This episode of the podcast is generously hosted by progressive equity research. Visit their website at progressive-ressearch.com. Hello and welcome to episode 44 of the desert island investor. Fundsmith under the guidance of portfolio manager Terry Smith invests in equities on a global basis and Mark has been invested in the fund for many years and he regularly attends their annual shareholder meetings. Now in this episode he's reporting back from the 2026 event in London. So seeing this is a hot off the press episode let's get straight to it. So good afternoon Mark and good afternoon to you Paul. Okay, you you're fresh back from the Fundsmith ASM and every year since we started this podcast, you've attended this event, not least as you have a significant holding in relation to your own portfolio. Uh now, we also use this as an opportunity to reflect on your own performance. So, what is the size of your funds holding compared to your own portfolio? >> Funmith is 41.2% 2% of the pie with my own portfolio 36.8%. I also have a third leg to the stool which is my my pension uh where I've had several pensions that accumulate and I've consolidated them into Vanguard trackers and they account for 22%. And in addition uh coming down the tracks this year uh when I reach 60 will you believe uh will be a final salary pension from Sappy who are a paper manufacturer. And I left that them back when I was 28 uh and it seemed like crumbs at the time when it has galloped along with compounding and uh perhaps we'll cover this in a future episode. Uh I have been uh making some modest redemptions from Funsmith to support my traveling and fulfilling some longheld dreams and ambitions. And after all that's what it's for. Uh not simply to look at it on a screen. Absolutely. Um now for many years fundsmith were outperforming the index to some tune but in recent years there has been a prolonged underperformance. So how did 2025 look? Well, the fund was up just uh 0.8% and that compares with a benchmark of 12.8% and that is the fifth consecutive year of underperformance. Since inception 15 years ago, the fund is up 13.8% on an annualized basis against the benchmark which is the MSCI world index of 12.1%. So long-term still positive and again that's against the benchmark. So remember, they've not lost money. Um, and I'm glad that I've enjoyed those returns rather than, you know, leaving my hard earned c cash on deposit in a bank. >> Why do you think the underperformance has lasted for such a long period? >> When you look at a short period of time in investing like a year, there's generally some phenomenon that's had a burster. uh back in the day it could have been.com stocks, it could be gold, it could be other commodities, it can be a sector perhaps banks or farmer. Um but this has dragged on and it's largely the weight of money that's been going into the the Mag 7 uh aided in a betted by the weight of money that is in trackers and a trackers of many attractive features but they don't have a brain uh it just follows the money and the weight of money uh and and it has no consideration for the valuation or the underlying prospects of a business and I am myself just said I'm adding to this in some small way through my my pension that's in Vanguard trackers, you know, which are, you know, split across various indices. >> Now, this has lasted for some time though. How how long can it continue? >> I have I have no idea. But I I doubt like any bubble, it will last forever. And when it comes to an end, it will be ugly. Um this was a large essence of the other evening of the in the presentation from from Terry Smith and his 2C Julie Robbins on the night. you know, they were explaining and hammering home this phenomenon and and trying to predict, you know, how long it will last. >> Do you think any correction or crash will be limited to those max 7 shares? >> I'm no market expert, but from my experience over four decades of investing, there's generally a lot of collateral damage, especially in the short term. Um, what tend to furer best are the defensive stocks. These are businesses that supply products and services that we continue to need rather than want. Um and you know irrespective of what the economic circumstances are and be it you know insulin or toothpaste and these are the type of things that funds find attractive historically the funders perform best uh relatively during the bad times. >> Now we we hear the phrase mag seven uh quite a lot. So who exactly are they? Uh it's Alphabet which we used to know as Google uh Amazon, Apple, uh Meta which was Facebook, Microsoft, Nvidia and Tesla. >> Right. So this is MAG is Magnificent 7. That's correctly where they take that from. Okay. >> Um right. So this this bubble as you describe it um it is a momentum play. I mean and it's lasted some time. Why have you not jumped on board with your own portfolio? I've restricted myself to UK equities. Um, it's what I've always done. Um, this is where I've done my fishing. Uh, I've have local domestic UK knowledge and these are businesses I have some understanding of. Um, you know, for one, the MAG or Magnificent 7 are businesses that are way way outside of my my narrow circle of competence. And uh, I have a a law buying I have a buy in a law churn strategy. Um, I wouldn't back myself to read the warning signs and be of one of the first out of these businesses if the tide turns. And when the momentum shifts, it shifts quickly. >> Okay. So, on positives, who were the fund Smith winners? Uh, as previously I mentioned, Alphabet, the Google, Idex, um, which are, um, pet healthcare, Philip Morris, previously predominantly tobacco, but nicotine uh, heat not burn products, uh, Meta and Microsoft. And the losers >> uh were Nova Nordisk who are into insulin and weight loss drugs. Uh ADP payroll and HR software, Church and Dwight consumer brands. Uh Color Plast uh medical devices things like ostmy bags and Fortunet who are into cyber security >> and on the subject of do nothing which is not meant literally but but limiting portfolio churn. What was out and what was in? >> Uh, out went brown Foreman who were manufacturer Jack Daniels and and PepsiCo. They were sold on on the fear that that weight loss drugs are a clear and present danger to curb appetite and profit margins. And in came Zertis who are a veterary pharma company. or Luxotica uh they manufacture spectacles in a world where people uh need uh vision correction in in emerging nations and increasingly they'll be able to afford it. into it, our um accounting software which they previously held and vultures clue our um technical publishing covering health tax accounting risk and compliance and legal and they also gained magnum icek company as did I after it was spun out of unilver. Um now unilver is retaining a 20 uh% share for the time being and it has just I'm I'm using the word just a market cap of only 7.2 billion and the median cap for fundsmith is 77 billion. So it will be interesting if it has a part to play in the longer term just to you know re due to its relatively small size. So, so Terry Smith is sticking to his guns, but uh not all of his investors are. >> Terry and Nick Train, another fund manager with a similar style and a similar long-term performance record, do not appear to be keeping all investors on board. Uh investors are like football fans. They obviously want successful performances every week. Uh Terry is not abandoning his principles, but obviously he's keen to keep his investors who are his customers. and investors have fear of missing out and this underperformance of the fund is admittedly taken an extended run. Uh things may be about to turn and Cherry can say I told you so. But looking at the fund uh in December 2021 the fund was trading at 670.75 and the assets under management were 28.9 billion. At the end of January it was trading at 703.65. So it's gone up but the assets under management uh were 15.3 billion. So you know what's the reason? Well over time you know investors have been pulling money out and perhaps you know you know putting it into the magnificent seven and this matters to Terry. Um in Norway is a popper but he and his partners charge 1% on the assets under management. uh and if you lose what 12 or 13 billion that pinches. >> So what what was the tenor of the presentation and what were the were any questions? Yeah. Well, a very large part was the underscoring of this whole Magnificent 7 tracker trend and it was a little bit of a carbon copy of previous narratives, but it's still the case uh you know and with various slides showing leg evaluations, weight of money and a selection of ratios. So, partly you've heard it all before, but it's still valid despite this this phase having run for some considerable time. a period that for many, you know, has been too long for them to endure. >> So, no chance of fund Smith's scrapping their strategy. >> Uh, no, they will they'll stand firm, but Terry did concede when asked a question that there is pressure. There's certainly pressure to do things different and they got to try and resist that. Uh, you know, as the opportunity cost between his fund and the benchmark has grown. But I doubt he will start rolling the dice to try and magically catch up. you know um you what they're trying to chase are there are league tables for funds. >> So um AI has been around uh for some time but its usage has increased significantly in the last 12 months. I know we've used it um much more so was that issue raised? >> Yes. The great conundrum is identifi identifying where if anywhere uh people will make money out of it. Um there's no assurityity at the moment. Um it could be just a destroyer of wealth. Uh if we look at the internet which was invented by Tim Berners Lee, you know, he made this free. Um there may have been some beneficiaries, many beneficiaries from the internet, but I I would argue there have been as many if not more casualties. The biggest winner has been the consumer. uh he has or she has greater visibility of pricing and comparisons that uh and that's that's squeeze margins and and goner high street do you remember high street insurance brokers um newspapers bank branches catalog shopping travel agents you know all kinds of shops you know we could go on and on and on and even with YouTube uh your average Joe like myself can watch a few DIY videos and educate yourself on how to do a a simple job that a tradesman could have made a tidy tidy come out of uh now it was thought that certain businesses say relics, experience, surge etc will be beneficiaries but suddenly uh this has turned into a fear that they themselves could be victims of AI. So opinion is split and probably at this moment nobody definitely knows how it will play out. So it's certainly interesting times. Now Terry used um some further examples that through history of inventions that have benefited mankind but did not generate great wealth themselves for their investors and he used in the case of transport canals railways and airplanes and in communication the telegraph radio TV and the telephone you know I think by profession Paul you're a a graphic or you were a graphic designer and you can you can type your requirements into a computer and press enter and you've got an image and that would probably have taken hours or days um by a professional and you know you never know might even be able to replace a podcast course with AI. >> All right, thank you. That's a veiled threat. Um so uh there was a question about portfolio management and and the restrictions enforced on a fund. Now as a as a private investor, this is where you have much greater freedom, isn't it? uh fundsmith uh and any fund for that matter cannot have more than 10% in a single holding. I I currently contravene that as I have two uh both around 12%. That's MP Evans and Concurrent Technologies. So if Terry picks a winner, he cannot ride it potentially like I can and there will be inflows and outflows to funds. So you know they're constantly having to trim and rebalance depending on the assets under management. And if you had a winner that goes on a moonshot, you could find yourself constantly trimming it as it's bouncing up against that hard 10% ceiling. Uh the other criteria is that as a fund is not allowed to have 40% in of its value in holdings over 5%. So uh this is where uh I'm well out of the league here because I've got 74% of my portfolio uh in holdings above 5%. You could argue um that this is greater flexibility for me uh and it's an advantage. But perhaps uh it also leaves me a little bit too exposed. Um perhaps our listeners will tell us what they think. Now I believe there were around 200 questions submitted by shareholders and Ian King who's best known as the news anchor of Sky Business selected 10 questions for the night of which yours was one. >> Yes. Uh Ian generally selects a humorous or whimsical question to bring the evening uh to a conclusion. And mine was actually sent on behalf of my grandson uh who is himself a fundsmith shareholder and uh it was dear Terry like you I am a long-term investor. I was born on the 9th of July 2025 and I've been an investor in Funsmith most of my life. Uh my parents named me Otis as they predicted I would go up in the world. Uh Otis is also at the time of writing a fund holding. If you had a to name a child after one of your holdings, which one would it be and why? And that's from Autist Sample. So, this raised a few titters titty not around the hall. And Terry said he would probably select L'Oreal. But he then shared that uh he'd recently become uh a new dad. Congratulations. Uh to a son who he had named Thomas Crownsmith after the Steve McQueen movie. He's a big fan of the movie and Steve McQueen. So you you never know this new arrival may spur Terry to soldier on until Thomas is old enough to come into the business. Um uh so they did say that everybody who uh this is the same every year who submits a question will get an answer privately. Now I did drop a line to Ian congratulating him on overseeing another excellent meeting and indeed selecting Altis' question and I know his parents will be thrilled to see the official video. Um but then Ian asked me how we I thought the event was received by the audience. So my feedback was that the audience and the wider shareholder base are understanding but frustrated that the tide has yet to turn and and just you know recapping you know many retail investors are fickle and even those that they call themselves long-term investors generally they're quickly impatient and want that jam today and perhaps after fundsmith's previous stellar run that they thought that there would be some kind of guarantee to this fund and it must be tiresome for Terry and Julian to keep trottting out the same mantas, but there is little else they can do ahead of that mag seven uh tracker bubble bursting and the strategy has been articulated as clear as it can be. But nevertheless, you know, it will fall on on some sad for them some deaf ears. And this phenomenon, it's not unique to Funmith. Uh that that morning, the morning of of the meeting, I had an another meeting with Matthew Burroughs of Frostro Capital and they have 13 fund clients including Finsbury and they're all generally feeling that same squeeze. So I'm I'm sure Terry, Julian, Etal will will rightly stick to the guns and although they're maximizing the communication, there will be a continued leaking of of investors through that FOMO. And when it turns ugly, uh, you never know, those self-same investors might come scrambling back. Um, that's if they've got anything left. >> Right. Prior to the ASM in in December, you were invited to a Fundsmith 15th anniversary event. I believe >> it was actually Elaine that was invited uh in her capacity as one's one of Funsmith's largest shareholders. Um, Elaine is a much larger holding Did I say larger? That was a >> She's always She's always holding a L. >> Yeah, I know. Yeah. So, Ela has a a much larger holding than me. However, everything we do Julie own is considered teen pot. Uh but I was there in the capacity of uh her plus one. Um I don't know what the threshold was for the invite and I did think it was a bit little too goch to ask. Uh but it was a very tasteful intimate event. uh drinks and canopes with some interesting people there. And I spent considerable time with Daniel Washburn, analyst and partner who I I met with socially um last month in Maitius. Uh Julian Robbins again and and Terry Smith and the key members of his team uh Revelar being another >> So what gems did you glean from Terry? Well, I'm just wondering where we're up to on the the name drop ometer, Paul, for this episode, but um >> a bit excessive, I have to say. But, you know, I'm I'm bearing with it. >> Okay. But a lot of the conversation was not fund investing related. I was I was pumping them for insights into relocating to Maitius and was given some useful information. And uh I was also asking Terry about his car museum that he's opening on the island shortly and that's going to cater for around 200 classic vehicles. So, we also shared what our first ever cars were. In my case, it was a a green Chrysler Sunbeam PCG 557T. It have over 100,000 miles on the clock and it cost me 500 quid. So, do you know remember what yours was, Paul? >> Um, my my first card was a it was a Ford a Ford Escort. Um, it was black and it was in terrible condition. It was actually painted in missile black. I bought it from a guy who worked at Brit at British Aerospace. I asked him I asked him what color black it was. I thought I'd go to Halfords and get a touch-up thing for it. But yeah, apparently they they sprayed him with the same paint they used on the nose cones of missile >> and not battleship gray then. Missile black. >> Missile black. Yeah. Unfortunately underneath the missile black paint was not considerably stronger than the car and it was just the paint holding it together, I think. Um right. So away from fundsmith specifically but from the same stable Smithson uh is transitioning from an investment trust to an OEIC. What's that all about? >> We call that an o we in the in the in the trade part. We we you'll pick these things up off time. Uh so there's been activist pressure from cyber capital. Um they've been very active uh in various places. So despite constant buybacks the Smithson persistently traded a discount to its uh net asset value. It's not uncommon and um you know false also had the feat which was the fundsmith emerging equities trust and as the name suggests this targeted emerging markets which uh I'm increasingly interested in but it never really gained traction and was liquidated I think was back in 2022. So in both cases I would imagine that these have caused some distraction from from the main fund. >> Okay. Moment of truth. Uh how did you fair in 2025? >> Well it was quite smug the year before. Uh Fundsmith did 8.9%. I used fundsmith as my benchmark really and I recorded 25.5%. So in 2025 fundsmith set the bar very low with that 0.8% but I failed to beat that poll. I recorded at minus 3.2%. So that's total return which is um with dividends reinvested >> reputation such as it is in tatters then >> well let's not be frightened to to heap on the compar the comparators um the so the footsy 100 was up 21.5% and I could claim I could make an excuse well I don't invest in the footsy 100 I'm I'm in you know smaller stocks than that so let's go below the footsy 250 that was still up 9% and the AMO share was 6.4%. So I' I've underperformed all of those, right? Let's get that out there. Uh balance that against Okay, I said balance that against the previous year up 25.5%. You know, portfolio returns uh will and can be bumpy and whipsawing and it's not a constant and predictable thing like fixed income in a bank account. Um it's often not a practice they say for widows and orphans. However, ironically, it would often be their best solution over the long term. uh mining and banks did really well in 2025 according to TrustNet. Fresnillo or a silver miner was up a mere listen to this 447%. So well done to all those that rode that. Uh I had two miners um Camel and one that I've sold which was Rio. So I' I've subsequently sold that this year and I had a bank Barclays um but they weren't my largest holdings. Um, so Barclays was my top performer in percentage terms that was up 77.6%. Uh, so I actually sold that uh together with Rio in January. Uh, I had previously held it for 20 years, but um, for pre reasons I've I've previously elaborated on, it shouldn't never have been in my portfolio as I don't have a command on on banking. So just watch that share price go now, Paul. It'll probably go on a really good run now that I've sold it. >> Right. So to cut to the chase, your performance was crap. Um what went wrong, Mark? >> Yeah, well thanks very euphemism, Paul. So it didn't exactly go wrong. Uh like I said, my performance is not calibrated to any index. You know, last year I was not getting c carried away and equally this year I'm not beating myself up. Um both are dangerous emotions. You have to try and remain dispassionate and I'm not an expert or a professional. uh we know customers or clients so I can be transparent without fear of uh complaints or criticism. Um what we provide is is a private investor diary and where others may wish to adopt some practices or skills like like navigating a period of underperformance. Lots of private investors will done better than me and good luck to them. Um you must remember that the performance of other investors does not impact your own life. We we know we talk about underperformance. You know, we private investors, we're not in a league table where somebody faces relegation or in the a workplace where you're you're hauled into personnel because you you're trailing other colleagues. You know, even in truth, you know, your performance is is acceptable. Um you could have returned 20% and be dissatisfied that you trailed the the footsy 100. Again, it's a better return than money on deposit. And I'm running my fol. running the portfolio to fund my life not as a competitive uh bragging rights exercise. >> So what were your respective winners and losers then? >> Well I will not go through the whole portfolio as it would be terrorists and what really turns the dial of the top holdings and I I'll give you the top 10 as it stood on the 1st of January 2025 which is not necessarily what is the top 10 today. So, MG groupoup was down 26.9%. EMPAC 41 down 41.3%. Smurfit down 33.4%. MP ovens, hallelujah, we found one that's gone up 23.6%. Gregs was down 39.3%. Tesco up 19.9%. Concurrent, this is a bit better, up 61.1%. Unilavor up 7%. Summerro down 32.3% and Titan up 15.6%. Now anybody running average stop losses would have exited a lot of these and which you know it would be too much to bear. You know I'm quite happy with the balance of my portfolio. >> And regarding what you brought in and what you let go talk us about that. >> Yeah well I disped of Shell which was another what I would call legacy holding. It's a pity that we couldn't have used that as a for one of the episodes cuz I think we could got some mileage out of the the shell theme on the beach. Um but that's that's you know it's a lost opportunity. Uh I did have a takeover of Alliance Farmer uh which I was disappointed to see go and in came intech which we covered in a in a previous episode and again Magnum through that um that unilver hive out. So I did a total of 11 trades in the year which in terms of cost is very low and remember it's not just the trading fee bit but also the spread and the stamp duty that you have to pay and having to learn about a new business >> and how has 2026 started >> Paul I don't want to I don't even like using 12 months never mind two uh let's look at back again in in another year's time um I'm very happy with the profile of the portfolio and hopefully I will have a better year just just returning to to fundsmith. Um last month they revealed in their fact sheet that Sage had returned to the fund and out went uh into it. So um both are in the sphere of accounting software which I have about as much command as that of scatter cushions and um I'll subcontract that onto Terry and the rest of the team. But fundsmith exit exited into it in December 2022 and announced that he'd been brought back into the po into the fund only in April 2025 and once again it's out and sage was exited in May 2021 and it's back in. So no questions were raised about this at the ASM uh as it only covered the last year but the rationale in the fullness of time uh will be interesting. It seems a little bit like the hokey coke, you know, in out in out. Shake it all about. So, wait for that. But in conclusion, Paul, um, you do say that I never I never give you anything. I would just like to pro provide you with a very nice funmith tote bag and pen. So, here you go. >> Thank you. Yeah, thanks very much, Mark. That's that's going to be very useful to me. and um thank you very much indeed for the your review of the fundsmith ASM and your confessions about your performance of your own personal portfolio. >> Yeah, it's been very it's been very cathartic Paul. >> Yes. Well, you know, it's it's good to get these things out into the open, isn't it really? There's no point pretending things are going well when they're not. Um and and I think if we are all happy and done, we'll we'll call it uh call it a wrap. Well, that's all for this episode. We hope that you enjoyed it. Please remember the content is for information only and it is not financial advice. Thanks again for listening. See you next time.