. You're not relying upon moats, competitive moats designed as a result of branding, marketing, distribution, and so on. You're relying upon legal protection. Uh 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. So, 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 got an awful lot of our data, which they use, and I have been a user of ADP products and companies that I've run over time. And also that what they're providing is non-trivial. Uh you know, 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. And that's non-trivial. Church & Dwight, Church & Dwight is a bit of a surprise entrant for us in here. This is a consumer goods company. It's the one that I always quote the joke on for the disclaimer, where the the chief executive said, "If you believe me and buy my stock, it's your problem." This is a consumer goods company. It makes brands which are secondary brands, discount brands, and so on. Things like Arm & Hammer toothpaste, for example, is one of their brands. Oxy detergent, which you probably never heard of, is one of their brands. Typically a company where you benefit from economically difficult circumstances was people trade down into the products. Guess what? They're not. Um and you've probably heard this expression, the K-shaped economy, K-shaped like that. Um this, I think, is an example of the K-shaped economy, which is people at the top of the K are doing very well, and they don't buy its products. And people at the bottom of the of the K are doing very well, and they're trading down to well, I don't know what. Only nothing at all in some cases. It's actually illustrating, I think, what's going on with the bottom of the K in the economy. Um we're not selling it. It will come right. I mean, 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. Uh but we will wait for that. There must be something in the water in in in Denmark, I think, and I apologize to anyone who's Danish in the audience by saying that because Coloplast, which is also one of our detractors, is a Danish medical company. It's a company which makes catheters, tubes that go into the human body. And then it's made a couple of acquisitions. One that provides devices that go into deal with the aftermath of throat surgery, throat cancer in particular, and and wound care. They acquired a company that uses cod skin, would you believe, for wound advanced wound care. And that's not a joke. I mean, they really they really do use it for that for a variety of reasons. Not the least one is there's never been a case of any transmission of any infection between a cold water fish and a human being. And so it's good you don't have to irradiate it before you use it and so on. Very clever. Nothing wrong with the two acquisitions. They forgot to apply for US approval for one of the products, which is which is pretty silly, but that was it. Nothing other than that wrong with the acquisitions. But 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 got a change of chief executive. They fired the chief executive, as you will notice, and 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 again had a wonderful pandemic. A lot of us worked from home. We needed a router so that we wouldn't actually 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 from that high, and we bought our stake. And it's done very well for us, actually, overall. But last year, a bit of a negative. I think what's driving that negative slightly is the view that there could be some form of replacement in terms of software that will replace the the router. For what it's worth, and I just take my leave from people in the industry I talked to is 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. Um You if you read our annual letter, you'll have seen some of these slides, although we've got quite a few more in the questions. What's going on? So we've got a strategy of investing in quality growth companies which performed very well for 10 years and then has performed increasingly bad for the last four or five years. What's going on, folks? Is it just we've got it wrong? Is it that the strategy no longer works at all? I mean, clearly it 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. This is about concentration of performance slide. The gray bars are the proportion of the S&P 500 which is in the market capitalization of the top 10 companies. So the top 10 companies by market value, what proportion of the index are they? You see they're 25% there, and they're 34% by the time we get over there. And then, and this is rather more important, what percentage of the performance of the index they provide. And you can see they're starting to provide 2/3 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, basically, in terms of performance. You can see concentration of performance here. This is actually market value rather than contribution, but you can see here where we've got to the top 10 companies being 35% of the of the market there, you get a long-term perspective. This is the top three stocks over here, and this is the top one stock here. But you can look back over 100 years and see when was it last like that? About there. That's about now. About 1929. That's all. What next? >> >> Yeah. Okay. Um This is one of the things driving it. Which is 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 index fund, which is an open-ended fund, or an ETF, to track an index, and they're outperforming people like us, and therefore the money is flowing from people like us into the index. And when that happens, it has a very big effect. And you can see it here on this slide how it's happening. You know, if you go back back to round about the dot-com here, you can see that the proportion of of money in index funds was round about 10%. I would guess something like that. Now, in 2023, I think that is, it went over 50% and it's still going up. Still going up. And 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 you 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. And momentum strategies can be very legitimate. Julian and I worked over the years with some very good analysts who analyzed things for momentum strategies and did very well with them. I've got to say, it's a perfectly legitimate methodology. But the thing is this. If you're going to engage in it, do not become confused about what you're doing. That's what would be my advice. So if you're going to run a momentum strategy, buy things cuz they're going up. And when they're not going up, sell them. That's it. Don't buy things cuz they're going up and then decide that you understand the market for GPU processors, and so you're going to hold onto it even though it goes down. 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 seem to be in league with the devil in predicting where prices were were going to go and what they owned or didn't own. But their methodology was very particular, and it illustrates that point. You could show them a chart of a price movement of a company, a commodity, currency, and you needed to show them the volume figures. They always needed to see the volume for the movements cuz 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. You are engaging in a momentum strategy with passive funds. This is paper which would imagine not a lot of people here have read called The Origins of Financial Fluctuations, The Inelastic Markets Hypothesis. I wouldn't imagine too many people buy that before a long flight. Um is quite interesting. I think it's been largely overlooked because talking about the switch of funds between us and index funds. And it's not just the percentage that's in index funds, it's the fact that for the percentage to be climbing, there must be money switching from one to the other. That's what's happening. Unsurprisingly, of course. Um The The thesis of markets, if you like, the original sort of elastic markets or perfect markets combined thesis is if you take a dollar or a million dollars or a billion dollars out of one company's stock and you put it in another company's stock, or you take it out of one fund and you put it in another fund, or you take it out of bonds and you put it in equities, or the reverse, whichever whatever you want, it doesn't make any difference to the valuation. You know, 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. It's unaffected. However, these people have looked at the data and discovered that the actual market impact for a single 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. Between those. That's a startling number. And the reason for it is, as I tried to explain in the in the title, the inelastic markets hypothesis. Because the Well, if you take the dollar out of there out of our fund and put it in the passive fund, it doesn't make any difference. Works, providing there are people in a in in a position to take the opposite view. So if you think that something is vastly overvalued, it can, by being driven by the momentum of index funds, that will be brought down to earth by people who are 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 index closet index trackers. They're running an active fund, but they stay pretty damn close to the index for 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 that I I would make about this is when people are talking about our performance and in the last few years and the rise of the Magnificent Seven and then AI and index funds, our differential in performance at the moment, a negative differential, clearly, has not come about because we couldn't work out what to do. Right? From somewhere around two and a bit years ago, it was blindingly obvious that that bunch of companies there were going to go up, and you really, if you wanted to 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. Right? And it's been costly, and it may continue to be costly, but we're not proposing to change it. Yeah? 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 actually problems and dangers in owning them, which in the long term we think will come to play. And we want to still be here running this money in the way that we said we would at the end of of it coming into play. Um you can see, just by way of illustration as well, the effect of this inelastic markets. These are some price movements from the last quarter of last year and first couple of months of this year of a range of companies. And the the size of movements is extraordinary. I mean, we own some of these companies, but not all. Magma ice cream spun out from Unilever down 16% in a day. These are movements in a day. Okay. We own Novo down 70%. It's done that twice, two times. We own IDEX up 50%. You know, we own Essilor Luxottica, the eyeglass company, up 13%. These are big movements in a day for for what are pretty big companies actually, you know, 145 billion euro company, you know, you had 200 and 15 billion dollar company. How about this one? Oracle goes up 36% in a day and becomes worth 933 billion dollars, nearly a trillion dollars 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 of considerable interest. Wow, that's a lot, isn't it? Now we're talking about exceeding that in a day in trillion dollar companies. Um Something's not right, right? And the something that's not right goes back to that paper. There isn't an elastic market out there. There's no one when Oracle announced, which they did, that they had 400 billion dollars of commitments to purchase hyper scale data center capacity over the few over the coming years. By the way, from a company that hasn't got any money, Open AI. When they announced that, the share price went up 36% because there was just not enough people with the the assets and 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 by the way that the flows into ETFs in particular is not just driving the the index funds performance in terms of large companies out there, which we don't own in some cases. It's it's driving other things as well. That's the Bitcoin price. So, here's the SEC agreeing that you could own Bitcoin in an ETF and there's the Bitcoin price, right? I suspect the ease with which people can own things it 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 thing I would put as a cautionary tale though, bearing in mind our strategy and how it differs from what the index is doing, is that this is something which does exactly the same in the opposite direction. The Bitcoin price is roughly halved once it started to turn. Momentum, remember I said as a strategy is legitimate, but try and remember that you don't have a view fundamentally just when it starts going down, you sell it. It's probably also partly behind gold as well. I suspect that we see there the the gold price of the ETF flows. Which way around is this is difficult to determine. Are there ETF flows because the gold price goes up or gold price goes up because of the ETF flows? I don't know, but it is an interestingly highly correlated chart, isn't it? Uh to to look at that. Enough of performance. So, 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 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 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 investing good companies, try not to overpay, try and do nothing. Only investing in good companies. There's the look through table. These are the companies in our portfolio over the years with five performance metrics down here to tell you how they're performing. You can see return on capital employed, ROCE, last year was 31% down very slightly, but not very much. And as you can see, very significantly higher than the 17% on the index. Good. Our companies are making 31 cents or cents for every dollar pound that we own of their capital. Gross margin, the difference between cost of sales and revenues. Our companies have got 62% 62% again, down very slightly. 45%, 43% on the index. Our companies make stuff for four and sell it for 10. People in the index make stuff for about 5.5 and sell it for 10. That's what it's telling you in English. Take out the other costs, you get to operating margins, 28% down slightly last year. We're beginning to get a theme here, aren't we though? Nothing to write home about, but bit on the on the weak side there. Not just for us, I mean, it's not this is not particular to this group of companies. I'm just saying for the for corporations on the outside very particularly as a whole, maybe a little bit of a trend there. And you can see 28% compares with the index pretty well. Cash conversion, you might recall that we always used to have sort of high 90s and we had a bit of a a downturn here and here and this was caused by the pandemic. People when the supply chain started to to seize up 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 or not they could get the components and ingredients. And we thought that would recover and they started to recover and then we had a little bit of a downturn here starting with the starting of the amazing spending on capex by the 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 and it has. Again, we're a bit better than the index, which is where we like to be on on the whole. 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 the see us through whatever kind of crisis we next have, for 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. So, all right, we think we've got a bunch of companies which are financially very sound there. How about the valuation? Well, 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 to measure it. And you'll see that last year we closed with a free cash flow at about 3.7%. And I think the starting number which is the number I presented to you when I stood up here 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 our fund. But they are now cheaper than the the S&P 500. Before I move on to to show you how how that looks historically, the free cash flow grew 16% last year. That's a hell of a growth rate for these companies. Now, I think it's rather exceptional because they were recovering from the squeeze on cash flows that I was talking about earlier, but nonetheless, that's a pretty interesting clip for these things. And um if you look at the the history on it. So, there we are with our our year that just closed with 3.1% plays 3.7%. I've stood up here in front of you for 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 of capital, profit margins, cash generation in that valuation. I can now tell you we own a bunch of companies which are better than the S&P 500, which is 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 if you were in attendance at the first annual general meeting out here. Other than that, nope. We've been we've been sitting here with our valuation, this line here, being below in terms of yield. We're now above it. Now, 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. Um 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've had several years of worrying about lack of free cash flow growth at the company actually. And 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 is absolutely in the crosshairs of it. So, we sold them. And Brown-Forman, you might recall we sold Yazo the year before. We held 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. But 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 or Z, depending upon whether you're American, drinking habits or lack of drinking habits. And the legalization of marijuana is another one which is quite big impact. And and I'm shocked by this, the number of people in my generation who stopped drinking. He said looking meaningfully over there. Shocking. Sobriety has caught on. We hope that Brown-Forman's family ownership would lead them to perhaps find a course through all this, but a company which was subject to sort of quarterly earnings influences wouldn't be able to, but it's not so. I think the family is very focused on getting its dividend rather than doing something. We need If we're throwing 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, marijuana. And what we're going to do is this as a result. We haven't heard that from anyone yet. That's what we need to hear. What did we buy? We bought back into Intuit, accounting and tax software company. You might recall we sold it a few years ago when they made an incredibly bad acquisition for a a marketing company called Mailchimp where we thought that they paid three times the right price and that it wasn't in their area of expertise. The shares, and is a sort of 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. Uh, the the acquisition is sufficiently bad that they've now started reporting numbers ex-mailchip. That's how bad it is. One would like to believe they've learned their lesson. We started buying Waitrose. Waitrose is the biggest veterinary pharmaceutical company in the world. Quite an interesting compliment, if you like, to Idexx. We like this area. Um, a company has struggled a bit. But, the fact there were side effects of this drug. We, um, asked our veterinary consultant, who's here tonight, uh, what she thought about it. And she said she knew about the side effects and would prescribe it. And, uh, she's also my daughter. You know, over there somewhere, actually. And, uh, so we bought it. Uh, EssilorLuxottica we started buying. We've followed it since its inception. World's biggest maker of eyeglasses, that is frames and lenses. Uh, a consolidator within that industry. Uh, an industry which has got a secular tailwind in terms of, uh, 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've got vision correction, but continue to trade up in terms of designer frames or multiple pairs of glasses, etc. And, of course, they've got a hit at the moment, at least, with the smart glasses that they've partnered with Meta to do. And, uh, uh, I it's a great leap forward, I think, uh, in terms of product because up to now the glasses were, uh, the ones provided by Google, uh, which were made you look as though you were at the dentist having a wisdom tooth extracted. Uh, and cost 1 1/2 thousand dollars. These ones are Ray-Bans and cost 300 dollars. And it's like, "Oh, well, I know which one I'm going for." I think there's a chance that they are part of the development now of, uh, of a new product that we haven't seen since the smartphone, really, in terms of how we will get and interact with, uh, with computers. Yes, there will be competition. Apple has announced that they're going to do some smart glasses. Uh, you know, I'm I'm amazed by the commentary out in the stock market continually, which is, "So, you thought there'd just be one company doing this, did you?" Yes, no, there course there'll be competition over time. We just started buying Wolters Kluwer. Wolters Kluwer is a Dutch company, uh, which, uh, is basically got a database of publications which they supply to people, uh, things like, uh, medical papers, uh, legal, and so on, which are used for people in terms of, uh, doing work on, uh, precedents for legal cases and contracts, uh, people developing, uh, surgical procedures, drugs, and so on. They are one of the companies which are slated as being wiped out by AI. I think it's unlikely. Um, I I my my current joke comparison is we've got this company here which has got all of this peer-reviewed genuine research on medical, legal, and other matters sitting there, uh, versus the former chief constable of West, uh, of the West Midlands, who decided that he would ban an Israeli club coming to play in Birmingham because of a, uh, violence at a West Ham, uh, match with the, uh, Israeli, uh, team, which he got from, uh, AI. And, of course, it was hallucinating. There'd never even been a game. I I don't think I really want people to research medical procedures that 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. And I think the rest of us will see that as an advantage, as well. Last, but not least, Magnum Ice Cream. This was spun out from Unilever. Um, it's pretty good business, actually. I think it just didn't fit very well within Unilever. I see that Nestle are contemplating something pretty similar. Uh, the supply chain, um, for ice cream is completely different to the other remainder of the food business. Um, we're hanging on to it for a moment. I think it may have some, uh, mileage in terms of self-help to do some things, uh, that, uh, will improve its performance over the years. Um, all of that activity didn't cost an awful lot. There was slightly higher turnover than usual, as you'll see. 12.7% is our highest in these periods, but that's still very, very low by industry standards. Uh, and you'll see here the actual cost of it was 1.7 million pounds. So, 0.009 of a percent, basically. So, not, uh, not something to trouble the, uh, the scorers or make the brokers rich in terms of dealing. So, there's slightly bigger turnover, and I think that's kind of a reflection of the times. And it may continue to be a reflection of the times. It didn't cost us a Good. Thanks, Terry. On with the, uh, questions, then. Uh, we'll open up with one from, uh, Colin Simpson. Terry says in your letter that the seven major tech companies are not all good good companies of the sort we seek to invest in. Can you explain the thinking behind this view? Yeah. I will have a go, won't we? Yeah. Yeah. Good. Um, there's a return on capital employed of the magnificent seven companies. I'll let Julian start on me on on this one. So, yeah, evening all. Uh, I should add that, uh, for those of you whose questions have not been answered, they will be answered by human as opposed to AI, uh, even though the human might, uh, use AI. Um, so, uh, what we are looking for from these companies is basically, or our companies is, I think, decent returns, predictable returns, and growth. Um, and we've got two slides on this. So, if you'll go to I know there's a lot of numbers on this first slide, but if you go to the last two columns, uh, you've got the average return on capital and the the standard deviation, which is basically a measure of volatility. So, with Alphabet, you've got, uh, 22% return on capital employed, which is a decent number. It's a little bit below, uh, our our our average. And the the standard deviation is 6%. So, these are predictable returns. Uh, Amazon, you've got, uh, 11% returns, which are a low, uh, and the the fact that the standard deviation is 5%, uh, unfortunately means they're predictably low. Um, Apple returns are good, uh, and I wouldn't worry too much about that 14% because they're sort of, uh, somewhat volatile around a very high number. Uh, Meta returns are good and and they're quite predictable. Microsoft, very good and they're quite predictable. Nvidia is obviously interesting because, uh, in the course of, what's admittedly a long period of time, um, we've gone as low as minus 4%. Uh, we've, uh, been at 13% as recently as 2016, uh, 12% as recently as 2023, and we're currently at 20 126%. So, the average looks great, but these are obviously, uh, based on those numbers, not particularly predictable. Uh, and Tesla, uh, the returns are, uh, as you can see, either negative or extremely low with the exception of one year. So, the average is negative and they're extremely unpredictable. Um, we I mean, just to say one thing on the investable universe, which is there is a there is a fractional element at the moment where if we did not have Nvidia in the investable universe and people asked us about and we just said, "Well, it's not in our investable universe, so we we can't really comment." I think that would become across as slightly lame. Um, so, the other thing is there could be a moment when, as there was in 2002, uh, with some of the companies that fell sharply after the dot-com bubble burst, there could be a moment when, uh, there probably will be a moment when 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 if we just move to the, um, uh, uh, next slide, this is basically the company's free cash flow going back, um, to 2010. If you if you go back, say, to 2015, so 10 years, you can see that, as well as, uh, Alphabet's decent returns and predictable returns over the period 2015 to 2025, they've gone up, what? That's a four or fivefold. You can see that Amazon, those numbers are all over the place. You might recall that we started we did but have a brief dalliance with Amazon in 2021 and 2022 because we actually were correctly thought that that number, the 2023 number you see of 32 billion, was actually quite interesting and was on its way to something quite attractive. Unfortunately, uh, AI then got in the way. Uh, Apple is interesting because, uh, it's a very big number, 98 billion in 2025, but it was actually 70 billion, um, 10 years ago. Meta during that period has gone from six to 46, and in the intervening period was 54. Microsoft's trebled from 23 to 71. Nvidia has gone up 600-fold. Um, and Tesla, is now positive, but, uh, it's a pretty small number. So, so when I go back to what I said before, if we take decent returns, predictable returns, and a measure of growth, um, we we think we've got those, uh, 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. Hm. Thanks, Julian. Next question is from Christian Croson, and he asks, "Is the attention economy a fundamental shift in how we define value, prioritizing liquidity and reach over cash flow, or is it just a modern justification for classic bubble?" Oh, by the way, I forgot to say I agree with him. >> >> I agree. Uh, yes. Okay. We both lived through, uh, as some of you did, I imagine, as well, but very directly through the dot-com bubble. Uh, and we're, uh, running a a broking business at that time, uh, in which we were using a fundamental valuation tool, which is still in existence today, called Quest, owned by Canaccord. Um, and the head of it is here today. Pardon? The head of Quest is here today. >> Is he here? Jimmy Cotton is here? Yes. Oh, Jimmy, you out there? Um, good. Um, and it's got a lot of similarities to the way that we look at companies, unsurprisingly, since we we developed it. And, uh, and so, you might be unsurprised to know that we were incredibly skeptical uh during the the the the dot-com boom. And we did have an analyst, uh Mustafa Omar, uh who famously used to put out share price targets of zero on companies on occasions, and proved to be right, but did get an awful lot of um uh sort of flak in the meantime. These are some quotes from that period that I've put up on the screen. Uh I wonder if it sort of rings a bell with anything that's going on now. Traditional valuation metrics like P ratios don't apply to internet companies. It's about market share and future potential. Hmm. That was expressed by sell-side analysts over the over the period. This is from We've actually managed to find the particular analyst for this one, uh Mr. Gilder, uh the author and tech prophet. Um 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. Yeah. Uh and Mary Meeker was very famous, Morgan Stanley's queen of the net, she was only in 1999. Uh we are in a new era. The old rules of valuation are gone. Um well, maybe. Uh I don't think that that we've entered a an era where uh the rules of of valuation in terms of returns on capital uh and growth uh are not going to be applied anymore. At the moment, they've just been suspended because people are in increasingly uncertain about the outcome of AI investment. That's That's what's happened to them at the moment. I was I was just going to add that one of the interesting things about the the the the four, I think most people wouldn't doubt, beneficiaries of the attention economy are Google in search, uh Amazon in e-commerce or online shopping, Facebook, Meta in social media, and Apple in providing the the device that actually enabled you to interface um uh with with the internet uh all the time as opposed to just when you're at your desk. Um and if you think about sort of when those companies came in, Facebook obviously wasn't even invented during the dot-com bubble. Uh you know, came in in 2004, as you can see from those Don't go back to the numbers on that previous page, but but obviously sort of still pretty small 10 years later. Uh Amazon was was going then, but was mainly, as I recall it, then still a bookseller. Yes, it was. Competing with Barnes and Noble. Competing with Barnes and Noble. Uh Google uh wasn't was started in '98, was absolutely tiny at the time of the dot-com 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 all this is that the way that the people who actually benefited from what the dot-com bubble produced, i.e., the internet, were actually very, very unclear at the time that this was all going on. Yeah, I mean, even if this is a fundamental change in the way that uh we work and assimilate information and uh program and process information, um taking that precedent, it seems to me unlikely that we know who the winners are right now. Very good. Well, there's a bit of a theme uh developing here because a lot of the questions that we've had in have been on this sort of theme, and we've put a couple together here from Graham Hedley and Hormuz Khodaiji. And uh the question is this, with 500 billion US dollars sunk into AI and profitability still theoretical, is this the largest speculative craze in history? Specifically, at what point does the declining return on capital invested employed and margin pressure from this AI arms race disqualify even the tech giants from your high return investable universe? Hmm. Yeah, okay. Um There've been lots of these uh episodes in economic history where there've been major developments. Um you know, there's a few on here, canals, railways, uh particularly like the communications one, the telegraph, so you know, put some wires up alongside a railway and use Morse code to communicate. The telephone, connect a telephone to the wire so you can speak. Radio, so you could speak without wires or broadcast. Uh of course, TV and the internet, which stay down there. Airplanes, um and uh and of course, now AI. And uh speculative bubbles existed around all of these things, basically, all of them. Um you know, the the radio boom of the 1920s was dominated by a company called RCA, Radio Corporation of America, uh which notwithstanding the uh universal take-up of radio, which continued, uh lost 98% of its stock value. Uh at the um you know, all of these, you might say to some degree or or completely, benefited us, changed the way that we work, changed the way that we live, uh and have benefits for us, but they don't always have benefits for investors sometimes at all, actually. Um airplanes is a is the classic. The The Wright brothers took to the sky in Kitty Hawk in 1903 with the first uh powered controlled flight, and uh the uh the great Warren Buffett said that the right thing for any investor who was present to do would have been to shot shoot them down because net net nobody's ever made any money out of uh out of operating airplanes in in the meantime. And so, you know, that there is an awful lot of precedent for these things existing in the past. What we're living through We always We have this great sort of recency bias, don't we, and uh live in the moment of of of of the present, increasingly, I suspect. The fact is that history does have quite a lot to tell us. Um the actual question was about is it the biggest though? So, we're going to talk about scale a bit here. Um these are the the capex, so the capital expenditure uh that's been declared by the um uh so-called hyperscalers building data centers and putting processing units into them for 2026, as you can see here, so for 2026. And what we've done is we compared the numbers that they've announced with their cash flow. You can see in the case of Microsoft, it's 87%, in the case of Meta, 91%, in the case of Alphabet, 97%, in the case of Amazon, where Julian's already highlighted the rather low uh free cash flow, it's more than 100% of their cash flow, so they're going into debt for that. In the case of Oracle, it's twice their free cash flow, so they are going significantly into debt to do this. And the the winner on the number one on the podium is CoreWeave, where the commitments uh that they've announced 2026 are 567% of free cash flows, or as we call it in analytical terms, a lot. Uh and actually, one There's some things that scare me that are not blindingly obvious. One of them that does scare me is since we're clearly in an arms race here, is that some of these people have enough money to keep going. That's one of the problems here is that they will probably keep going unless they 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 at their funding. Um Is it the largest speculative craze in history? We've tried to do some work for you here, which we've looked at some numbers. These are the top five AI hyperscalers' combined market value at the moment, 11.2 trillion dollars. These are the top five semiconductor businesses, 8.8 trillion dollars, so we'll call that sort of 20 trillion, I think, between those two, shall we? Um the dot-com bubble, the Nasdaq at its peak was a total capitalization of 12. So, hmm, that's interesting. Um we've had to do some work real work historically and and with some of the inflation statistics, which are totally imperfect, I'm sure you'll appreciate, to say that the Dutch East India Company had a valuation of 8 trillion, um having the major advantage of running India, or most of it, at the time. The Mississippi Scheme was 6.5 trillion dollars, and the South Sea Bubble was 4.3 trillion dollars. Um and we put the AI data center spend at the bottom there by way of comparison. Uh that's how much they're actually saying they're spending. The short answer to the first part of the question would seem to be yes. >> >> It is the biggest. Here's some other evidence of it in market terms. These are uh statistics back to, as you can see here, to 1964, so a long sweep of history, and they look at how the largest 50 stocks have compared with the Russell Midcap Index. So, how have the the the biggest 50 stocks in the market, which as we know are now dominated by the tech stocks, compared with the Russell Midcap stocks? And you can see that the dot-com is there, and there's where we are now. Okay. Yep. Um And an awful lot of uh of what people talk is they they say um well, you know, I mean, you you've got to be wrong um you know, cuz you know, all these companies are doing this, and Satya Nadella is a very clever guy, and and Larry Ellison, and and Mark Zuckerberg, and so on. Yeah, they are. Uh there's absolutely no But you know, then, rather like us, they're not they're not exempt from making mistakes. Right? So, this is Larry Ellison talking about uh of who runs Oracle, talking about cloud computing. Now, cloud computing, distributed computing, as I'm sure you're aware, has been the big thing uh prior to the the AI boom in terms of the development of technology, in terms of moving from having on-premise servers to putting your your stuff into a cloud, which is run uh in a in a communal space in a data center. When the cloud began, um he said, "What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?" Now, as a result of that, he completely missed out on the cloud. He is now number four in a two-and-a-half horse race in the cloud. Uh the others the others being clearly Amazon, Microsoft, and and Google in the cloud in terms of the provision of cloud services. And I think uh as smart as he is, that's affected the way that he's approached it. That's why that earlier slide shows that he's spending 200% of his cash flow on this. He's going all in on this. He's not missing the cloud twice. I think he's the way he views it. But before we think, well, that's good, you know, cuz he's judged this to be right and he's spending twice as much money as he's got on this. He does not always get things right. You know, in 2022, they announced the acquisition for $28.3 billion. a company called Cerner. And Cerner was a transformational system to reduce the administrative burden on doctors and nurses by using AI to analyze patient data and eliminate data fragmentation. So different parties having different bits of data about our health and not being able to put the whole lot together. Um we've not heard anything since. Now, I'll leave it to you to decide whether we've not heard anything since because it's such a wild success that he's embarrassed or because it hasn't actually worked. Um but I know which way I'm betting on that. Julian, do you want to say anything about this? I've been talking I was just going to say one thing which which is uh So when I was sort of looking at some factors for this. So the If you'd have seen the the Wright brothers, I think it was their fourth attempt. Was it? I can't remember. during the day. Right. Uh and it flew for 852 ft. If somebody had said to you it's going to change the world and you said, well, it could only fly for 852 ft for 12 seconds. I don't know. And it can only carry one person. Then obviously 100 years later you'd have looked pretty stupid. But I've heard the phrase which has already come in about people being AI deniers. Uh we're not AI deniers. We're just trying to say Well, how do you make money out of it? Yeah. How the hell do you make money out of it? Or not only how do we make money of it, but who are the people Who are the people who will make money from it if any? >> in the long run who are going to be the way that Meta and Amazon and Google And we haven't got a clue. And in aerospace it wasn't anyone called Wright. That's that's the total Oracle movement over the few days when they announced the $400 billion commitment that they got from Open AI who I can assure you have not got $400 billion right now. Maybe they will have, maybe they won't. And and of course >> So the answer I think is yes to the gentleman's question. Next question comes from David Cox. He asks, when people withdraw money from the fund, how do you decide what companies to sell? Um it depends really. Sometimes the decision is is kind of made for us over time in some respects. We're subject to a thing called the concentration rules which are hardwired into the OEIC regulations, the open-ended investment company regulations, which means we can't have more than 10% of your fund in one company and we can't have more than 40% of your fund in companies which are over 5%. And as things move about from time to time, we do get close to those rules being breached. We don't breach them, but we do get close to them being breached. So quite often the thing that we're selling is something to prevent a breach in those rules. Uh and and that provides the liquidity for redemption sometimes in in this regard. If we've got something to sell either because it's about to go over 5% and join the other companies and breach it, we might sell that or we might have one that's about to go over 5%. We don't want to sell that one, so we'll sell something that's bigger and take the them down. I did some today in fact, I'm selling on this basis. Uh that's quite often where the liquidity comes from. 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 on sub-20, it doesn't automatically mean that the higher valuation one is the one to sell. Uh because sometimes low valuations are are not always an indicator. They're sometimes a trap. But it certainly starts us thinking about it in terms of 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 of which we retain. So we might sell things to to come out of things like the drinks companies. Very good. Right, we're back to AI and capex again. Another question that we've blended from from two people who've written in. Stephen Hall and Mark Weisberger and they 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? Yeah. I mean we roughly halved the holding in Microsoft Meta and slightly less so in Alphabet. And yeah, we did so because of concerns about what we're seeing sitting there in terms of the spending. You know, we're seeing $600 billion. I know not exactly the same group, but four companies $600 billion per annum going out. Per annum. Going out. Um If we're looking for a 30% return on capital, say, you know, those companies are going to need to generate $180 billion of new cash flow not from the things that they've already got, not by cannibalizing what they already have to justify that in terms of return on capital per annum. Uh that's quite a lot actually. And uh at the moment we're not really paying for AI mostly in terms of AI. We're users of it and we are paying, but not not to anything like a degree that could possibly justify that. And we are probably unusually paying because we're a business. Most consumers are probably not paying at all. I mean as a consumer I don't pay for using it. Um and so that's tricky and I know there have been models historically where people have given you things and got you hooked on them and then later on told you what the price is and started to make lots of money from it. But they're relatively unusual. And they do usually involve the person who manages to accomplish that achieving a dominant position in the industry. You know? So it's all That's And at the moment, if you think you can spot somebody who's going to achieve a dominant position in the in the AI industry, let please let us know who it is and why you think it is because I just at the moment it looks to us like a anybody's to to choice in terms of who might be the winners if any out there. Will there even be a company in the West? I don't know. I I really don't know. So you know, there's I don't see the justification coming from that at the moment from a dominant player or players emerging who are able to charge, able to get that incremental cash flow in order to to build returns that would justify the kind of spend that we're seeing here. I mean the other way of doing it uh which people have done historically a bit as well is to get you hooked on something and then not charge you directly for it, but to sell you something, advertising, your data, etc. Facebook, Google and so on. But again, in order to accomplish that you need a dominant position. All right? You can't do it if there are myriad competitors. Um and so taking all that into account, yes, we did become quite pessimistic about whether or not the big tech companies that we have owned have been very successful like Meta, like Microsoft, like latterly Alphabet um can continue to be the kind of companies that we want to own because they if you look at the businesses that they were, we're talking about companies with very high returns on capital and they were very capital light businesses mainly. Um these are not going to be capital light businesses. This is going to change fundamentally change the characteristics of those companies in a way that we don't like. So yes, we sold them for that reason. Are any of the leaders of these companies making a good fist of explaining to the market why they're making these investments? I think at the moment they've had the luxury of really not having to. They're not I was about to say something slightly different but the same thing. We obviously listen to analyst calls and read reports. They're not being asked mainly. Yeah. People are not asking them. Which I just find quite shocking. Like, yeah, it's great you're spending this. Could you tell us how it gets to make a return? I mean I mean only a year ago Google was seen as a loser Hm. from AI because AI was going to replace search. Since then the price has more than doubled. I mean one of the reasons it's or key reason it's more than doubled is simply because they've announced so much money they're going to spend. Uh which leads us to just want to sell the shares in those. I don't I also just in terms of just to give you a few numbers in terms of the way things move. This time we were This time last year we were sitting here with 5.2 million Microsoft shares and that constituted constituted 7.4% of the portfolio. Um by August we'd actually sold actually over 10% of those, but the stock had gone up 25%. So it was near up to nearly 10% of the portfolio. And now we're actually down to uh uh actually under 2 million. So we've actually had to sell over 2/3 of our holding, but the fund size has gone down by 30% as well. So there's kind of a lot of moving parts. Yes. Yeah. Very good. Right, this next one's on the performance. This is a terrific question. I know there's a lot of investment enthusiasts in the audience, so hopefully this one will pique your interest, too. Uh Augusto Ramos asks, is the most difficult part of underperforming a benchmark the psychological pressure of doing something different to catch up? Uh yeah, that's an interesting one. Yes is the simple answer. Uh look, the great John Ma I know at the moment we're not succeeding, so it's not exactly a great quote, but it's it's sort of he says it's better for you in career terms to fail conventionally than it is to succeed unconventionally. Yeah? Because even if you're successful, I mean you saw during the 10 years when we were doing very well in lead up to this, the amount of criticism that we got then for doing something different. Um and now it's just easier to criticize cuz you're doing something different and it doesn't work. But yeah, the psychological pressure is is considerable. I mean if you we just put these in here. These are This is the the Nasdaq versus the S&P value and the S&P quality sub-indices running up to the the peak. So running in the the last 2 years, 98 99 and into 2000. And you can see there's the Here's the Here's the quality portion index. Here's the value portion index. And then there's the There's the whole Nasdaq. And and trust me, during that bit there, the psychological pressure is intense. Uh and it is. Look, um one of my old clients when I was a broker who then became a very successful fund manager and then very wisely retired from fund manager The fund management guy called Andy Brown who ran a very successful fund called Cedar Rock used to talk about the mental health aspects of running money. And before I did it myself, I didn't quite understand fully what he meant. Uh and there are great pressures, Jules. You No, there was a guy who was I think it 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. And I remember in February, I think, of 2000 or early in 2000, he was on the front page of the Wall Street Journal with one of those sort of drawings that the Wall Street Journal has. And he said he was getting hate mail and his children were getting hate but were basically being sort of bullied at school because of because of his performance. Yeah. But look, that's what you pay us for, believe it or not. I mean, 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 is on that chart. But it's also having some degree of emotional stability to stick to what we think is right because when you look at what happened next with regard to that that chart of the Nasdaq versus quality and and value here. So, you know, the the previous one, as you can see, ended there at the beginning of 2000, about March. And here's what happened next. Well, there's your Nasdaq going down there. And there's the there's the quality and the and the value. The value went down there. And 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, one would hope, in a way where you understand what it is we own and that we still own an awful lot of these very good things which not only won't lose their value here because there is a real business here with great returns and growth, but also will become increasingly undervalued and bounce and produce a sort of performance that would came out of these kind of stocks post-2003, post-2009, and I think we'll do again at some point. But yeah, it's it's a tough old place to be. But then that's what we get paid for. Next question is another one that we've put together from two very similar ones from Diego Scow and Patch Ruff. And the question is this, in your letter this year, 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's the portfolio positioned to capitalize on that reversal rather than just weathering the storm? I'll do part one. Yeah. I'll do the first part of the question and I'll pass over to Jules to start to start the second part of the question. I'm not being facetious in this next bit I'm about to say. I I really believe that events move like this in life and in markets in what we do. I was head of research at UBS before I managed to famously get myself fired. And when I was there, a gentleman who ran UBS Phillips & Drew Fund Management was a guy called Tony Dye. And Tony was a guy who was very vociferous about the fact that he thought the dot-com boom was was a sham and and that was going to burst and and cause catastrophe. Stuck with the old line stocks. And when I left UBS and ended up joining the Collins Stewart startup, I kept in touch with Tony. He's he's he's certainly he's dead now, but kept in touch with Tony for quite a long time as a client. And he used to have lunch with me from time to time cuz we were kind of like-minded souls, I guess. And and say to me, "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." It's like and and that was lunch for a long time. And anyway, Julian, on the 1st of March, 2nd of March, I think, 1st of March was reported on the 2nd of March, 2000, Tony Dye was fired. UBS Fund Man- Man- Asset Management confirmed departure of Tony Dye as chief investment officer of its UK fund manager Phillips & Drew. Uh signal retirement of Gary Brinson. Brinson Partners. I knew Gary as well, chairman of P&D's US counterpart, Brinson Partners. So, Tony was fired on the 1st, got reported there. I think it was And that is the same day marked on the Nasdaq chart. There you go. >> >> It's not a coincidence. I think People who study the psychology of investment will tell you that, you know, you can't have a a end to certain types of market until the last hope is given up. Uh and you know, that was it. I mean, I presume after that the entire UBS funds were were switched into something which tracked the the Nasdaq index, bought all those things. And oh dear, there we are. Which brings me on to sort of more of the subject for Julian Jules loose on the second half of it. When to fire a manager. This is quite topical, I think, in in the you know, for us. Um this is some data which looks at It's from Cambridge Associates. And it looks at when to fire managers. And you'll see that basically, if you look at managers' performance for 3 years before the change there, if they out- These These managers on over here, 3 years before the change, the blue ones out-performed 4.8 went up 4.8%. I think I'm not sure if it's absolute or relative. Uh really um absolute returns while I'm at it. 1.7% for this lot. In the last year before the change, 7.2% for these stars, minus 3.7% for this lot. Right, you're fired, you're hired, basically, there. You can see. And now the guys who were doing 7.2% under-performed the guys who were under-performing. And so it is on 1 year and so it is on 3 years. And look, the time to fire us, were you going to do so, was about 2021. And you might say, "Terry, why didn't you tell us that?" And there are a couple of reasons for that. One of them is it's not my job, actually. >> >> That's That's either your investment advisor's job or your job, actually. 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, when you look at this, this data was from 2003. So, it's a bit out of date, isn't it? Let's bring it a bit more up to date. Here we've got some some stuff in here from Research Associates using Morningstar data. And this is funds mutual fund performance in quintiles, so fifths, based upon past returns. So, get those sorted by 3-year simple returns because what they're looking at here is the performance of the funds after they were changed. So, the losers managed that kind of performance. And the the winners in the in the the best quintile managed that kind of performance. And this is what they were like in relative performance. It's not just in absolute performance. The time to fire a fund manager is when he's doing very well. Oh, anyway, that's my pitch and I'm going to stop there and let Julian do the next bit. So, the second part of the question, to remind you, is how is the portfolio positioned to capitalize on the reversal on passive funds if it were to happen. So, I suppose the answer is threefold. First of all, if you think back to the dot-com bubble, Amazon crashed, presented a great opportunity in Amazon and other stocks like that in 2002, 2003, 2004. So, that is one thing we would look to do. Secondly, we've had a slight live firing exercise here because I know this wasn't an exodus from passive funds, but in 2020, during COVID, we, as it happened, owned two of the biggest cleaning or the two biggest cleaning stocks in the world, so Reckitt that owned Lysol and Clorox. And 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, and we we've we've got sort of course and distance in in terms of doing that sort of stuff. And the third thing is the reason why we maintain an investable universe is 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. And in the event of a big fall out in terms of exodus from passive funds, the baby is probably get thrown out with the bathwater. And so it's possible or quite likely that those would come into range. Very good. Two very topical questions now. We'll ask them separately. The first is from Howard Rosen who asks, "With the dollar falling likely to continue, does it make so much sense to be so overweight dollar equities?" And then Brendan Andrews asks, "Is de-dollarization occurring? And if so, how would it impact the fund?" Yeah, I think I'd start by saying 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. Um and um is not entirely surprising. We In fact, we we've thought from the outset that the Trump administration's policies of trying to correct the trade balance and and get interest rates down in his particular case were antithetical to a strong dollar. So, that's not a shock. But that's not the same as de-dollarization. They're two different things. And I would say um you know, the the de-dollarization bit is, you know, people moving on to use other currencies. And people talk all all of things that are going to happen. People are going to use the renminbi, people are going to use the euro, uh they're going to use um stable coins, they're going to use other forms of digital currency, etc., etc., etc. I think it's a little unlikely. Um I understand the impetus for dollarization. I I imagine that the Russians uh would very much like to be able to sell their oil for another currency that they could they could convert. Um but you can't. And it's really quite difficult because when you look around, not only is America a come on to a little bit of information about this in a moment, an enormously big economy, all right? And the alternatives are not great. I mean, so the second biggest economy in the world is China. The renminbi is not a convertible currency. Um if you want to own renminbi and you if and you do so, there is only one way for you to do so. You have to open an account at the Bank of China to do so. Uh good luck. I think that would be my view on that. And so, I think there are there's an impetus to it caused by the tensions with China, by the tensions with with Russia, and so on and so forth. But I still think at the moment the the likelihood that there's anything out there which is capable of taking over to that degree is is not very likely. But the value in the dollar is a somewhat different concept. We may or may not be getting dollarization. As I said, I probably think we're not. Um but what we have had is a fall in the value of the dollar, and that that may continue. So, you know, there's a the chart since 2008. And uh you can see that um if you look at the the US dollar over this period here, where we where we look at the what's happened in in this bit here, which we were looking at, uh with the dollar going from, you know, somewhere around 120, 114 to 137. It's kind of, you know, it's not that's not that big a move compared to other moves that we've had in either direction out there, actually. So, we are getting into a little bit of recency bias about about what's happening in the dollar. Plus, I would also say, looking at that uh that chart, the notwithstanding these rather large moves here, bit here, bit here, bit here, uh the trend would seem to me to be clear, and it's not the dollar going down against well, the pound in particular. Um and so, look, I just don't think that we should get quite worked up about it. Part of the problem, though, is this. Now, here's a split of our fund. We've got 69.9% of our company by weighting and listed in the United States of America. Uh that's because it's actually the world's biggest capital market, all right? Uh in fact, it's only 47% of of their revenue, so it's a lot less. But I know the question would say, "Yeah, but you know, if you've got this view that the dollar's going been going down and may go down further, shouldn't you be diversifying for that?" It's not as easy as you think. I mean, this is the size of the US economy in comparison with a few other economies out there. So, the US economy is larger than the combined economies of Brazil, Canada, Russia, Italy, France, the UK, Japan, and India. Wow. You know? Unsurprisingly, you're going to find companies uh which have, you know, an awful lot of revenues in that bit, even if they're actually listed in that bit or operating that bit, you know? Unilever is a UK-headquartered company, a UK-listed company. Its two biggest markets are India and America. Um you know, you might want to own Sage rather than Intuit if you were looking at being diversified from from America. 45% of Sage's revenues are in America. I was going to say, in in that pie chart, uh if we had the market cap of Nvidia, it would actually be the second biggest uh piece of the pie. Bigger than India. Bigger than India. >> And Japan. And then if we go to the next slide, we tend to have a bias towards investing in certain types of company, simply because they tend to produce the characteristics that we look for. Technology is 36% of the S&P 500. It's only 10.9% of the Stocks Europe. I'm actually quite a bit surprised it's that big. Uh in terms of payment processors, uh in in the US, we have Visa and Mastercard and even companies like PayPal. In Europe, you have Adyen. And then in medical equipment, we've got $200 billion plus of market big global leaders. Uh in Europe, uh we've got very fragmented, much smaller firms. And then in in the next slide, we've actually just listed those medtech companies, so you can see Yeah. uh eight of the top uh 10 are basically US. >> US. If you want to be invested in certain areas, consumer, technology, notwithstanding what we said earlier, has been a great investment for us, and I'm sure it will be again, all right? Um medical, in particular medical equipment devices, and certain aspects of industrials. It's difficult not to invest in America. Uh you can see the the problems in terms of the currency and so on, but it doesn't mean that it's easy to to find a way to deviate from investing in the United States given the size of the economy and the type of companies which it's developed. Yeah, exactly. And look, if you And look, if you went back, you know, 20, 30, 40, 50 years, and you chose to invest you wanted to invest in a different type of business. So, if you wanted to invest in a bank in the '80s, probably the place to be would be to invest in the UK or something or Europe. Insurance companies, it's different. Chemical companies, so it's different, but it's just in terms of the sectors that we tend to prefer to invest in, we find most. And we don't prefer them just because it's caprice. We we prefer those sectors because historically, they've produced some of the very best returns out there. Just to go back to the dollarization issue. You made you made the case there why the renminbi is not going to displace the dollar as the global reserve currency Go on. anytime soon. A lot of people would say, "Well, what about the euro? You know, the eurozone is a big, rich block of similar number of people to the United States." >> Yeah, yeah. I mean, I would doubt the euro personally because there isn't actually, as we know, the same structure in terms of of support for either the the bank or the bond market. I mean, bear in mind that it is the Federal Reserve Bank, and and and it has the power. I mean, what makes the dollar so powerful? Enormous economy, and it has a great tax base, and actually, let's not beat about the bush, an enormous nuclear arsenal which defend the whole thing. None of the above is true about Europe, right? The the European Central Bank does not have any ability to to to rely upon government taxing the individual countries in order to support the European Central Bank in its mandate. It just doesn't have it. And there's not there's one currency, and there's one central bank, but it stops there. Yeah. There isn't anything else behind it, are there? Look, other places I think have currencies which, because of the fiscal and monetary policies that they pursue, probably make them pretty attractive, like Switzerland, Singapore, and so on. But they're just too small. There just isn't enough capacity there for them to become the the marker for global trade in oil and coffee and anything else, given the the size of of lack of size of the of the currency concerned. Very good. Uh next question comes from Michael Young. Michael, if you're here, thanks for the question. And he asks, "The doing nothing part is my concern. I think a lot could have been 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?" Well, I think it's a fair point. We said in the letter this year that we uh very much like the Charlie Munger mantra. We like a lot of his mantras, actually. Like Charlie Munger's mantra, that any period when you don't tear up one of your long-held beliefs is a wasted period. And the one that we singled out in the letter uh was the one that which we'd operated on historically, uh which was only invest in a business that can be run by an idiot, because sooner or later, they all are run by an idiot. And and I guess what the Novo thing has painfully told us is, you know what? There aren't very many businesses that can be run by idiots, and they can cause a lot of damage uh when they do it. So, that's one that's definitely torn up. I might say I digress, I am going to come back to the question. Alongside that, another mantra, it's not really a mantra cuz we didn't really have it as a mantra, but an awful lot of people do when they're talking about investment, is engagement. Engagement with companies, in our humble opinion, is a waste of time. Uh we we almost never get them to to change what they're going to do, even when it's disastrous, like it was when Adobe bought Twitter by Figma, or when Intuit bought Mailchimp. They just carry on. Uh and so, actually, the only way to handle it is to run away and and sell the stock. So, 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 that the times are such that we will continue to increasingly not not to the same degree as other fund managers, do a little more because there are things which are causing change, and it's not just AI. I mean, it's easy for us all to rely on AI because it is the the topic du jour, or whatever it is, uh up there. But there are plenty of other things that causing change as well. Weight loss drugs is another example. Weight loss the you know, the the impact of weight loss drugs is going to be felt across clearly the food and drink industry, and probably wider than that over time as well in terms of other aspects of health care. And there are lots of other things like that where I think you're absolutely right in terms of the questioner's suggestion that we actually will 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, it's not about to be there. We are trying to do things in in advance of the downturn. It's things like we are doing where we're shifting out of those large technology companies into the Essilor Luxotticas of the Waters Closers, uh those waitresses 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 will survive and prosper better, I think. So, we are working on that, Julian. Well, was just going to say that um reference the earlier uh price chart about the volatility of stocks and the movement in a day. I mean, that's just the movement in a day. Think of the movement in, you know, the space of I mean, 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. So, when you see and I was just quoting earlier, you know, Alphabet has doubled in the last year. When you see movements of this magnitude, to just to just I mean, it would be life would be very easy if in pursuit of our, you know, return of, you know, 12, 13, 14%, you know, the price, you know, prices went up 5% one year and 20% next year and averaged out at about the sort of number, but we're now seeing such volatility that I think sometimes you just have to be more active, yeah. Yeah, you just have to just have to be. You have to take more action than you ideally would like to, yeah. Yes. This next one is from Peter Harris. Peter, thanks for the question. I love this question, actually. Of the companies in the current Fundsmith portfolio, which company's CEO do you admire the most? You want to go first? Yeah, so I'm going to name So, we we own this company Waters in Massachusetts, uh and the the chief executive is called Dr. Udit Batra. Um so, Dr. Batra So, so when a new when a new chief executive comes over, there's there's generally a fairly sort of well-choreographed series of events that happen. The first thing that happened is the corporate jet is fired up, uh and there's a world tour, uh where the he or she goes and surveys his domain. Uh the next thing that happens um is that uh an army of consultants come in. Uh the next thing that happens is some snappily named Project Galactica 2040 uh is uh is invoked uh and rolled out. And the next thing that happens is generally absolutely nothing. Um Dr. Batra came in in to Waters in September 2020. Uh this was a company we'd owned under the previous but one chief executive when it had been quite successful, and then throughout the tenure of the immediately previous successful chief executive when it had been much less successful. And I guess when Dr. Batra came in, we were expecting it to take some time, not least because he came in in September 2020, which as you recall uh was not a particularly uh auspicious time. And he was very numbers-based. Uh he was very he he he didn't put out any snappily named plans. He just went to people and said sort of why don't we try something a little bit different. Um and the results were extraordinary uh in an incredibly quick period of time. Uh and he's still there today, and um it is one of our top holdings, and um we are uh very optimistic. And they've just made a major acquisition of a business from Becton Dickinson, which is a company we know well in flow cytometry, which fits quite well with what they do, we think. And uh we trust them to get this one right. I mean, one of the things that helps with it is that they're buying it from Becton Dickinson, a company which we once owned and sold, and I've got to say there's never been a day when I regretted selling it. Uh I've got to say. Um but my I don't think that's a bad one at all, but if I were going to put an alternative, it would be a man called Kevin Lobo, uh who's the chief executive of Stryker. Stryker is a leading company in uh in particular orthopedics, number of areas of medical equipment devices, defibrillators, uh stents, and uh things that are used to remove clots in arteries and so on, but orthopedics is their big thing, so replacement hips and knees uh and other bits of of your of your body that wear out and get damaged and uh so on. And um I would just highlight a couple of things uh about it. One of them is they made an acquisition of a surgical robotics company a few years back called Mako, m a k o, and at the time that there was absolutely no way it worked on the numbers, and uh and he basically said, "Trust me," and he was right. Uh it's become the go-to surgical robotics system for orthopedics surgery, and if any of you are uh about to have I'm not allowed to give medical advice, I'm not allowed to give any advice, but I would say, "Ask them if they've got a Mako robot if you're going in for any of this stuff," would be my view of it. Um and um I think it's it's interesting to see cuz what Julian said about Udit at Waters, he didn't do anything it's not about great thoughts and strategy plans and consultants and so on. It's very simple things that Udit did like, you know, finding out where the equipment is, let's start with that, and how long have they had it? And don't come back and be very proud that they've had it for 25 years, sell them a new one. God, I don't know. And and I think Kevin the thing that distinguishes uh Stryker, in my view, apart from the Mako acquisition so on, from other companies in the industry, which have been very unsuccessful. We watched Johnson & Johnson buy a company um and and and turn it into a disaster as part of their Depuy uh medical equipment, a company called Synthes, which did trauma equipment in this area, which is a great business. I mean, you as people say, when you're lying on a gurney with a broken leg, you don't don't discuss the price of the plate, do you? But it's been a disaster for them. And in Stryker's case, I think it's because they grasped the reality that these things need to be sold. That to to get your knee or your your hip in there and used by the medical practitioner, somebody actually has to turn up and do a sales, a proper sales job. It doesn't sell itself, you know. Whoever said, "If you build a better mouse trap, 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 mouse trap. And I think Kevin uh and and the Stryker lot have shown great great form at that. Very good. Right, this is the last question of the night. It comes from Mark Atkinson, who I know has been coming to this meeting for a number of years. So, Mark, thanks for the question. And this is on behalf of his grandson. And he says, "Dear Terry, like you, I'm a long-term investor. I was born on the 9th of July, 2025, and I've been an investor in Fundsmith most of my life. My parents named me Otis, partly in the hope that 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 one would it be, and why? Kind regards, Otis Sample." Oh, good one to finish on. Yes. Um I I suppose if I were going to name a child after a company, it would become L'Oreal Smith. And um >> >> It doesn't really trip off the tongue all that much, does it? And it so happens that I do now have a son. And uh and so I did name him after something, but I hope you'll forgive me. Uh I didn't name him after one of our portfolio companies. I'm uh uh something of a a movie buff. I I love the movies and hold movie nights at home, and I would say I financed a couple of movies. Finance is the wrong wrong phrase for it. Give given money to people in the movie industry would be closer to it. Um I'm I'm very keen on and I think there's an awful lot that we can learn from the from the movies. Uh Julian sends us daily when something happens uh in the world the the clip from Casablanca where the the gendarme says, "This place is closed. I'm shocked to hear shocked shocked to hear there's been gambling." And the waiter goes, "You're winning, sir," as he's going for Uh well The we quote these things to each other all the time about these things. So, anyway, um uh my son uh is named after a movie, not after a company. And I wanted him to have the same initials as me, as well as they, which coincided with the fact that I was able to name him after my favorite movie. So, he's called Thomas Crown Smith. >> >> And I hope you'll forgive me. Um and uh it does mean that I've got lots of things like cufflinks and so on with my initials on that I can give to him, none of which you'll want, of course. Uh but never mind, he's going to get a though. Brilliant. Mark, thanks again for the question. Uh that concludes uh this year's meeting. As I say, if you put in a question and it wasn't answered, you will be getting response from Fundsmith. I hope you've enjoyed it. Please give your thanks to Terry and to Julian for a great presentation. Thank you. >> >> And um >> >> Thank you, Ian, for once again guiding us through this, uh which is much appreciated. And thank you all for coming tonight and for your continued interest and support. Thank you. >> Thank you.