Good afternoon everyone and welcome to the fundsmith equity fund semiannual update webinar. Uh so without any further ado over to you Terry. >> Thank you comrade. Good afternoon everybody. I'm going to run through the usual stuff and some slightly longer things. An unusually long semiannual letter with more change. So there's a little bit more to cover. Yeah. I won't dwell on the details of the performance except to say it require it continues to be painfully uh at odds with the the performance of our chosen benchmark which is the MCI world. I'm sure you're well aware of that. What worked and what didn't in terms of attribution. I'll run through those because I think there's some things to say about that. Uh Foret is our best contributor. Um it actually made a new alltime high I think um overnight uh in in the United States. Uh it's I'm sure you're aware of it. I'm sitting on my desk looking at two 40gate routers sitting on my desk. Uh we bought it after it share price stumbled postcoid. Uh there'd been a dash into working from home and security for working from home during COVID which had raised the the growth rate to about double its usual level. And when that came back down to earth uh the share price uh uh panicked and we we bought in there and so far so good. Ditto with Texas Instruments. we bought into Texas Instruments when they announced that they were making some pretty significant investments in new capacity in the United States uh for building uh analog devices and that's paid off so far. I'm pleased to say uh Marriott continues to perform very well. Um it's uh clearly bucking the the sort of the problems that we've seen in travel which have occurred as a result of the Middle East situation to a considerable degree. No problem there. Alphabet uh performed very well. the old Google in old money. Uh the I don't know if you all noticed, but the recent capital raising by Alphabet to fund their uh their their contribution to the AI arms race. Uh $10 billion of the fundraising was taken by War was taken by Barkshire Haway and Warren Buffett was on CNBC I think a little while ago saying that he was personally behind that decision for what it's worth. And Philip Morris, one of our inception stocks, uh our only remaining tobacco stock. uh but obviously contributed during the period uh very well. What didn't work? LVMH continued problems particularly in China and and with luxury more generally uh with LVMH. Zuitus Veterary Pharmaceuticals largest veterary pharmaceutical company in the world uh problems with um generics uh causing problems and some side effects of some of the drugs which are causing concern with some vets at least. Um IDEX uh slowdown in veterary visits. uh it would appear that vet visits are not totally immune from the uh the situation in the economy plus they're coming off the high of of COVID where people did a lot of pet adoption. Microsoft Microsoft is one of the um uh the counters that we've held for a long time that's done very well for us uh and is clearly now apart from anything else raising some concerns about the the size of the AI uh capital expenditure and Colass Danish uh medical equipment and devices company which has stumbled uh and had to appoint a new chief executive after two acquisitions uh at least one of which is which has not worked out terribly well. Other things to say about those at the moment are um we've actually sold uh three of the five of them in our our reshape of the portfolio what we've done during the last six months. So LVMH, weights and collast have all gone. Um why in LVMH's case I can't see a recovery until there's a recovery in China and I can't see a recovery in China. U I think the the Chinese recovery uh in terms of at least correlation and probably reasoning rest wholly upon a recovery in the Chinese property market and there is none in sight. basically plus, you know, allied to lingering concerns or even growing concerns about the succession issues at the company where uh the four of of Mr. Arno's children are placed in positions of responsibility. Anyone who's viewed succession will perhaps have a view on how this might end. Uh I would say Zuis is very disappointing because we've been very keen on the veterary area but the management I think has not shown great form in terms of their ability to deal with the challenges concerned uh in uh in this area. So we we let that one go and collast uh I'm afraid our adventures in investing in Danish uh medical companies in Novo Colast and Ambu in dismissive portfolio would suggest that that's something we should probably avoid in the future. Um I mean the only thing to say about it is Microsoft um you know there's a a tendency I think amongst some commentators and and investors to attribute great sagacity to the uh to the people involved in the tech industry in terms of the uh the sort of the headlong rush that we've got into artificial intelligence and so on. And maybe they're right about that although personally I doubt it. Um uh there's a sideshow going on at Microsoft which is part of the reason perhaps for the the poor performance which is uh they've spent the thick end of a hundred billion dollars on getting bigger in the gaming business in particular with the Activision Blizzard acquisition and you if you read the news you would have seen that they're going through quite a dramatic downsizing there because the business isn't performing very well. Um and although we've got considerable respect for Satia Nadella and what he's achieved at Microsoft um none of these people are infallible basically um you know we don't own it but we do follow it. I mean a case in point I think is Oracle uh which completely missed the cloud business. There's a wonderful quote from quote from Larry Ellison uh from about 10 or 12 years ago saying the cloud was a myth and irrelevant and um and I suspect that Oracle's allin stance on AI is because they just simply don't want to miss that twice. uh not because they've got any great insight into whether or not AI is the next big thing. But uh one mustn't overestimate uh uh other people's intelligence. Um we certainly try not to overestimate our own. Um but we shouldn't attribute it to others. Uh Julian and I uh probably quote a movie to each other every second day because we both like the movies and we also think the dialogue from movies quite often is is incredibly uh sort of insightful. Um, we could quote the scene from Casablanca in which uh, Inspector Renault comes into Rick's cafe and blows his whistle and says, "I'm shock shocked to hear that gambling's been going on here." At which point a a member of staff walks past and and backhands him his winnings. We could quote that almost every single day in terms of something people profess to be shot with. The one that um that springs to mind for Microsoft and uh and the gaming business and possibly for Oracle and the and the AI business and maybe wider for the AI business is one from the movie All the President's Men about the the Watergate affair in which Deep Throat, the FBI director, who's meeting Woodward regularly to give him uh the lowdown on what's going on, is asked by Woodward, why did the uh the the Republicans burgle the Democratic campaign officers in the Watergate building given that McGovern, the Democrat had a candidate's um campaign was imploding and he was going to lose anyway. And deep the informant says don't believe all those myths you've heard about people in the white those people in the White House. They're just not very smart and matters got out of hand. And um I think it's wise to bear that in mind. Um I'm just going to show a couple of slides uh very briefly about what's going on in the uh the industry. You're very familiar with it, I'm sure, but it's always good to see the new material that's coming up from time to time. Um there's obviously been a gusher of comment on our semiannual letter uh by the uh the commentary. I know today the investors chronicle claims that I might be unhinged and have become Neil Woodford. I'll leave you to make your own mind up about that at the end of this presentation. Um but the one thing apart from that that I find in there is they say that I'm lashing out at things. I'm not lashing out at anything. We are where we are in terms of our strategy. we are where we are in terms of active management as a whole compared to uh indexation at the moment. I'm merely presenting the material I present by way of information. I think it would be remiss not to comment to investors and by the way we have 50,000 or so retail investors, direct retail investors as well as it sells is to give them some kind of picture as to what's going on and why out there. So that's why we present these things. This first uh bar chart here uh shows ETF net inflows which as you can see have been rising steadily uh from uh from 2020 with obviously a bit of a downturn post the the pandemic but has now set off on lunar trajectory. That 2026 bar is is very informative. you will see that it's uh it's it's about a third a half sorry bigger than the than the 2025 bar next to it and it's only half the year the uh the flow from active into ETFs of various sorts is um an absolute tsunami and I do read also people writing commentators saying that um we are wrong in in suggesting that this is having an effect upon uh stock performance and valuation I just again I' I'd quote all the president's men uh they just aren't very smart. They can't see that that's what's happening because what it is is an is a momentum strategy and we can see uh here in the in the Bloomberg MCI momentum versus the MCI index as a whole what's happening out there. Momentum is currently at a high for the last 30 years uh in terms of what's happening here. If you uh uh if you're not in if you're in active management and you're not in a momentum strategy, you're in a lot of trouble. See us for details basically. Uh and lastly, this is the Russell 2000. So it's not an index that we directly compare with. It's the only one I could see any data on. This is the difference in performance uh since sort of the middle of 2025 roughly uh until uh quite recently uh on the Russell 2000s from companies with negative EPS and those with positive EPS, negative EPS or losses as we usually call them. And you can see the performance differential uh is wide and indeed is widening out there. Um we are seeing basically uh stuff which has got no fundamental support unless you've got a great vision of how that changes in the future going up versus things which have got some earnings. Um as I said in the half yearly letter which some of you will maybe have read the movie that that reminds me of is it's a mad mad mad mad world. Uh when you combine those factors I can't see any fundamental methodology of investment and that's all we're trying to sell here that would capture that. So, I will just say that just run through our usual three blanks of what we're doing and then I'll take you on to the recent changes where I imagine an awful lot of you may want to focus your your questions and comments. As you know, that's our investment strategy. Only investing good companies don't overpay, do nothing. That's what we're endeavoring to do here. Um there's our look through ratios. Obviously um we are uh updating for the half year there but you can see at the half year there isn't any material change or material adverse change at least in terms of what's going on in our portfolio. Um you have to be a little careful with this because there are some things in here which are quite seasonal and so a half year doesn't really give you a very accurate picture. So return on capital employed remains steady at 31% gross margin remains steady at 62%. Uh operating margin has actually ticked up at another 29%. Cash conversion is almost steady at 92% but that's probably the one metric more than any other that I would be cautious about on seasonal effects and interest cover has gone up to 40 no less than 43 times. Our portfolio at the half year was a very conservative portfolio. I've put in the the look through again later on for the new portfolio in there because one of the things which um uh people ask say assert is that we've somehow abandoned investing in good companies. We've taken the three-step investment strategy we had and torn it up. Uh we have not knowingly do done so. Basically the things that we are invested in still have metrics which satisfy what we're seeking uh in relation to uh investing in good companies. valuation. This is in some respects arguably the most interesting fact amongst the slides. The free cash flow yield uh that we calculate at the half year you see was 4.3%. Um mainly that's a change in price rather than uh than free cash flow because the free cash flows don't alter that much within the period and we're not even confident that the half year is is a great indicator. But you can see 4.3% it's near it's getting on for the valuation in the footsy 100 which is not really a comparable index in terms of quality. I would suggest you and it's compares with 2.7% in the S&P. Uh the portfolio we got now is currently rated a lot more cheaply than the S&P 500. And as I put in the in the letter kind of a more interesting statistic in some respects and this obviously does in a degree of guesswork is I looked up independent estimates for what the prospective free cash flow yield for the year is on the S&P 500 X Financials and the answer is 2%. And the reason why that's a lot lower is quite simply that the uh the major constituents of the index which are involved in the the AI arms race are looking to spend some fantastic sums of money in capex during this period. I think it's um uh it's the full year 2027 number rather than the 2026 number. Um, and I may have that wrong, but we're talking about a trillion dollars now in terms of declared uh uh spend that people are planning, which just to put it in perspective for you is significantly higher by about a short hundred billion than the US defense budget basically. And when I say the US defense budget, I think that's the number that the Department of Defense is asking for rather than any number that's been agreed uh during the period. So that puts in perspective the scale of the Dash in terms of spending here and what it's doing to the free cash flow. Whatever else may be true here. Uh I am confident that we've got a portfolio which is now very significantly cheaper than the equivalent index. You can see that on the graph here. Uh which is obviously um not up to date for what I've just told you in terms of of numbers for 2026. But when you look at that, you can see that we were already entering this period with the first time uh really since we started where we are significantly cheaper than the index. Now maybe we're just investing in value tracks. Got to be a possibility. I have to bear it in mind. But if so, we're doing it pretty consistently across a short 30 companies compared with what we're getting in the index. And obviously if those perspective numbers for the index of 2% pan out to be roughly correct and if our numbers remain even steady in terms of price and free cash flow, we've got a relatively cheap portfolio on our hands here. What we've bought and what we've sold. I mean fairly obviously there's a very long list of purchases and sales there for the first half of 2026 even compared to the somewhat heightened turnover that we've seen in 2025. uh there. Why did we do this and what have we done? I imagine that's where an awful lot of this will sit in terms of uh of of your thoughts about what we're presenting here and what you may want to ask me about about the situation. We had a very long hard look at at what's been happening in terms of performance and we considered everything uh that we could think of in terms of what action if any we should take with regard to this with the kind of no holds barred. The the only thing that I would have penalized anybody flung on the team is if they didn't say anything frankly they're allowed to say anything whatsoever. They came up with everything from the possibility of of basically indexing the the top 10 stocks in the index within our portfolio um indexing the top 10 stocks in the index unless we have a reason not to own them. Um bringing in somebody from outside who's clearly got the the zeitgeist of a moment in terms of investing in the momentum that there are in these stocks to assist with the portfolio or a section of the portfolio etc etc etc. What we decided in the end was to stick with what we're doing. We think it would be a very bad moment to come out with a radical shift into basically becoming a closet index fund or embracing uh the momentum in the sense of investing in the in the large stocks that are involved in AI whether they're within the index or like skinex they're in other indices. Um we we just thought that that was a not what we do. Uh and b almost certainly when you do things like that you find the next day that your timing has been perfectly wrong. If you got things wrong going into it, why do you suddenly think you've got it right now? So in the end we rejected all those and I mean we went a long way in in exploring some of those uh possibilities in terms of how they would look and what we could do. What we decided was that one of our problems was this. We look back to the um investable universe over the last 5 years and we did some work on whether it was possible to have constructed a portfolio out of our out of our um um investable universe that would have outperformed the index. And before we get on to the remainder of this presentation and you ask for our work on that, no, you can't have it. And but I just ask you to take my word for it that we did it. And and when I say a portfolio, the problem with portfolios like that where you back test is even though it's not a back test we're trying to sell to anybody, when you look at a back test like that, it comes up with some rather strange things. It it was a portfolio that in with some parameters you would have found difficult to run, particularly given the constraints that exist in terms of concentration risk and so on, but nonetheless, it's informative. And we looked at it and we decided the numbers told us we could have constructed something. And that means that actually one of the factors in producing this performance is me or us. And so if we were going to continue, what must we do to to uh uh get away from that? So we looked at what that was versus what we actually had and decided that what we'd be very subject to allowed ourselves to become subject to is to take the do nothing mantra and allow that to transmute itself into a degree of of incumbency or endowment bias if you're familiar with those terms which is we held things and held on to them because we held them. Now someone's pointed out in one of the many comments that the things that we then ditched when we got to this perform this performance uh um analysis were things which have underperformed u by and large in the last few years that's correct but that's not really the thing that we think was affecting us most it was that they underperformed fundamentally that they that's really where the problem lay that we were buying things or had bought things or had held things like unilver like collast um like novo nautis like um uh uh Atlas, Copco and um and so on which had disappointed us but we were too busy making reason coming up with reasons why uh we should continue to hold them. Um and and actually the main reason we continue to hold them actually was that the share price had performed bad. that that was one of the main reasons in there and our history of sales with things like Estee Lauder and PayPal which I see has been bid for finally today is that when these things do fundamentally not do what it is our thesis was and we held them for actually selling them is a good idea even if you're not selling them as early as you could have sold them. And so we sold them basically and we went and replaced them with a number of things from our investable universe. Not new things uh that we just you know took off the shelf from from somewhere else but things that were in our investable universe that we could have owned and that we think were a better replacement for them. And there are lots of things you can say about the things that we ditched or the things that we replace them with. But I would I guess one would say that the uh the biggest parameter within the things that we bought in is we've got a greater certainty of growth and I mean growth in in fundamental terms in terms of organic growth in revenue than we have with the things that were executed uh during this period and that's really what drove the changes concerned and um that's what we've implemented basically um we haven't gone out there and even though they're within our investable universe and bought um broadcom or Nvidia uh or um SK Inix or any of the other or Amazon or Apple or any of those companies that we could have done which would have basically negated our index exposure and our possible continued exposure to if it continues the momentum in these stocks. That's not what we've done. What we've sought to do, we've sought to basically replace a bunch of things where our incumbency in those stocks, our endowment in those stocks had allowed us to talk ourselves into keeping them notwithstanding the fundamental deteriorations that we were witnessing and the share price deteriorations that went with it that we're witnessing and to parlay that into things where we're more confident of the uh of the future fundamental growth that we seek. Um, and that's really what the change has been about. That's the look through ratios which you saw earlier uh in the chart. That's that's just the look through ratios for the portfolio waited for as it outstands basically. So it's got a return on capital of 31% a gross margin of 62% operating margin of 29% cash conversion of 92% 43 times interest cover and a 4.3% cash flow yield. I don't think that we have moved totally away or or noticeably away from the the three factors that we we put down as as the main stays of our um of our strategy. A couple of other things to say about it and I I'll stop then and hand it back to you so you can um ask me things if you wish. Um one of them is if we had done this over the past five years, I doubt we'd have got very many questions about it. And really the answer is we probably should have been doing it over the last five years. I think that's a fair point if somebody wants to make it. I think it's fair. The other thing that you could say and um and I think we reached this as our conclusion which drove the the change is our incumbency had in these stocks that we'd continued holding had to some degree got in the way of us executing principle number one of our strategy properly. that we were no longer holding a portfolio of 20some of the best companies as a portfolio that we could derive from our investment universe. So, you know, you could say, well, does it mean that you hadn't executed that as well as you could have? Yes, would be my short answer to that. Yeah, but there we are. or not. I think that the likelihood is that whilst current market conditions persist, and by that I mean the volatility more than anything else, that we may continue to see a slightly higher level of turnover and activity in the portfolio than we've seen for the past 15 or 16 years. But I don't think it'll be anything like the level of activity that we've experienced in the last six months. I think this is a a one-time change. What I think is we will continue to be alert to changes it that either show us that we've got another degree of incumbency in a stop agreeing there or changes which occur because of the degree of volatility in markets when markets can move as I pointed out in the letter 30% overnight in a 200 million pound company you do have to react sometimes sensibly to it and so I think taking those into account we're likely to be doing a bit more than we have historically would be my guess But having said that, probably nowhere near what people uh in general engage in. The total cost of all this, it's not on the on the on the the final slide because obviously it doesn't update for 2026 at the moment. Um it cost us about 11 million which is you know quite a lot of money even if you say it quickly but just to put it in perspective that compares with 5 million back in 2020 as you can see. So the amount of actual cost that we've inflicted on ourselves by doing this is not huge. And as I say, if this had actually arrived by a million or so extra peranom over the last 5 years, I don't think we'd be even be having a discussion about it. But there we are. We are we're here. And I'm going to finish there, which is earlier than comrade predicted and um and hand back and try and answer your questions if I may. >> Perfect. Thank you, Terry. That just gives us more time for questions. So, as mentioned at the start of the call, if you'd like to ask a question, just click on the Q&A speech bubble that you'll find towards the top right hand corner of your screen. Put your name and your company name in and we'll endeavor to answer the question. We've got quite a few come through. Um, firstly, Terry, historically, Fundsmith's been willing to hold highquality businesses through periods of operational weakness where the long-term investment thesis remained intact. Given the greater emphasis on momentum, higher turnover, and a reduced willingness to buy into glitches, how has your threshold for patients changed? And how do you distinguish between a temporary setback and a deteriorating investment case? >> Yeah. Um I think the answer on the threshold is that um uh in terms of putting up with the um uh uh the problems that uh we find in a in a good business is the reality is my my threshold was always pretty low and my colleagues threshold was a bit higher partly because they were probably worried about what I've written about about being patient in these circumstances. But the reality is if you had sat through some of the meetings that we've had in the last few years um or if you even read the things that we've been writing or listening to what we've seen in the last few years our threshold um I don't think it has got to change um it's just got to be applied rather stringent so we'd already reached that threshold in my view in in Tuit LVMH um Metler to Nike Novo Nordisk Otus Unilver and basically which is quite a lot, right? Um, you just got to accept that when the when a a good business uh, you know, one of the one of the the mantras that Buffett has is always invest in a business that can be run by an idiot because sooner or later they all are. And I've got to say, and there not many things that he says that I would tend to disagree with, but as time's gone by, I've got better at disagreeing with that one. Um, which is to say, no, lots of these businesses can't be run by idiots. the damage that they do uh is is I guess maybe it's a feature of the sort of businesses. We're not talking about Coca-Cola here anymore. Uh that they are it's partly that you know maybe you can do that in Coca-Cola. I think it's it's a lot less easier to do that in in businesses which have got medical technology involved. Yeah. Like cold blast and so on. I think that's that's probably changed. Um and the world around us has changed a little in terms of whether or not they can fight their way back in in those circumstances. when a company like a Nike or maybe possibly an LVMH runs into a problem with not servicing bricks and mortar retailers because they think they can do it all themselves andor in China it's not evident that really if we just remain patient they'll be able to recover this you know this is a different world in some respects and we have to adapt uh in terms of of how we might do it yeah I mean temporary setback investment case um my colleagues uh would tell you that the best indicator they've ever come across is when I get upset basically. Um but there are a number of other factors in there. Um a management's propensity to utter rather than giving you honest analysis is quite a good one. You know that we all get things wrong. I'm sitting in front of you today uh describing that. Uh obviously um coming out with things which nobody understands uh including the person ushering it isn't really going to get you there. So if you you know if you listen to what's coming out of um uh say Zuetis for example if those people can manage to turn around the problems they've got in the business all I can say is their managerial capability must be considerably greater than their communications capability and the two usually are quite linked. So you know I think you watching for people who communicate clearly and honestly here's the problem and here's what we're going to do to fix the problem in language that we can understand. uh gets it. Secondly, the nature of the problem um you know that you that you're dealing with. Have they managed to blow something up which is absolutely fundamental to the business and may become irreparable? That's that's what you really look at in in a number of cases and I think in some cases that's the case. Um you know if you look at what's happened with Nike and bricks and mortar it's a long way clear from clear that they can fight back now partly because nature of boards a vacuum and the competition has made an awfully big inroad into the bricks and mortar area. Can people um repair that? I'm not so sure that they can. Um and then of course the final sort of plank that I'll give you in terms of you know how do you tell setback from uh from temporary is sometimes you know when you get the sort of thing that happens more than more than once you have to analyze it rather like or goldfinger analyzed um uh things going wrong in in Goldfinger which is he said when something something goes wrong once it's happen stance when it goes wrong twice it's coincidence when it goes wrong the third time it's enemy action or a trend. Um, and well, with some of the companies we've got, and I would probably pinpoint Unilver more than any other company in this, I'm sorry, but I've heard this story before, and I'm just not buying it, basically. I mean, you if you keep hearing uh things which don't really don't fit what you want in terms of capital allocation, how to manage the business repeatedly, it's time to go away. >> Okay. Thank you. uh many clients invested in Fundsmith because of its disciplined, low turnover, buy good companies, don't overpay, do nothing philosophy. Uh with the changes to the process and the increased portfolio activity, why should long-term investors be confident that the original investment thesis remains intact? >> Um yeah, good question. Well, I think that's because a if you look at the portfolio we've now assembled, it looks very much like the the portfolio which we had before in terms of its its metrics. We haven't got a portfolio here uh that looks completely different. We haven't suddenly got something where there aren't the earnings or uh it's got very low returns, but don't worry, they'll be all right in a minute when the network effect kicks in or the you know the the the data centers start making money and it's not that. It looks it looks pretty similar in that regard. Probably a bit more growthy than it was before. probably a bit cheaper than it was before as well, funnily enough. There's there's an odd thing. But, you know, we've known what won't we do? We're not going to go we haven't and we why why should they trust us? We could have just gone and bought some Nvidia. We could have gone and bought some Apple, some Amazon and some Arista networks and a bit of SKX and some Broadcom and then I don't think we'd perform very well particularly um who knows but I don't think so. But I do know that nobody would be complaining about the uh about the the deviation from the index to the degree that they they might be now. Um but it's not what we do. The fact that we have we could do that but we have not done that. All of those stocks are viable from our investable universe. The only time I think we're going to contemplate doing that is if or I should say when a catastrophe occurs and we find a gem amongst the rubble in those companies. Now that's the only way that we're going to be buying uh into those. Finally, I'm I would say look, this is a large turnover, but a what I'm being very I hope honest about is I think it should have been going on a bit more and gradually over the last five years. The market's clearly changed a bit in those five years and we probably should have gone up to 10% turnover peran or something like that rather than the very low numbers that we've had and then I doubt whether we'd be discussing this turnover and I don't think we're going to be doing it again. and we're going to be sitting here in 6 months or a year or even 5 years time and going oh well we've had another 50% turnover this uh this half year and the reason for that is as follows no that is not going to be happening. >> Okay. Uh what gives you confidence in the future growth of the portfolio and is it topline growth that you're primarily focusing on? >> Um there's nothing you can say much beyond analysis really in terms of the topline growth. Um but you know if you try to fix within that certain areas that you uh you'll be relatively confident uh at looking at it on it's things where we think for example they uh unlike something where we've got uh areas which were affected by AI and the company previously was fairly low in growth. Walters Clue would be a good example, right? We're talking about single, you know, low singledigit growth or mid-s singledigit growth and there's the fear of AI interjection versus Sage where you've got twice that rate of growth and I've got less fear of of AI interjection. But even if they even if they're both equal on the AI factor, one's growing twice as fast as the other basically. Um and so it's analyzing companies like that as we've gone along to see where we would feel that we've got a high level of confidence uh that the uh that it's better than what we had before. Not confidence in it in itself, although that's pretty important. It's more confident than we were in what we had before. Uh I would say so another good example would be taking our Atlas Copco. So we're talking about compressors and vacuum equipment and so on which uh you know is is partly linked to the semiconductor cycle but quite a lot not linked to the semiconductor cycle and substituting with LRD uh and with LR we've got yeah that some data center exposure in terms of cabling and ducting and so on but an awful lot of stuff which is in low voltage uh equipment which satisfies that that great sort of mantra of a very lowcost item that goes into a project uh that's mission critical in terms of getting the project finished and where people are really want a piece of of equipment that's got a brand where they're not risking their reputation. Your your electrician or your electrical quantity surveyor feels very confident in in specifying it. So those are the sort of comparatives we've made across the companies. >> Okay. >> Sorry we yes topline growth is the first plank of this. um you know growing profits without growing the top line is nice but it's not it's finite isn't it? Uh that's the problem. Uh so basically margin expansion as a means of u of growth is a nice to have but it can also be dangerous frankly and um and it isn't a gift that can keep on giving. It's finite. Um topline growth is the first plank of this. I mean obviously we don't like topline growth that's got no profitability or worse. So we're not particularly keen on that. Um but we are um uh starting with topline growth and topline organic growth where we can see it as well. >> Okay. Thank you. You've been critical of some management teams of your companies over the years. Has this been down to the quality of the individuals involved or down to events? What are you doing to try and ensure that these situations are limited moving forwards? >> Yeah. Um I think it's um combination of both in some respects. I don't think one would pin it necessarily on events or or individuals although in the end it always does come down to individuals. So you know if you were to take companies that we've um exited here where we uh look at them you know Collast uh Intuitit uh Nike Novo Nordis Unilver there's absolutely no doubt that they faced some interesting situations in a number of respects. I've got to say Knight for example had to deal with the the whole COVID uh situation and the fact that obviously we were uh dissuaded to some degree from going shopping in our normal method at the bricks and mortar uh trainer shops during that period. So yeah events have but in all those cases I would say it's individuals and their reactions which have been the problem uh running through colast in terms of their reaction to uh acquisitions and not managing the operational aspects of them. adequately intuitit making a very large acquisition or two and then burying their head in the sand about how bad they were uh I would say Nike uh in basically ignoring one of the two channels uh etc etc so you know all of them I think as to say which one it is I would say it's individuals more than that more than it's anything else and in judging the uh the individuals I I keep coming back to this again again I I've I've been in business in one form or another now uh for 52 years this year, believe it or not. And um and you know, some of my colleagues have been in business uh you work with I've worked with Julian for 40 years this year, right? So we've actually seen quite a lot of stuff uh over that period. And I think one does start to get a feel for these things. Um and it's just sometimes I guess we haven't actually let our instincts have full reign in many regards. you know, when we when we sit and think that's somebody who's extraordinarily good, um we're bet more right than wrong. And when we think they're they're very very bad, we're even more right than wrong on average in terms of of of what we're getting out of the people. And no amount of uh of attempt to pour sort of commentary out to pour honey on the situation affects it. Basically, it's more, you know, I'm I'm thinking my feet and asking, it's more the individual than the situation. >> Okay. Thank you. Should investors expect the increasing focus on momentum to result in further running of winners in the portfolio? >> Um yes, I think people should expect more running of winners. I mean historically that's worked very well for us and I think we'll continue to do so. We are mindful though uh of the concentration limits. We've bumped up not we not gone through at any point I assure you but we have bumped up against the concentration limits in the past on a number of occasions with running winners and we are going to try and find ways of be more innovative in terms of how we handle that. So at the moment we think that particular with the valuations available uh that the payment processes are a good opportunity um and uh for the first time in the portfolio we bought both Mastercard and Visa because it gives us an opportunity to run the winners there without hitting a a concentration limit basically. So yeah I think thinking through how we can handle uh being able to run winners is a part of of giving us the equipment to do that. >> Thank you. Um, is there not a concern that some of the factors impacting a stock that you sold will not will just impact the stock purchase? Thinking the likes of Intuit into Sage, Walters into Apploving Diva. Um, this is slightly more focused on stocks impacted by the software selloff, but are you not at risk of having your fingers burnt by momentum markets again? >> Yeah, look, I think we could um I can't give any guarantee that we won't be affected by momentum in terms of share prices. So I don't know whether you know selling a Waters Clure out there in an Intuitit uh will lead to any better result in the in any future I can foresee in share price terms by owning Viva uh and and Sage. Um, but what I am relatively confident about is that we're in a fundamentally better place. that what's being supplied is more difficult for AI which is what you know the SAS apocalypse is all pointed at to replace in the case of a sage or in in in a viva than we are talking about in an intuitit or or a waters cler because you know in the case of intuitit they're first of all you know they've got about 37% of their revenue is is tax filing in turbo tax I think that is more vulnerable than accounting software basically uh you know the tax codes, you know, are uh like languages and large language model is a clue easily codifiable and applicable and so I think that is probably and plus we've got the whole credit karma mailchip particularly the Mailchip access none of which exists in Sage and I think therefore it is more vulnerable than Sage um and so I think fundamentally I am confident that we're in the better counter there particularly since I don't think the intuitive management still notwithstanding us talking to them and everything else um able to grasp that they really should fess up to the mailchimp thing and try and uh deal with it in terms of the the way that we're trying to deal with postmortems on what we do uh out there and the same goes for things like wers kur and and viva wers kur is is I'm sure you know a publisher of technical uh information it is relied upon by professionals but we are talking again about documents right and and language and I keep going back to this large language models are good at dealing with documents and language that is you know the physical world is more of a a difficult frontier for them. But where language and uh uh um and documentation is concerned, it's their forte. At least at the moment, I would say it's much more difficult when you've got something uh that's handling software that goes from clinical trial data through to manufacturing data and is embedded in the in the operations of of drug companies like Viva. Basically, we're no longer dealing with language here. We're dealing with something that goes considerably beyond that. And so I'm more confident fundamentally. It doesn't mean that I'm going to be right in share price terms as far ahead as I can see. That's something where I'm afraid your guess is at least as good as mine. >> Okay. Thank you. Maybe some um shorter answer questions here. Um with a new with regards to the do nothing at what future level do you think portfolio turnover will settle at? >> Um well I would I would peg it at 10%. >> Okay. How how do you forecast portfolio volatility and how that sorry how do you forecast portfolio volatility will change in light of the alterations? Um I don't know how portfolio volatility will change uh exactly in relation to it. Um but you know I would say if I were trying to measure it by the sortino ratio more than anything I would be relatively confident that we are going to see a higher sort ratio from the new portfolio. more gain per unit of volatility than we were from the old one uh out there simply because of the the adverse fundamental characteristics that I can see from some of the companies that we've sold because after all volatility can prod be produced by a number of things but as we can see from events such as IBM this week some negative fundamental volatility can produce enormous market volatility I mean IBM only missed their uh their revenue number by about 2 or 3% in terms of consensus and got a 25% share price move. So moving across from the sales to the to the purchases, I would say that I would be um I would measure it by the sortino ratio. I would be relatively confident that we'll have a higher sortino ratio out what we bought than what than out of what we sold. >> Okay. You're currently at 28 stocks. Do you think that number it seems about right or do you believe that there'll be movement either side of that? >> Um it seems about right to me. I mean, it's very difficult to run something down in the low 20s because of the concentration risk I that I touched upon earlier. So, I think, you know, we're we're likely to try and keep it up in the higher 20s rather than the lower 20s. And plus, you know, in terms of things to buy, there are only, you know, looking at our current portfolio, there are only one or two things left in the investable universe that are of interest to me versus what we've got. Yeah. Equally, there are one or two counters within the the things that we've bought which are at the it's a portfolio folks that are at the more speculative end of of what we're expecting here. So, I don't view apploving, for example, uh as in the same way that I that I view um the TJX, the uh the discount designer goods retailer. They're quite different. Um and so, you know, and and you can see that from the fact that one's, you know, a much lower waiting than the other. So I think we would uh we would handle that by being willing to lose some of the ones there which are slightly more speculative if if that speculation doesn't produce the kind of growth that we want. >> Okay. You added your first Asian stock in the last quarter. Are there any other uh geographies that you're mulling over at the moment? >> Uh look, we continue to to look at the uh uh at the world at large. We've got a couple of Japanese companies which we like. We've got a Japanese pump manufacturer. We've got some Japanese companies involved in the in the semiconductor sector. Uh we've got a a factory automation company in Japan. We've got uh memory companies uh in in Korea. Uh so not all of those are possible at the moment. Most of those things are problematic because they're so closely linked to what's going on in the semiconductor area. Uh which I think is uh pretty dangerous and not really for us uh in terms of direct exposure to it. >> Okay. Um, how long do you feel is fair to judge you on whether the changes that you've made have had a positive impact? >> Another 15 years would be good. Great meeting. Thanks. No, no, realistically, um, I would say if I was sitting here listening to all this and I were you, I would say the end of 2027, 18 months. Okay, thank you for that. Um, given your experiences of investing in meta through the capex spend of uh in 2021 with the metaverse etc. How quickly and how quickly the company reverse this? Do you believe a similar change can happen with the hyperscalers? Um yeah, I think similar change, rapid change could occur uh with the hyperscalers because I think that um my take on it continues to be the one that I have consistently since the beginning of this, which is I think it's somewhere between very difficult and impossible uh for the kind of activity that we're seeing at the moment to produce an adequate return. You know, a trillion dollars a year spend requires profits and free cash flows of $200 billion peranom incrementally to make a good return. Um, I just cannot see where it's coming from. And as we're seeing with the IBM results yesterday, for example, we're already beginning to see that it's making a large sucking noise drawing in expenditure that would have gone to other areas. But eventually that's going to run out. The number is is so big. So yes, I think it could occur. I think if they do it will be Armageddon in two respects. Um Armageddon because it's all very well to say I'm not going to build this anymore. I'm not building these um uh uh data centers. I'm not taking the uh uh the the GPUs. I'm not taking the racking and the cabling and the cooling and the power and everything else into there. And I'm not building this model anymore. And so that's it. I've thrown I've thrown the gear lever into reverse and I'm out of here. As you say, we have seen people do that in the past. Uh like Mr. Zuckerberg with with the metaverse and I think it could happen again. But I think it will be carnage if it does so because um clearly people have signed contracts for an awful lot of stuff and um I think the consequences of such a a large reversal could be very very damaging for certain companies particularly ones that are involved in some of the circularity of ownership and finance here that that we've looked at like Core Weeave and others. And so I don't think it will be one of those well I've thrown the switch and this is going backwards and there'll be no consequences. I think there'll be an awful lot of consequences with people running out of financing potentially going bust and suing each other uh one way or another uh in terms of doing also I mean I've read certain commentary by uh people um saying it'd be really good if people scaled back on this very dramatically because it means then we wouldn't have to worry about them becoming capital intensive and low return. We could get back to them being software stroke social media advertising businesses which have got very low capital intensity and very high returns. I agree that is uh kind of fundamentally interesting. The only trouble is since it's completely at odds with the current market negative. I think it's going to cause a massive route basically. Now we've got a market which has risen because this capex is all going out there and it's good. If it's suddenly not only not good but it's abandoned. The likelihood we're going to go back to the oh well isn't this great? We've got software companies here making 80 to 90% margins and with little capital intensity and 100% cash conversion. Great, I'll go, you know, I'll I'll go go and, you know, go and have my dinner and relax now. No, I think that that such a change in the narrative I think is going to be hugely damaging uh to things. And look, I think it's already we can see the warning signs of this out there. you know um better has announced that as I'm sure you've all seen that uh you know first of all it was building it own large language model then it was building an open source large language model and then it's involving in massive expenditure to build data centers to run all this. Now it's announced that it's going to sell some of that data center capacity uh which is more than it requires to other people and run a cloud business. Well that's interesting. First of all, we do have somewhere around three uh cloud businesses which have already got this market and it's not easy to get in there uh and compete with them. Look at how long it's taken Google basically to get up to the point of of of adequate profitability in doing that. Uh is there any reason to believe a fourth or a fifth can accomplish this and and achieve so you might say well I'm going to sell this to people outside. Will he get sufficient profitability by doing so? I would severely doubt that. basically part particularly in the circumstances where he might not be the only person thinking this. It may be that this is across the industry and um I think it was uh Jim Kramer said in in his mad money kind of uh whatever it is that he thought this announcement by uh uh by Meta was $100 worth $100 on the share price. H uh I wouldn't think so myself. I think it re it really sounds an awful lot like uh whistling in the dark basically uh to me. So yeah, I think it could happen. Uh I think it will happen. Um and when it does, I think it will be very damaging in terms of um financing uh uh viability of some of the businesses involved uh the the legal ramifications and what it will do to the market uh the the market in these companies. >> Stop. >> Okay. Thank you. Uh, you previously >> opinions on it. Not that I've got any opinions on it. >> Another one that I know you don't have any opinions on. Um, you previously sounded quite skeptical about the prospects for the semiconductor sector. What changed? >> Um, I'm not I'm still I'm still reasonably um suspect of the prospects for the semiconductor sector in so far as I think the the dash that we're seeing at the moment uh in in its nature is not sustainable. Will there be competition in in the in the GPU? Well, yes, we've got it already. So we know that the Broadcom and others are going to compete in the GPU. Do we see that the the Dash in terms of capex in this area will not be sustainable? Yes, I I think so. But we were already involved in things that we think yeah well they're exposed but not in quite that direct way. So Texas Instruments would be a good example is in analog devices. Um I think not the same by any means but other examples are people who are involved like TSMC. I mean, I've been of the view for quite a long time on the team that TSMC is a counter we should own because whether or not we can predict the semiconductor cycle, I would doubt. Whether or not I can predict who's going to be the winner in the semiconductor cycle, I'm even more certain that I can't do. But I do know that this is a primary beneficiary of what's going on and will continue to be so I think for as far ahead as we can feasibly see the people who supply power ditto. I mean obviously what's going on in the in the dash for data centers and building uh is obviously being a great um uh boon to Janova uh and and so on but I think it's going on anyway. I don't think that it's whilst it would be injurious to the business were this all to end. I don't think that it's actually something which means that the fundamentals of the business are completely uh at sea. you know what's going on there in terms of the installed base of equipment that it's putting in and it's very early stage work in modular nuclear reactors I think is going to continue going on come what may basically >> okay thank you how closely do you monitor correlations between stocks in the portfolio >> um we do yeah look we do monitor correlations because it's all very well for us to say well we've got a portfolio um but whilst we may sit there and say look we think that Amdas is is quite different to Sage. It is quite different to Viva and is quite different and so on. The fact of the matter is they're all software businesses and if somebody else thinks that they're correlated, it doesn't really help all that much at least in terms of near-term share price performance. So, we do try and look at how the portfolio has moved historically when we get big factors impacting to see whether or not we're taking on companies that we may not think are correlated fundamentally, but they are. So, we do monitor that. >> Okay. Uh we've still got sort of five minutes or so. So if anyone has any more questions then uh please do let us know. Um are you still enjoying managing money Terry? >> Yeah I like sometimes it's like having a headache in a thunderstorm. That's the nature of any job really. Um uh I don't think anything is is without its uh without its problems. But you know I still uh enjoy finding out about things and trying to apply them. Um, I probably could uh uh do enjoy it more if it weren't for some of the commentary act, but you know, I'm a believer in the First Amendment, so you know, but they can write what they like. Somebody said to me, "How do you deal with a client of ours who uh um is a rugby league um uh fan, as am I, said to me, how do you deal with when they write all these nasty things sometimes?" I said, "That's quite simple. I don't read them. um I read the headline and um you know it's it's slightly lazy but if I read the headline and it's um you know it's it's pointed in one direction sometime I think oh it's I probably don't need to read the remainder because I know what it's going to say you know um it's rather like reading a number of newspapers these days or news channels it's like ah right now they've given me the headline I know what the article's going to say so there's you know I don't need to read it but yeah that's that's about the only gripe really I would say. Okay, got another question here for you. Um, the conclusion that I've drawn listening in is that there's been no material change to mantra or philosophy or investment process perhaps barring a bit of momentum sneaking in. Is this a fair assessment? I think it is a fair assessment. But I would also say and I've tried to be as honest as as I can uh in in in addressing this today that I think when we talk about a little bit of momentum creeping in a what sort of momentum are we talking about right and I think the answer is fundamental momentum rather than share price I accept that some of the big things that we're buying uh are have got negative share price momentum just like some of the things that we're saying say sage versus intuit but I think the fundamental momentum is quite different between the two businesses as probably is their fundamental exposure to AI incursion into it. The other thing is and I was honest about this is um I think that the the the changes which have occurred are also something where we should admit that we didn't um apply with the sort of acid test that we should have over the last 5 years. number one which is investing in good companies and having that fundamental momentum in there as one of the components because when we talk about good companies historically we've always been fundamentally clear that we need two things to make a good company. We need good returns and a source of growth. We've always been clear about that and I think we managed to lose sight of the second part of that a little in hanging on to some of these companies. I'm being really very straight with you about my my my take on on how we did this. Okay, thank you. So, we're out of questions. There's been a couple of questions just on um flows since the annual or the semiannual letter was issued. Uh so, it was issued a week ago. I mean, the outflow has been pretty much in line with everything that we saw uh year to date. So, I think that the number that I've got since the letter was published was just under 95 million of outflows. But that is not uh >> on different. >> No, I mean in terms of incoming from people uh in terms of commenting upon it, I'm not talking about the published commentary. I'm talking about clients who who talk to us. Uh I've so far uh mostly been very pleased with people who um have said to us that they invested in us for a particular strategy and they are pleased that we are still with the strategy. Uh basically that we've not made a fundamental shift. We haven't gone, oh well, it's all momentum now. Oh, well, we're going to quai index. Oh, well, we've got to own AI, otherwise we're going to be out of a job and have no fun in it. But mostly, that's what I've got. I've got people who've come up with a few other things uh out there in terms of telling me how we should be doing things differently in life to the way that we are doing things, which usually involve me hiring them or taking a service, which they're offering. Um, but I'm not doing any of those. Yeah. >> Okay. Another couple of quick questions. Um, is the fund size an issue? >> No, don't think so. I mean, um, I don't think the fund size was an issue when it was when it was twice this size. So, I'm not sure why it's an issue now. Um, I mean, the only area where we get issues, one of our sales was Magnum Ice Cream Company, you'll notice, which was spun out from Unilever. Um, we couldn't own it. I mean, we couldn't get a meaningful stake in it. It was uh, it just had to go. It's it's too small in terms of liquidity for us. >> Okay. Well, that takes us up to 4:00 UK time, so I think we'll end it there. Thank you very much, Terry, for your time. Thank you everyone for your questions and also for your continued support. And clearly, if you have any more questions post uh this meeting, then please do get in touch with your fundsmith point of contact. But have a good afternoon everyone and uh enjoy the evening. Byebye.