FUNDSMITH Annual Shareholders' Meeting February 2025

[Applause] ladies and gentlemen very good evening to you and welcome to the annual shareholder meeting of the fundsmith Equity Fund uh my name is Ian King I'm still business presenter of Sky News and

you're not here to hear from me of course our two guests Terry Smith Chief investment officer fundsmith and Julian Robbins head research at fundsmith a lot

of you uh will know the uh format by now but just in case you don't when Terry sent out his annual shareholder letter you were invited to submit questions to

be uh put at this meeting obviously we get more questions than we can conceivably answer if your question isn't asked don't worry because

fundsmith will reply to you personally so uh you will get an answer at some point but uh the process as it is I sit down with with Terry and Julian and the team we go through uh all the questions

that you've submitted then I choose the ones that uh I think are probably the most pertinent or the ones that uh I probably like to hear the answer to um Terry and Julian have no say in that

that's that's down to me uh I I decide what questions are so uh as I say if your question hasn't been answered or or put tonight don't blame Julian and Terry

blame me um and just a further reminder um my interests are very much aligned with yours I have money invested in the Equity Fund so do all three of my children and I think even Mrs King may

have a bit as well so uh my interests are very much aligned with yours and I'm just as anxious and eager to hear from Terry and Julian as you are so those are

the the rules and regulations um the whole thing is being recorded so you'll be able to watch it online at some point in the near future n say if you have if your question hasn't been asked tonight

you will get an answer so uh don't panic and now without further Ado I'd like to uh welcome Terry Smith to the podium thank

[Applause] you evening everybody very nice to see

you all here so many familiar faces over so many years I think this is our 14th annual shareholder meeting at we're here tonight for and uh you know my standard

joke on the disclaimer by now you've heard it 14 times if you've been to all these meetings which is if you trust what I say and buy the units it's your problem is what that disclaimer says you're welcome to read the the legal Le

if you want I'm just going to do a short intro running over mostly pretty familiar ground about what we've done and what we do uh primarily for you to check whether we're doing what we say

we're going to do uh is is the main purpose of that and then we'll go into the the question questions the I will bowl at us and then I'll try and duck some of them and junan could answer them

basically uh which is traditional I only want to talk about two things really here in this portion one is performance which is obviously something that you're very interested in we're very interested in and the other one is investment

strategy what do we actually do what are we trying to do here what's the uh the aim here and are we walking the walk uh as well as talking the talk in terms of what this fund does so without further

Ado take you on to Performance there you can see the performance up on the screen as you can see if you look at the 2024 column uh you can see that last year wasn't our finest Hour 8.9% up in the

the T class in Sterling where dividends reinvested the same one that we're in and I am in in particular the market which I'll come back to a little later in this case the msci was up 20% so we

fairly significantly underperformed it and it's obviously a run of of three years maybe even four if you look at it that have not been so satisfactory and I will come on to what I think are the reasons behind that and how we might

think about that as I talk about it obviously I would rather focus on the longer term of course I would um over here you can see that since Inception we've annualized 15.2% per ROM uh the

market's at annualized 12.3 so we're about three points ahead this is really the ratio that I think is important to focus on unfortunately if you're not in the investment industry it probably

sounds like go the saltino ratio it measures how much return you get for every unit of variability or volatility in the unit price and in particular it measures how much you get

for every downside movement in the unit price so it looks at how much you're getting for a measure of the risk that you're taking uh if you like um I don't particularly like the ratio but it's the one that the industry uses and you'll

see that you get 87 of a of a of a unit of return for the fund compared to 6 for the index over the long term it's beaten the index which is good but more particularly it's produced more of a

unit of return for every unit of variability than the index and I think that's important because on the whole high levels of volatility whilst it would be nice to ignore them do tend to

affect us all and uh when you're holding something which might go up over the long term but is highly volatile it does affect our our ability to make decisions

on a very uh non-emotional basis and so only things which are very volatile in my view can be quite injurious to your uh your performance so that's why we seek not to do it we'll talk about that

in relation to some other companies perhaps in a moment um 2024 attribution what worked for us what didn't work for us there were the top five contributors

and the top five detractors for the fund over the last year our number one contributor was meta platforms Facebook in old money which you saw you can see they made a fantastic contribution this

has been a very very difficult stock for us to own at the time when we were first buying into it just after the Cambridge analytica uh incident where they uh were basically charged with not having taken

sufficient care of the data that they were collecting from users uh we received a a veritable tsunami of criticism from people about holding this this company it's come good uh

spectacularly uh in recent times uh I'm pleased to say and uh it really is something which I think demonstrates that what we have to try and do is

ignore the noise uh reading what the commentators say about the today's news is not the way way to make an investment decision in my view uh Microsoft is our

second best performer this is its eighth annual appearance uh in this top five which is quite extraordinary I think for a company of this size to have been in the top five performers uh for eight

years continuously during this period Philip Morris um we often get asked about what's the most controversial share or the share that's most surprising and so on we're not really

all that surprised by the fundamental performance of Philip Morris it's the world's biggest Tobacco Company um but it's also the Pioneer that more than any other tobacco company has

developed heat not burn products and L Lea through its acquisition of Swedish match nicotine P pouches it's the Pioneer in reduced risk products and you can either be in the camp of a number of

people who I think are a very good negative indicator of what to do which is a lot of Health Regulators around the world who say that we should uh uh not be supportive of what Philip Morris is doing in uh in reduce risk products in

heat not burn and nicotine pouches because they're a terrible tobacco company or you could be where we are we're just saying well that's better than people smoking cigarettes isn't it and we're very much in that camp the

thing that troubled us about Philip Morris wasn't whether they're doing the right thing and it wasn't whether they're doing it well because I think they are doing the right thing and they're doing it very well um it was

whether or not in this uh era that we're in where this the thought police seem to want to monitor what sort of companies we can or can't invest in whether or not there are enough investors out at the

margin to buy the shares and reflect the formidable financial performance they were getting from doing the right thing and it appears that there are fortunately fourth on the list automatic

data processing ADP this is the world's leading uh provider of uh payroll processing and HR software um this is the curse of the commentator you know

whenever I watch a a game and they say he's never missed a penalty guess what happens next um and uh this is a company that's like a metronome you could set your watch by this company it produces

uh a very consistent High single digigit uh Revenue growth year in year out uh and has been a a great performer for us over the many years that we've held it and lastly but not least Striker medical

equipment and devices company uh leading position in things uh like the orthopedic medicine so uh replacement shoulders hips knees ankles and other

joints stroke care endoscopy so on this is a company which is bouncing back very well from the downturn in elective procedures that accompanied the covid uh lockdowns and but that's not the only

thing behind it this is a very well-run company I think uh and uh has made some great Acquisitions uh which is a very unusual thing in itself in the time that we've owned it uh in particular their

acquisition of the make robotic surgery business I think was uh uh very very successful what didn't work L'Oreal one of our STS one that's contributed for

many years running you can see there was a detractor last year China China is their biggest Market China has problems uh obviously it's uh uh put far too much

into the the development of Housing and infrastructure and that in turn has bounced into the credit system with banks who provide a lot of financing for this and so it's got a downturn in that

market however uh in our view it's a business that's so good that we're not going to sell them uh whilst we wait to see this this problem resolve and we've got a management team there for whom

this is not their first rodeo they've seen large mark markets turned down before so I am pretty confident that we'll be okay on the end ditto idex idex is the world's biggest uh manufacturer

of Veterinary diagnostic equipment and dominates that market it had a very good pandemic as people adopted pets and obviously is coming off the high of that in terms of visits to vets and so on

again it's a very good business and one that we're not going to sell we're going to try and as I put it smile through the pain uh and continue to hold our position not least because in this one in particular it's not that big a

company uh and not that liquid a share and I think if we sold our holding we might never get back in and I think it's is a company with many many many years of high level growth ahead of it in the

in the Pet Market uh Nike Nike's problematic we bought it if I may say so reasonably well uh during the pandemic when the shares were off about 40% and people seemed to think that this was uh

going to be very problematic for them in terms of selling uh sports apparel trainers Etc uh because people couldn't go to the shops and so on WE gathered at the time that they had cracked the

digital advertising and Supply Market probably better than any other sports equipment supp major sports equipment supplier during this period and uh so we bought the shares unfortunately what we

hadn't figured out is that the management would then ignore the bricks and molter traditional Channel and open the door for some of their competitors um however in um in typical American

style having stumbled by letting competitors into the uh the bricks and Channel by that approach uh the Americans did what the Americans do best in circumstances like this which is they fired the chief executive and replaced

him uh with somebody who's uh I think going to turn the business into back into uh the the business that it was before in terms of its relationships with the the traditional retailer so not

too worried about that one brown Foreman we'll probably talk a bit more about weight loss drugs and drinks companies I think later on uh because I know we've got some questions that uh Ian's going

to bowl at us on that so I'll say probably quite a bit more there but we've retained this one at the moment because uh this is a company which has got more premium Spirits than some of

the major Spirit suppliers uh for one thing and if people are going to drink less because of things like weight loss drugs amongst other effects then drinking higher value premium drinks is

one of the things that may actually continue During the period and it's a family dominated business and we think therefore we might actually get some decent long-term decisions um as we've pointed out to ourselves and the family

themselves pointed out to us in a recent meeting this is a company that Sur that managed to survive prohibition so they have actually got a bit of form in terms of surviving diffic difficult

circumstances um and last no least Novo nordis this is the Danish company which has pioneered the weight loss drugs uh OIC for diabetes wery for for for weight loss uh quite an interesting year in

terms of that if you can find these things interesting at one point the shares are off about 45% not withstanding a fantastic performance in terms of developing the drugs and claiming Market leadership as people

worried about drug trials and they worried about the outcome of drug trials and they're worried about competition and so on again I know that we've got questions on that later so I'll save my my powder for those if I may and talk

about it a bit more then performance the Fab Five as I call them here's the major five uh technology companies on this page and the thing

that was most outstand standing last year was the degree to which performance in the market depended upon holding these companies at least in their index waiting you can see here these five

companies contributed 44% of the S&P return that's an astonishing level of concentration frankly and one of them Nvidia the maker of gpus make for um uh

processing for large language models for AI was 21% of that index return unless you hold these companies in roughly their index proportion you've got a bit of a problem these are very big

companies that dominate the index and dominate the return and we don't we don't own Nvidia we can debate whether we should or shouldn't own Nvidia we don't we did own Apple but we sold it again I'll talk about that in a moment

in terms of the reasons for that uh we do own meta pleased to say we do own Microsoft we did own Amazon but I sold it uh that was my problem in terms of selling it I was still debating it with one of my colleagues today where I was

saying I was wrong and he was saying I was right in terms of selling it I've got to say I like him a lot he growing um when we're talking about owning these

or not owning these valuation although it's not our primary uh sort of objective in terms of getting lowly rated shares neither is it inconsequential people talk about value

investing and growth investing and these are labels uh which like many other labels are quite unhelpful um but we don't ignore them the fact that it's not our first thing that we look at we look for quality in companies first it

doesn't mean that it's something that we completely ignore and we would have to probably think about ignoring to own some of these things uh when I last look Invidia was on 53 times earnings

Microsoft that we do own is on 38 times earnings I'm not all that happy with that to be honest with you you know um I'm not all that happy with Amazon although I don't own it on 45 yeah I'm

okay with meta on on 24 and alphabet probably on 26 um apple on 32 we bought it on half that rating apple and we sold

it when it was the rating had doubled during a period where the sales grew by zero over two years we couldn't quite see why the rating it doubled and Tesla

on 99 times you got to count me out I'm afraid I'm just it's it's a car company okay in the end so there are a lot of reasons why we don't think we should be

following the fashion and holding these companies that produce this concentrated return um this is not just an American phenomenon here's the the Dax the German market index you can see the Dax uh

during the last year in terms of return 4 4 1% of its return came from sap the enterprise resource management software company 41% of that return you can see

everything else below these these companies at the top of there produce 2% of the index returns beyond that those half a dozen companies but that one if you didn't own it how were you going to ever match the Dax you couldn't do it so

it wasn't just an American phenomena this incredible concentration of returns something else which has affected performance in the last two or three years and I think we'll continue to perform to do so so for as long as

this trend persists is the rise of so-called passives um uh the uh the rise of index funds ETFs um not all ETFs are passives by the way some of them are

active but the big ones are the the ones that people think about mostly are actually index funds and you can see that during 2023 we reached the point where more than 50% of the assets under

management worldwide were in so-called passive funds and this is a very big Distortion to Performance um John Bogel is the The Godfather of index

investing the man who who founded Vanguard and I think a Great Hero in terms of the approach that he took to investing even though it's obviously in many respects the diametric opposite of what we do that doesn't mean that it was

uh wrong or bad in any way quite the quite the contrary bogul was interviewed at the 2017 barer hathway annual meeting Warren Buffett's annual meeting and he

was asked very specifically if there was a level of index funds is a percentage of assets under management that would distort markets and he said yeah clearly

there is um now he couldn't give you any precise number on a level um but he said not there must be something because he said at some point when certain proportion of the Assets in the market

are in index funds they are invested without any consideration as to the quality of the companies they just own the index they're invested without any consideration as to valuation doesn't

matter how highly valued Tesla gets if it's in the index you own it that's it and he said of course this will this will lead to distortions and of course what we're now seeing is that he was

absolutely right um as I said labels are unhelpful index investing is not a passive strategy um it's only passive in the sense that there's no fund manager

there's no Terry and Julian trying to make decisions uh involved in the process there just a computer that's sitting there matching the the index but it's actually a momentum based strategy the money that goes into index funds is

allocated for most index funds in relation to the market waiting of the shares that value in the market which means that the ones which are biggest get most of the inflows and guess what that does to

their share prices over time and um what really exacerbates this and this um Bogle wasn't asked about this in 2017 so he didn't even think about framing the question it's not just the percentage of

assets which are in passive or index funds versus active funds that's a distortion and he rightly said it would be it's the flow between the two which we're now in which is really distorting

when you take money from us who don't own any Nvidia and you put it into the index where Nvidia is the largest or one of the largest stocks guess what happens to the Nvidia share price it goes up so

the flow between active and passive is or active at index is in fact one of the big distortions so that's what we've been battling against for the last year or year or two and we might continue

battle against it for some time to come I've got no crystal ball as to when this uh reverse es um you can see this exemplified here this is a chart which shows you the last

uh uh two and a bit years and you can see the the red line up there is the S&P index the in Market weighted one and the gray line is the evenly weighted one where each company receives an equal

waiting you can see the difference between the outcome is astonishing this is the effect of investing based upon market value of companies um people often say in the

circumstances that we're living through right now uh is this the end of of um of active investing we'd like to draw your attention to a law it's a real law we

didn't invent it it's called bdes law and bdes law is any headline so we're talking about newspapers here their online equivalent that ends in a

question mark can be answered by the word no so here's a few examples uh that we've got here uh trying to pick a few

favorites out here for you um uh will the bond market reign in Donald Trump no um Can this golf simulator turn a novice into Tiger

Woods will Europe put boots on the ground in Ukraine that's topical obviously at the moment uh in terms of what's going does your company need a chief value

officer uh no I think no I'm pretty consistently uh can France with you apology to any French people in in the can France become a global AI

Powerhouse gentlemen there obviously agrees with my thinking on this one I can hear from his laughter um Can K badok unite the right in Britain I'll leave you all to decide on that here's

my favorite can growing coriander in an underground par Park be a path to Peace In conflict zones now you might think this is ridiculous and this sounds like

a headline that was written by Monty pison but it's in the financial times anyway I'll leave you to explore the reaches of BD's law actually I mean

it it goes on B's law and on and on and on I uh I got one yesterday literally there were two more um this both Financial Times again can Syria's new

rulers sustain its fragile peace um is China investable again and yeah okay I'll leave you with the

thoughts on the on B's law why do I make betes law because portfolio advisor on the 6th of January said is the game up for active management no it's not

practive management we're going through a rather difficult time the difficult time has very specific reasons behind it it may persist actually um but the dream

of any active manager who's worth their salt is to be the last active manager left right when all of the other money is invested without any consideration

whatsoever as to quality of the underlying company and business or any consideration of the valuation that's when actually you're in the great position the only trouble is it's very

painful when you're on the way there and of course you've got to survive to be there to do it and surviving in this business can be a bit tricky I mean there are lots of historic examples of people who were wrong for quite a while

right in the end and didn't manage to survive an old colleague of mine from my UBS Philips and Drew days Tony Dy the Press love these catchy phrases don't Dr Doom as he was known who was a big bear

on the on the dotom boom of course managed to get fired from uh uh from Phillips and Drew Asset Management uh and of course it almost marked the day of the collapse of the of the doom boom when he did that and that that's

absolutely typical of the industry work so our aim amongst other things here is to survive and prosper in this environment long enough to reap the the

benefits of being able to deal with this uh this flood of money into uh so-called passives which is distorting the market quickly on the

strategy we have a very simple threep strategy which I hope most or all of you are familiar with by now um why am I talking if it's familiar with you just so you can check what we're doing only

invest in good companies try not to overpay do nothing so touch upon each of those if I may only invest in good companies there's the lookth through ratios which we give you each year where

we take the companies in our portfolio we work out these five measures or metrics and we run run them through over the years so you can see what the trend is and we compare them with the major

indices the S&P and the footsie uh just to see you how our portfolio Compares so return on Capital employed rce last year was 32% pretty Rock Solid over the years

you can see um about twice the level of the index there okay gross margin the difference between revenues sales revenues for the companies and their

cost of goods sold they take in stuff ingredients components services do something to them and then uh sell their customers a product and or service with their markup on it this measures the

markup if you like 64% on our companies again very Rock Solid they're making things for 36 and selling them for 100 in the index you can see it's about 40% the index companies are making things for about 60 and selling for 100 better

to make things for 30 and selling for 100 than 60 and selling for 100 obviously um it's also the biggest measure I think quick indicator rule of thumb on two things pricing power how

much much can you mark things up before you sell them and protection against inflation the lower the percentage of of cost of goods sold are as part portion revenues the less you suffer when

inflation hits your cost of goods sold uh so that look pretty good on that operating profit margin which is the one most people talk about which is taking out all the other costs that companies incur below the cost of good sold line

you can see last year 30% again about twice the index cash conversion now this is a Nutty one and it probably relates to a question I know we're going to face later um we've historically had our

companies converting at around 100% you'll see and then in 2022 it went down to 88% the companies suffered during the pandemic from the disruption of Supply

chains and these were very efficient companies they were converting 100% of their profits Into Cash uh and that meant they were really managing their working capital very well uh when the supply chain disruption occurred however

they had to move from so-called just in time having whatever they were buying arriving just in time to to make things into just in case they literally went out there and bought things whenever they could get them and held them in stock particularly things like

semiconductors that they needed in their products and so that really depressed their uh their cash conversion and we said to you uh in our last meeting we said that will bounce back and it did

start to bounce back and then it's turned down again which is interesting and you'll see now it's about the same as the index uh it's not bad but it's not as good as our companies were what's going on and I'll tell you what's going

on huge capital investment by two sets of companies that we own one is Novo Nordisk in the drugs business Novo Nordisk has a runaway success with the

weight loss drugs and they are building capacity to make those drugs as fast as they can go they did an acquisition for $10 billion of three manufacturing plants recently they really do have uh a

great deal of opportunity ahead of them if they can make this stuff fast enough and I'll come on to noo nordisk's numbers so you can see the sort of Returns on Capital I get a bit later uh that doesn't bother me at all and the

other one is the um it companies our major it companies are spending money like a drunken sailor on Shor leave at the moment uh on so-called hyperscaling of data centers uh for them to roll out

the services related to Ai and we will debate that a bit later and I've got to say somebody has said something along the lines of are you worried I could cut through to the chase on the question and say yeah yeah it's interesting

development they're very conservatively financed although these companies interest cover last ratio this is the degree to which their profits when divided by the amount of interest and Lease rentals that they pay how many

times do the profits cover these payments they've got to make to remain solvent you can see these are very conservatively financed companies 27 times they are much more conservatively financed the index where it's only nine

times cover that's great apart from one thing this thing about spending a lot of money on on capital expenditure which we're going to touch upon later I'm sure and which is a big hot topic now I think

in terms of investment in technology one thing that's unlikely to be a break on this is lack of resources on their part these are very very well conservatively financed companies they can keep spending on this if they

want don't overpay last year we finished with a free cash flow yield of 3.1% so the amount of cash the companies generate

divided by the market value 3.1% okay um you'll see that that is a lot lower than the footsy 100 5.5% um I don't think that's terribly relevant there are probably only about a

handful of companies literally a handful of companies in the footsie 100 of the quality of the sort we invest in it's dominated by companies which are not investable from a quality standpoint for us and therefore I don't think it really

is very meaningful this is a more meaningful comparison the S&P 500 3.7% much higher quality business in the S&P 500 and it is where about 70% of our

companies are so it's a more F we're about 20% more expensive than the uh than the S&P 500 and the question we've got to ask ourselves you got is are our companies bearing in mind that previous

slide that much better and worth paying because on average high quality companies are always more expensive than lowquality companies it's not question whether they're more highly rated more expensive it's whether how much High

more highly rated more expensive they are a clue to how good they are is this at the bottom of the slide you'll see there their free cash flow grew 14% last year that's a pretty decent clip which does suggest that these are actually

pretty high quality companies as well as all those ratios we had before so I would suggest to you that it's certainly in comparison with the remainder of the market and that's the only way you can ever measure these things in the end

we're probably okay do nothing here's what we actually did last year uh which I'll run you through briefly before I give you the numbers on what this all cost us we sold

deio I know we've got a question on deio coming up so I won't steal the Thunder too much of the the Q&A session that uh we sold Deo for a number of concerns including the impact of weight loss

drugs on drinking habits we sold mccomic this is the leading manufacturer of condiments spices and flavorings in the world it's got two businesses roughly equal in size one of them is selling to

us for cooking at home the other one is selling to restaurants for flavorings they had a great pandemic was selling to us because we all had to cook at home for the first time more than we do before and if you're anything like me when it comes to cooking putting a lot

of spice on things a really good idea uh um and of course the restaurant business was terrible because it didn't exist to a considerable degree as they came out of the pandemic obviously that seesaw uh

went from the other to the other direction we we had laders full of spices and the restaurants were now back in business what was disappointing was that the systems and agreements that they had in the business were very

sluggish in getting the input cost inflation during this inflation period through into the customers we were really very disappointed by what we saw in terms of the management reaction uh at time in terms of getting this fixed

and uh as a result they lost about three or four points of gross money margin and uh and we didn't think that it was kind of The Bu quite as good of business as we thought it was originally and we sold

Apple um when we bought Apple it was on about 18 times earnings it was trading on a rating lower than the S&P so don't think we can go badly wrong with this

business um we correctly foresaw that it was going to have a number of reporting periods of poor sales so we only bought a 1% state to begin with we're going to get another couple of goes at this to

buy some cheaper stock we absolutely right about the poor sales and the share price doubled and we still can't figure it out frankly um Apple's sales growth

for the last two uh full Financial years is zero down 2% one year and up 2% the other year and neither of us can figure out what's going on here we think that

if any of our other major technology companies uh had produced flat sales for two years Microsoft meta uh Nvidia although we don't own it alphabet it

would be a disaster for them so we really they seem to have a falce field around them that protects them for this but we do know we weren't going to buy anymore on that basis that we've been right about relatively poor sales and

the share price and rating are doubled it's time you know are we going to go up to our normal sort of holding or are we out we're out we started buying Texas Instruments I know that Julian's got

that down as an example later on in relation to um uh in relation to questions on tariffs so again I'll try not to steal too much Thunder it's the biggest manufacturer in the world of

analog Dev devices and embedded processors think of the opposite in semiconductors to your Nvidia gpus uh the average product made by Texas Instruments cost under a dollar right so

we'll talk about that in a minute and we started buying Atlas Copco Swedish company um sometimes called the fourth utility uh by Industries uh it makes things like

compressors and vacuum equipment and Power Equipment in industrial applications there two or three things we like about it one is there's a controlling state from the wenberg family um um we quite like family

controlled businesses when we're treated fairly we think they make good long-term decisions the wallenberg's I think we could justifiably say our long term they've been in this business for 168 years so they're probably getting the

hang of it by about now I would think um secondly this is a company with a very uh devolved structure of making decisions they've got 660 operating units around the world which make their own decisions on how to address their

local market they don't make decisions on big important things like Finance so on they do make local decisions on on on Market addressing and they are quite an outsourced manufacturer they assemble

rather than make things uh which Cuts their working capital requirements quite significantly um what did all this cost all this activity well you see the portfolio turnover over last year was

3.2% so back to the kind of very small numbers that we've seen historically after quite a bit of an elevated level of turnover during the pandemic um it actually cost

us2 of a percent £ 447,000 as I always say about now the broking industry would be wearing black armbands if everybody had money like this and with that I'm going to hand you

back to Ian and have a SE thanks [Applause]

Terry so to kick us off a nice topical one from Kenneth deil uh Kenneth have you're here thank you for your question sir how might Trump tariffs affect the

portfolio given it has over 70% invested in US stocks I'd like to start by not answering the question but making an observation about it and that is um two

things about the questions that we have here tonight one of them is as has already been pointed out but I'd like to emphasize it if your question has not been selected it's his fault that's that's why we have him here

but the other thing is Ian does suggest the questions because it's good that he can see sometimes better than we can what's topical but in selecting this one he selected a question from the guy who

sat next to me on the first day in school in Nessa Road Primary School in Forest Gate in 1958 isn't that great and he's in the fund which is wonderful and look Trump

tariffs we've we've been here before to some degree but maybe it's different this time because sometimes it is here we've got the the snp's total return there's uh 2017 the height of the of the

Trump tariff for comment if you like as you can see it didn't make a blind bit of difference to the return uh on the market um this time may be different maybe he's going to do things in his

second term that he didn't do in his first term so there might be things which are different however on the whole we don't do very much even though we've got 70% as you say invested in the

companies that are in the S&P 500 about this for a whole variety of reasons one of them is that we've got no clue what he's going to do um of course he may not not have a clue himself which might not

help in that particular regard um so we don't know what he's going to do and quite a lot of companies although they're is in the S&P 500 it's right say they're in the S&P 500 it's to see how they're affected so Philip Morris

International which I was mentioned earlier is a company in the S&P 500 and until its recent relatively recent acquisition of Swedish match with with the nicotine pouches it sales in America

to the exactly to the whole number was Zero um its largest markets being Indonesia the Philippines Russia and Turkey U and it has no business in China and it has yeah and it has no no the

China is is a state tobacco Monopoly as Julian says it has no business in China what whatever so bearing all those things in mind I we tend to spend most of our time thinking about the things which we think Drive our companies which

is you know this morning did you brush your teeth I hope you did um you know did you feed the dog um are you what are you drinking um what's your medical condition is it something that uh you

need uh is it something that you're using in terms of everyday uh Communications and it etc etc having said all the waffle Julian and I'll give you a specific example no well I was actually going to continue on the waffle

oh oh the waffle okay by saying that and and and I've used this example before but if if uh if we were to divide the room down the middle and uh this half of the room was to take

a self-evidently successful business from a business perspective and a stock market perspective over over the very long term 50 or 100 years and this half of the room were to write down what made

that business successful and then this half of the room were to uh read the Ft today listen to financial news sort of Ian Kings type with obviously apologist to it and and write down what they

thought were the most uh important drivers of the stock market and the interesting thing would be that that there would be absolutely no overlap at all between the two sides so this half

would write down things like the quality of the product whether it traveled well whether they had good management uh whether whether uh how easy it was to make what the economics of the business

were and this half of the room would talk all about interest rates bond yields tariffs Donald Trump AI exchange rates Etc so so and and and we

spend pretty much all of our time thinking about that having said that if we just move on to the next slide um I mean this is quite a good example of what a very good example of what Terry

was saying in the sense that that this is an American company Texas Instruments and 20% of its sales are actually from so it's actually making its

semiconductor chips in China and so this is an American company making chips in China or some of its chips in China and importing them back to America so quite how that's going to

work I'm not quite sure but but also to Terry's Point earlier the the average selling price per chip is actually less than a dollar so if you are somebody who

are using their chips uh and you have to pay A110 or a125 instead of a dollar it doesn't make much difference and and that is in the context of these chips going into things like electric vehicles

which obviously cost 20 30 40 $50,000 these products as as the fourth bullet point says are typically designed into product with a multi your product life so once you've designed a product which actually has these chips in you

you're probably not going to substitute it for the sake of an extra 25 cents a chip uh the company also as for the second Point makes uh a lot of use of Jewel sourcing so if it has to Source

something from a country other than China or wherever the tariffs are are are imposed um uh it's got an alternative

and last it it's its biggest long or the reason why it will succeed or fail long term is because it has significant cost advantages because of the the capacity

it's building in the US and because it makes very high quality products which people which companies car companies Industries across the world rely so so that is what that is what we look at not

what's going to happen over the next two or three years great stuff thanks juli um next question is from Samuel Brammer again this is quite a a topical one he he asks do you think politicians are too worried

about the financial Market's reaction to policy decisions it seems the financial Market's opinion on policy is taken as gospel if markets react badly the only Pol the policy must be bad if they react

positively the policy must be good and he he says surely financial markets only really have one goal which is to make money I think it's a bad goal anyway um we thought we'd give you a start with a

quote this is uh James car who was Bill Clinton's Chief strategist he said um I used to think if there was reincarnation I wanted to come back as the president of the Pope or a 400 baseball hitter but now I want to come back as the bom

Market you can intimidate everybody and um it's interesting thought I think and um we thought we'd give an honorable mention to this gentleman uh Julian and I in 1987 were sitting uh running the

financial desk at what was then called bzw Investment Bank and a colleague of ours Peter Thompson wrote a piece of research in August of 1987 about the weakness of the US dollar and

the consequent rise in interest rates and he titled it a storm warning for markets which means that he was prophetic not only about what's happening markets but about the weather because of course we had a hurricane and

on the day when the hurricane was at its peak in terms of damage the uh the US index went down 22% Julie and I were in work uh observing all that rather

closely and the point I'm trying to make here is markets are quite important um I realize that the a large number of the people in Market are well first of all they're all trying

to make money as the questioner rightly points out um but then I think that does cut through things people's desire to to achieve a good result does actually cut through in terms of decision making and

although any individual Market participant you can look at and say Well they're really just interested in money and many of them are very people that you wouldn't necessarily respect their

great macro judgment on something about their collective intelligence The Hidden Hand of markets very often lead you to the right decision I think uh in terms

of things and if anything I would be the other way to the question I think markets and this what I'm talking about storm warning for markets maybe governments don't take enough notice of

markets and maybe we should be more more interested in the uh the markets policing our governments because given their ability to control the printing

press uh for Bank notes whether it's a real one or a digital one uh there are only really a couple of things that can hold them to account and they are the bond market when they need to borrow

money and the Foreign Exchange Market when they're basically try to borrow or trade internationally and I think those things are important controls mean I would I would Echo that

I mean um one of the things that we've all been reading a lot about recently is uh the the uh uh uh the importance and the success of of large US tech stocks

and the absence of uh such of almost any technology sect well not almost any technology sector at all but the absence of a lot of large successful tech companies in Europe and you might

have thought the politicians would look at that and think maybe my policy decisions are making uh the creation and growth of these companies uh too

difficult impossible maybe I ought to do something about it the the uh EU strategy to this uh seems to be to uh fine US tech companies that seems to be

uh the way they think they should go I'd also um this is I think this is answering the question one of the uh one of the things that living the states as I do one of the things that I think

people forget about the states uh the United States is that although there's a federal government uh there are 50 individual states and these states

compete for capital for for talent um and they do so on a much more in in a much more Dynamic way than than countries in Europe do and that's why

you get big in what's why you've seen huge influxes of people into Florida and Texas um uh something which you might not believe if if I say this is that the

if if you are a uh if you live in California your top rate of income tax of state income tax is 133% if you live in Florida or Texas there is no state

income tax at all so you can see why why the uh why capital and and people are moving from one state to another so I think that that is I think a good

example of how sort of financial markets are are much more sensitive in the states and one reason why it's a much more Dynamic economy just to quickly pick up on something you said Terry I

mean we often keep reading that Donald Trump is obsessed with the S&P and he regards that as the sort of barometer of his success I mean really he should be looking at something like 10e treasury

yields uh yeah in many respects I think that's right you should yes I think that's uh you know coming back to that quote about the bond market it's a as we saw in our our performance you know

three years ago it it's an insuperable head or Tailwind when you when you get the kind of conditions that we had when y went up in the way that they did and he should be looking at that you go back

to 1987 uh and the the storm warning for markets I think you should I I don't think you should be disregarding these things um we put this on as a final slide which is Elon Musk one of the uh

the the headlines which I didn't read out earlier was an Elon can anyone Control El mus hostile takeover of the US government the uh for some reason the financial times continues to refer to

the Department of government efficiency which he's now heading is the so-called what's socalled about it I mean I just don't get it personally but uh he's certainly got a rich Target set and um in terms of the federal government

expenditure and uh it may well be that taking note of What markets tell you about that and acting accordingly into because mostly this is the this is the biggest economy in the world this is the

richest economy in the world you know the the poorest state in the Union is Mississippi okay Mississippi has a median income of $444,000 per person

which is the same as the UK the UK has a median income per capita the same as the poorest state of the United States and I don't know if any of you travel outside the main cities of the United States of

America when you travel through some of those bases the degree to which they are poor places is quite striking sometimes and um you know when I see that I realized what a what a very rich country

this is uh what a powerful economy this is so if they've got a very big fiscal deficit problem which they clearly have um it may well be not an income problem

it might be an expenditure problem it usually is frankly I always uh quote the uh um with due apology for the individuals involved the conversation that I'm told took place between her

majesty late Queen Elizabeth and uh and her daughter-in-law um when her daughter-in-law had A7 million pound overdraft at Coots uh and went to see the queen hoping for some help and said do you have anything

to suggest and apparently she said have you tried spending less I mean just to give you I mean you probably know these numbers but in in 2007 the US government had uh$

3.8 uh trillion dollars of receipts and was spending uh 4 trillion so it had a budget deficit of of uh 200 billion which is frankly peanuts given the size

of our economy which is $28 trillion um since that time uh We've added a trillion dollars to our income well the government's added a trillion dollars to

its income and is added $3 trillion to his expenditure so uh I I uh on the day that um Donald Trump was talking about

um uh how many people the Social Security was paying who were over 200 years old I thought I should actually uh read I I should go to the guardian because at least I couldn't be accused

of being uh bi and uh the uh the Guardians said that out of $8.6 trillion of benefits uh

which the US government had paid out between 2020 and uh 2024 less than 1% of them of them were fraudulent well that's still $72 billion so it's not exactly

picking pennies off the floor uh and if you think about it um uh the you've also got Medicare you've got defense so um he

has a as the as the uh slide says he has a he has a pretty rich Target set and uh yeah very good we've got uh three questions now for the price of one all

on related themes uh Jonathan mccuan asks with the Advent of gp1s how do you see this impacting on the drink and consumer goods companies uh ham marari uh it's quite a long question but

essentially he's concerned about NOA nordics diss ability to sustain its Competitive Edge and pricing power in what feels like an increasingly crowded Market obviously Eli Lily uh making

great strides in in weight loss drugs now and lastly uh AMT mahotra uh asks conversion of water to wine is one of the oldest and most profitable professions in the world why is Terry

going against the wisdom of past centuries to dump alcohol stocks like diio we're going to try this in three bits we're going to start with Julian who's going to talk about the Obesity Market yeah yeah so the Obesity Market

is uh currently as you said there as I said they're 31.6 billion um we've actually estimated that by just adding up the sales of Nova NIS and the sales

of Eli Lily we're not actually including the uh the uh sales of illegal or comp so-called compounded drugs which are maybe quite significant um but versus

the current market of 32 billion the estimates of Market size range um from 100 billion to 350 billion um and so I think the first thing to say is it is an

extremely big market and it is like to get a hell of a lot bigger now because it's going to get hugely bigger uh when people talk about competition um you won't be surprised to know that there's

going to be a lot of it there are currently reckoned to be at least 400 other companies who are working on um uh in the weight loss area and um I should

just add that uh that uh Nova Nordisk if you'd have said to a you know one of the big typical drug companies so MC rash fizer 15 years a go they barely would

even have regarded Nova NIS as a serious drug company they were saying oh they're just a kind of insulin business and Eli liily is not been a successful um us pharmaceutical company at all so the

fact that that this gold mine has been struck by these two companies is something which is very irksome to the large players so we are going to get uh

competition uh we are uh from from the big players Raj fisa astroica and there's also a lot of smaller ones uh that we come across or I come across every day in the US market so Viking

therapeutic Zealand Pharma aimmune turns um and uh they are all working feverishly um a lot of them have got things which are um sort of we already

know something about one thing I think you should um think about is that is that if you had a a molecule a a

potential drug and you were touting it around um uh 10 years ago or 5 years ago and you thought it might have some sort of weight loss but um the people you probably would have

gone to were people like Eli Lily and Nova nordis because they were the people who were experts and interested in this field and the fact that uh that uh that

novais has gone with his molecule seatide and the fact that uh Eli Lily has gone with this one to zepeti probably tells you something that they

think that these are the best ones um they they are the first they are the incumbents they are the first to they are the first to Market there and they there's probably a reason why they chose

to go with the two that they have done as opposed to one of these other ones yeah um and then also just to say to you that that at the moment the current

market is an injectable market and and you hear the term or the any real term you hear is weight loss um two things will certainly happen in the future

which is the injectable Market will also become an aura Market um and the other thing is that one one of the obvious drawbacks of the current class of drugs

is that once you stop taking them you uh tend to put quite a lot or or some of the weight back on some people put it all back on and so we will go from

having an injectable just injectable weight loss drugs to a class of drugs which will probably be known as weight management drugs which will be in oral form and you will take them every day or

every week in the way that you take a staed or an aspirin yeah okay and look will be competition I mean Julian's made that fundamentally clear from the the moment that we got involved with Novo

and uh the the weight loss drug came on the scene we real you people say but there's going to be competition competition is a good thing in some respects not in every respect obviously

but in some respects it is because quite often and we see this across a number of sectors or sub sectors it's a market expander uh the likelihood that you

would have one company doing this is uh is ridiculous it's not going to happen but once you have other people doing it the market is expanded what are noo

advantages well bear in mind that we bought NOA about six years ago before weight loss was was ever mentioned we were looking at drug Discovery process for this company which we found attractive and um now that they have actually got to this competitive

position where they've got about two-thirds of the market if you look at the numbers currently that won't persist there will be competition they will have less than 2/3 I'm absolutely certain about that but it will also be a significant iFly bigger number on the

numbers Julian's quoted somewhere between three and 10 times the current size uh that it is currently what have they got they've got patents fairly obviously probably in some respects the the line of defense that I least am

least impressed by because uh patents are often challenged uh what they do eventually run out that's a fact but but patents run out and it depends what you've done during the time when you had

your patn you know if you um travel up and down in an elevator uh in the world you know the chances are that the the most frequent urren you can have is to

travel up and down in an Otis Elevator it is still the biggest installed base of elevators in the world Mr Otis's patent for the safety elevator was taken out before the American Civil

War but the the company went on to be the biggest installed base in the world and has maintained that advantage over time so it's not the only thing they've got they've also got manufacturing efficiency and capacity making these

drugs is non-trivial we're not talking about aspirin right we're talking about for any of you are in the biochemistry field 31 amino acids in sequence is what actually goes to make this molecule and

the capacity is very limited at the moment for doing this which is why it's been on the the uh the ri the the list currently in America although it's coming off now for drugs that are in short supply uh Nova again I think is

ahead there apart from being early on the field they bought three manufacturing plants for 10 billion uh to take this forward which is what I was talking about earlier in terms of capital investment one of the three Manu manfacturing parts does a contract

manufacturing for Eli Lily um and then there are the number of labels and additions this was originally a drug that was there to treat diabetes and then as a result of looking at the

data on treating a population of diabetics they realize that it was weight that it achieved weight loss but you can't go to The Regulators not in any respectable country and go look

we've discovered that in the data can we have a label because they might point out to you that's not a controlled experiment you probably need if it if it causes weight loss along across a population where not everybody is

diabetic where it's got a normal number of diabetics for the population in there and Nova nordis are ahead in having done that done that work first of all in weight loss because they got there first

in terms of having the data for a normal population to see if it achieve weight loss and they continue to be at the Leading Edge of additional labeling and the additional labeling is quite extraordinary they've already got it for

cardiovascular function so there's a very significant reduction in serious cardiovascular incidence here and they have got the approval to label it because they have done the testing with people who are not all overweight and

are not all diabetic to prove that it works across a general population we think from the data that that they've got we will see further labeling for arresting decline in kidney function for

chronic kidney diseases ditto for for liver function for Alzheimer's uh for autoimmune conditions so arthritis lupus Etc uh and for various forms of addiction alcohol and

other forms of addiction as well and for Sleep apia um and um one of the chief Executives of of another business in the area said to us when we were discussing exactly this point he said I think

they've invented the elixir of life um it does cover an extraordinary large range of conditions and the continual roll out of new labels so that medical practices can prescribe it for those

conditions I think is going to be hugely significant over time and wter into wine was the third one um we sold our diio

and obviously this was um uh partly about weight loss drugs uh if you look at the data on this um you'll see that the the area of consumption which goes

first or most readily for people whose consumption is reduced and in on the rout to them losing weight is alcoholic drinks and um people say well it's a bit

early to we've got data from 150,000 us households over a 2-year period where the household at least one member who was on a weight loss drug and what their

purchasing patterns were now I realize it is still pretty early but if we wait until we've actually got enough data for everybody who could possibly be in the the 300 million who might be taking we

300 billion that that we could get be a bit late to make a decision this looks pretty clear in terms of of what this does but there are other factors uh in the uh in the decision on diio and

indeed on drinks companies legalization of marijuana um have a look at what's happened to to sales of marijuana and of hemp infused drinks uh for those who are basically drinking for the reasons that

uh uh they want to achieve the effects alcohol could achieve um marijuana is another way of doing it and one that's growing in popularity and in legalization it's a threat to this industry and then there's the drinking

habits of different Generations generation Zed is we put down there is the sober curious generation there's the uh basic expending on alcohol from the United States of America in the bottom

right hand corner here uh by generation so the uh the the Baby Boomers which I'm a proud member are up there leading the charge with 25

billion I myself a very esteus Generation X at 23 billion uh Millennials at 23 billion and generation Zed or Z if you're American obviously

3.1 um now we got to point out that since the earliest you could be in generation Zed is 1997 the oldest members are 28 and since I think the other end is 2012 the youngest members

are 13 which is trifer start on the hard stuff um so you know this will probably rise over time but it's going to have to go some to get up to the kind of drinking habits of earlier Generations Julian you look like you're about to say

something there well I was just going to say so Terry has a saying that the uh the plural of anecdote is not data but however I've got uh including myself I've got uh five members of my family

here today uh and um I can report that 100% of the Boomers drink and only 50% of j z drink so um that is evid I also came across the something I

didn't know I was actually looking up how many states uh uh marijuana is now legal in uh in the uh us it's actually

legal so it's uh it's legal in 24 States from a recreational perspective uh 39 States from a medical perspective and believe me yeah the uh the uh the the

barrier to get to uh get over in terms of getting a doctor to prescribe you a medical marijuana license is not high but the thing I discovered is that I'm actually in Connecticut I'm allowed to

cultivate six plants six marijuana plants but only three could be mature so um so I've learned I've learned something that I didn't know before

anyway so all of those things in combination led us to believe that um it may be a while before we think about diving back into the the drinks business uh further than we are now with just our

Brown for mistake okay very good actually I just one thing one thing I I just wanted to add is that is that on the one hand we try to take a long-term view but on the other hand if we can see

quite you know a period of quite a few years where things are going to be pretty uncertain there's no point in just sort of hanging around and standing in front of the bus so no no no it's got to be a very specific reason to stay

there if you can see a problem uh I said idex veteran equipment the problem is coming down from the highs of pet adoption during the pandemic so what's the specific reason for staying there we

think this is a business with many years of growth ahead of it and it's not not very liquid we got into that stock because of very specific events that made it possible from another fund that was having to liquidate its position we

don't think we could get back in again I'm not sure we'd have the courage to get back in again even if the opportunity arose so we in that case we'll stick in there very good now this one's quite pertinent to your

presentation this one comes from way Chen ding I love this question actually do you have any concerns about C providers such as Microsoft and alphabet both among your top 10 Holdings heavily investing in infrastructure could this

shift indicate a transition from an asset light to an asset heavy business model with returns on these infrastructure Investments being less certain so I mean I think the short

answer to that question is yes uh one thing that we have uh we always try to do as you know is to rather than as Terry says hand waving arm waving is to put up some numbers so you can see that

back in 2018 uh uh we we picked 2018 as a start because it was a kind of unremarkable period uh followed by a few years of

unremarkable growth so uh 64 billion for alphabet Amazon meta and Microsoft combined in 2018 69 billion I a very modest increase

in 2019 then it starts getting going in 2020 uh we are in 2024 we were at nearly

210 billion and in 2026 we are forecast to be at 281 billion so um uh you also another thing is that this is just this

is capital expenditure uh you might have seen a um a headline the other day that in response to as a result of Tim Cook going to the White House to see

President Trump that Apple came out and said it would spend $500 billion doar in the US over the next four years not much of that will actually be in capex

relative to the rest of them so so these are huge amounts of spending and we think there are three possible outcomes um the first is that um it will all work

out very quickly that these companies will make the kind of returns uh on these uh this expenditure which will uh ju sort of justify this spending pretty

quickly uh the second is that they will cut back which um won't be good for companies like Nvidia which are and the data center companies which are supplying them but as Terry said they

are very well financed um so they can keep going for a long time and the third is that they will indeed keep going which inevitably will I think um put a bit of a dampener on returns but we need

to see some very big revenue and profit numbers that relate to this so in addition to what they are already doing they need to get us and other customers

to pay for the AI that this is basically putting into Supply to supply an adequate return on these kind of numbers and as you can see in a single year here

we're talking about 281 million so you needed probably to get somewhere like a 100 bill billion of cash flow uh left over after you paid for everything to in

addition to what you've got already so it's a very very big mountain to climb and also and remember this is just capex this is not like hiring the tens and tens of thousands of data ERS that they

will be doing all the R&D that they' be doing so the the the the yeah the numbers that they require to justify this are I mean if we had to guess and we don't like guessing much but if we

had to guess it will probably go through something which will what went on in the Doom which is no they won't get sufficient revenues and sufficient cash flows coming through and there will be a bit of a disaster for a period and

everybody will run around saying this will never work and then of course somewhere amongst the rubble will be great opportunity because it will eventually but probably not on the first outing if it's anything like history the

next question comes from guy Merill uh guy thank you if you're here um I'm curious on your views on management incentive structure what does good look like and which companies have Exemplar

obviously another very very topical question given the big debate going on about executive pay right now here in London yeah the first bit on the slide is a quote from the the late great Charlie Munga I think what Charlie says

here is true show me the incentive and I'll show you the outcome I thought i' to start by talking about how we engage with companies on this and you can see here this is our voting record over the years on proxies for the companies that

we uh uh that we we vote on um these are the number of proxies that we voted on by year here so you can see it's quite a large number we vote 100% of them we we vote on every single annual general

meeting for companies on every proxy we don't engage with any Outside Agency we read them ourselves and we make our own decision on what we want to do so if we want to communicate with companies or vote on them we decide what we want to

do we don't take uh uh somebody out there we've voted against Management in a number of respects you can see here on a number of occasions this is really the column the number of times we've voted against the remuneration policy

basically it's a 50/50 call about half the remuneration policies we vote against uh in these companies because we don't think that the incentives are actually going to produce an outcome that we that

we want to see Julian so another thing that these companies do is to uh create what they call a peer group uh so that they can uh supposedly compare

themselves with the So-Cal peer group to uh so so we uh can evaluate how they're doing and and we've got this is for setting their remuneration they'll set a peer group and measure their come against the peer group in terms of what

they produce in deciding how much they get paid and uh so we've got two uh interesting examples here uh so the first one on the left is quite small print but in the red is Nike now I mean

I think if I was to do some uh interactive uh stuff here which I which I won't and I was to say who do you think is naturally in Nike's peer group I think you would probably a lot of

people would say Adidas a lot of people would say puma um let's look down here so so you've got American Express which is basically a bank you've got uh cocacola you've got Kimberly Clark which

is a toilet paper company uh and you've got Walt Disney um and then if I was to say and then on the right we've got

Estee lorda um and uh I think again if I was to uh say who do you think their most natural uh peer group here is I think pretty much everybody in the audience

would say L'Oreal um but here we've got um we've got Johnson and Johnson we've got Kimberly Clark the toilet paper company again um we've got Nike uh but

no L'Oreal um when asked why this is um they give a number of reasons uh one of which is that it's quite difficult to get the information for how European

executives are paid really I mean really seriously um so um I basically told I can't remember which one of these companies was that I told them I thought

this was absolutely ridiculous and um with feeling and and uh I I I I noted down at the end of the meeting that the lady thanked me for the energy on the

call um which was her way of saying thank you very much and go away yeah and um what you're basically dealing with here is a peer group comparison which has been set

for very particular reasons so that they can beat it uh and in particular they don't want any European companies in there because the chief executives are paid less yeah

they're all American companies is where's a coincidence anyway going along the problem with setting the wrong incentive is this this is a chart that I think I've shown at one of these meetings before it's from a an article that I wrote for the financial times in

2012 when I was asked why we don't own Tesco and I pointed out that Tesco over these years which were the Ley years at Tesco had had a steady and beautiful

progression in terms of growth in earnings per share um and I'll come on to an example about how you generate that without generating any value in a moment um but their return Capital

employed which is on this axis over here had gone down from about sort of 18 20% to about 10 or 12% over here so the capital was being invested at lower and

lower and lower and lower returns to generate the earnings per share I wonder what the management incentive was based upon let's have a think for a moment shall we what do you think a wild guess on what if you if you set the wrong

incentive you will get a very bad outcome um Julian do you want to say something about this one I'll give my sort of a yeah we we just put this up to

say that a uh a good company needs both returns so high Returns on Capital and it needs growth um a a if it has high

growth and high Returns on Capital uh we Define it as a good company um if it has low growth but High Returns on Capital it's a cash C it's basically a dividend

stock so it can't actually reinvest uh its money into the business so all it can do is pay it out as uh as dividend uh if it is low growth and low return on

Capital it is a just a outright poor company um and if it is low uh return on Capital but high growth it is a value Desto Destroyer so it's a company that

um basically keeps investing more and more money at uh at into things that destroy value the airlines are a pretty uh noteworthy example of this so so we

look uh in the in the same way that we look for companies that have these high returns and high growth we look for companies that uh try to pay themselves on that

basis um I should I come back to this point about earnings and uh you know if you look at management incentives you'll see one of the two most common things that are mentioned in in management incentives I would say is earnings per

share growth great isn't it I mean there's nothing wrong with is that you can get earnings per share growth without creating any value for shareholders whatsoever here's a bank account and this is an example even

though we've updated the years over here this is actually an example that I made up 30 years ago you can tell that from the interest rate I use 7% but I I haven't bothered to adapt it so you've

got 100 in capital and you put it in your bank account and you've got 7% interest rate guess what your earnings are seven you take that out okay and so you basically keep the 100 and you get seven you get seven you get seven all

pretty straightforward really isn't it but imagine instead of that you incorporate bank account PLC and this is a company where you have exactly the same asset base 100 in a bank account

but in this particular case you've got an in incentive based upon earnings per share growth you're going to it's not your money you're managing this for somebody else and in this case you get paid upon earnings per share growth so

you tell them you can spot some excellent investment opportunities I can almost read it in the in the management report and you're going to retain 75% Le so you start with 100 and you have 7% so

you get earnings of seven and you retain 5.3 which is seven 75% of that so at the end of the year you've got 105.3 so the next year with 10 5.3 and

7% you earn 7.4 and now you can retain 75% which is 5.5 so you start the next year with 1108 earn 7% it's 7.8 so now

you're going to earn you retain 5.8 and this column here the earnings column here I can assure you is 5% growth all they've done is retain some

of your Capital through the retained earnings and you've got earnings growth and if you are prepared to let companies have capital and not look at the return that they've got they can produce this

trick time and time and time again and if you incentivize the management on the basis of earnings per share growth that's what you're going to get that's why we have to have in in for us to get

that that 50/50 voting that you saw earlier to get the yes we agree with you they have to have two components they have to have a measure of growth and a measure of return not just one or other

has to have both and I think the question asks us if we could come up with a an example of a good structure so juli you so yeah so

the the the answer is that the short answer is that that I don't think we we have any uh particular example of something that we think is absolutely perfect um one of the things we always

uh one of the things we always say to our companies is we have a view as to what we think is perfect but we appreciate that we are a minority shelder and that you will have other people uh and they end up with something

that looks like you know the camel is a horse designed by a committee um type approach but here is ever which is pretty good so in the short term uh 40%

is based on sales growth organic uh underlying sales growth uh 30% adjust ebit growth ebit is profit uh and 30% is free cash flow growth um so in the in

the short term you want something which is basically based on on sales and profits because in the short term you can't change your returns very much um

but in the long term uh you want the same you you certainly want a measure growth um but you also want a measure returns in other words you don't want a company to just achieve uh uh uh sales

growth by going out and buying companies for some vast expense uh and destroying returns um and then uh the relative Total sharehold return which is the

share price plus the dividend is not our favorite but it's something which a lot of companies put in um one of the things that we also applaud um is companies

that actually seem to make sensible changes uh in response not only to what we say but other what other people say

um one of the things that is the bane of uh of uh global companies uh based in Europe or America is when the head of

some Emerging Market company comes in um and says that uh that uh their profits in uh some Emerging Market currency are

are up 50% uh to which the CFO says yes but in Euros or Pounds or dollars they're flat um so unever has recently changed um its incentives so that um 80%

of the team's incentives are based on on on on hard currency rather than what it calls fake money metrics another trick that these companies use is to base their I mean it's bad enough basing your

remuneration and earnings per share but a lot of companies base it on adjusted earnings per share uh in which case uh if you are a uh decent uh company well sorry if if you're good at doing what

you're doing you can make these numbers say anything so you has actually just included um uh uh restructuring costs which are basically cost to do sort of

something outside of the ordinary uh in the um in its remuneration plan and then I'm going to have a shout out here to church and Dwight which is another company we own which is not like a mini

unever and they have a metric uh in their remuneration for all people um when they arrive and they're told that

um that 25% of their um remuneration is based on gross margin and uh I want to take somebody young here and uh Joe my

nephew and if you were told uh that 25% of uh your remuneration was based on gross margin I'm going to answer this for you you would say what is a gross margin um and um and uh when you are

told that a gross margin is a fancy way of saying if you can actually make it for Less so we can retain more uh you'll get paid more you actually s of think well that's interesting I think I might find a way of actually making it for

Less uh and so uh here we've got un Le actually uh giving middle uh lower middle management incentives that are actually what they do that actually affect they can actually affect what

they actually do yeah well I mean since we're on unil um I mean we like to keep this topical we we woke up this morning to news that H schumac as the uh chief executive has has left after only 18

months now you were quite a Stern critic of his predecessor what do he make of this news um interesting obviously I woke up to the same thing I literally switched all the gr there it was this

morning um we spoke to the chairman of un L uh this afternoon and um strange enough we met um Fernando the uh the replacement

who's the CFO last week uh and so we fairly up to date with it um I think it's good news and that's not because we had anything against hin schumacker he was a breath of fresh hair compared to

the previous management he actually focused on the things that we think you should be focused upon in this business which is not saving the world nice as that might be uh but we're not going to be able to have a very sustainable business save the world if the business

disappears in a puff of smoke which is what it was busily doing under previous management uh and so we thought he was doing a fine job and and actually you know I think that the the board judging by our conversation thought he was doing

a pretty good job too they just thought they had another guy could do it better and um that's our take on it too we were supportive of hind Shoemaker from his appointment um and uh but the the man

who really stood out was a CFO who is an Argentinian who uh has come in there who is dynamite uh who if anyone understands operating in a in a in a a company which

has got some of its operations in depreciated currency that man sure can I tell you and um he reminds me of other situations that very much that we've

seen in the past um in fact when now with them uh I I quoted uh somebody else who uh from the history of companies that we followed which was Jerry

Robinson who ran Granada uh and acquired Forte the hotels company and he had a chief operating officer Charles Allen you'll recall and I remember him saying

to me Charles's great strength was that if he realized something was possible so if he worked out in a business that he worked out that the margins or the sales growth or the return on capital or the

cash flow or all of the above by peer group comparison and everything else could be gotten to a different level he became totally unreasonable until it was and I think that's what you need to get

things changed um nobody ever achieved anything by being reasonable in my humble opinion you know you have to be unreasonable because if you're reasonable you kind of understand the point of view of people you my I can see

my colleagues over there smiling Riley because they've known me for a long time I'm very unreasonable when I think something can be achieved and so we think that that it's a very good

change um by a strange coincidence in the meeting that we had with Fernando last week the Julian signed off by saying I hope you're not thinking of leaving and going to run Pock and gamble

I've got to say that's that seems less likely now he is really by the look of it quite a talent I would say I I was just going to add that that that the one of the things which is kind of a mixture

of sad disappointing worrying is the number of Chief Executives that we that we come across now who are in that kind

of individual mode in that unique honest individual mode so I mean I'm I'm Warren Buffett always gives a shout out to to the people in his sort of who run his barkshire haway companies and and I was

going to name Jean Paul Aon who used to run L'Oreal Kevin Lobo who runs Striker that we still own Carlos Rodriguez who was our absolute hero who ran ADP

Jonathan SES who who ran idex and then Lally Udi batra who runs Waters Dr Udi batra who runs Waters and I think Fernando Fernandez um who is the new

chief executive um of of univa I think has a I think we'll be joining that group I I mean I've been doing this for 41 years I I I'll wait until I've been

doing it for 50 or 60 to make the comment it takes a lot to impress me because I think it'd be arrogant after only 41 years to say that but um I I think it I think in the research team and and and with Terry I think it

probably does take quite a lot to impress us and and this guy I'm promise you this guy is fantastic yeah good to hear next

question from Katherine James thank you Catherine if you're here um in the footy 100 index there are a number of stocks with very high dividend yields with the fund ever consider these to boost the distribution from the fund do you want

the long or the short answer Julian not on your Nelly repeat Nelly which yeah so um so if you had bought

Vodafone in February of 2015 you would have paid 231p and you'd have been quite attracted by the fact that at the time I think it was paying a dividend of 14p so

14p as a percentage of 231 sort of what is it between 5 and 6% so um in the interim you would have got uh 105p of dividends uh your current dividend would

be 9 p uh and I I see from Bloomberg it's forecast to get a 5p uh next year and uh the share price is now 6 9 P I'm slightly reminded of that um George best

quote about I spent a lot of I spent a lot of money on booze birds and fast cars the rest I just squandered um so um so uh half the uh the 231 half the money

was spent on dividends and most of the rest has gone to waste um I mean there is there is um it is it is possible uh uh I mean I don't want to go into

Financial advice but there are there are some companies that we've seen over the years where which fit into the the vein of a of dividend growth stocks um

unfortunately so I mean I'm thinking so I think when we when we first bought Visa which was in 2012 I think they were

paying a 13 C dividend it's now uh I think uh it's over $2 when we first brought striker in uh 2010 they were paying a 63 Cent dividend it's now over

$3 when we for first bought Domino's in 2010 was not paying a dividend at all it's now paying over $6 a share but unfortunately at the entry point the

dividend yield would not have satisfied people looking for a high yield yeah I I thought give juli's obviously given a disastrous example from the uh the UK

income fund model um how about this one bsh has away people say has never paid a dividend that's not true Warren Buffett did pay a dividend once he paid a

dividend in 19 third of January 96 10 cents a share at bathway he paid out a total of 10,755 bucks in dividend there you go

there it is now had that money not been paid out in dividends and handed to people who like dividends if they kept it in barkshire the

$11,000 it would now be worth $3.1 billion okay um there's barers uh rise in um in market capitalization or value

over time and you can see uh from uh we got it back to 1977 here but $500 billion as long as I live and as long as I do this job I know that there' be a vast number of people who are investors

uh and particularly people who are financial advisor some of them and in particular most particular people who run income funds will go that's not true Dividends are not the way to make a lot

of money in equities it's about compounding in value and that compounding in value happens most particular by companies not paying out

dividends and retaining the money that would otherwise Beed within the company and investing it at the rate of return they can achieve when really good businesses do that it compounds faster than you can ever do it by taking your

money out of the dividend and reinvesting it now I know there are a lot of people who are who are listening who won't believe that jolly good luck to them is all I can say and and um uh you carry on doing what you're doing I

mean I think it's it's a it's a marvelous Leap Forward uh for for us uh and the other thing people say is like oh well so what should you do invest for the maximum total return you can

identify and then take a bit out sell a bit people don't like selling but they say well I've got to sell it because normally when I get my dividend I'm not selling that's taking money out of the equity market so you think when a

company pays out half of its earnings to you that's not money coming out of the equity Market but you think there's some Magic Pot that they've got that that would that wouldn't otherwise have been invested in the business if they'

retained it yes when you get a divid end you are taking money out of the equity Mar as surely as if you sold a portion of your holding I mean you might as well not that I've got opinions on this you might as well take money out of your savings

account put it into your checking account to think you're wealthier yeah yeah I mean I just want to read a direct quote from from the bathway annual letter published on Saturday bathway has

participated in the America Miracle by forgoing dividends you go he also said he said I can't remember why I suggested this action to Bar Shaway board when he did

pay the dividend n at seems like a bad dream love to know the reason why I did that yeah next question comes from Felix mercy and obviously you talked a lot at the beginning about uh the ma s's

dominance of the S&P last year or the ma or the the Fab Five I think you call them um he asks beyond the concentration in tech stocks are there aspects of the fund's approach that might need

adaptation to thrive in increasingly Tech dominated markets what are the lessons there so I think one of the things we've talked about in the past is that it's

very easy to disrupt a market uh it's not so easy to disrupt the real world the stock market yeah yeah yeah stock market get a little more disrupted than the real world yeah and so and

so in in direct answer to the second part of this question are the lessons from the past decade that inform your approach to balancing focus on quality with capturing disruptive growth TR actually actually don't think we're

balancing at all if something is disruptive to so to to prevailing quality then the def of quality changes and so on that note instead of starting

the fund in 2010 we' have been starting it in the mid 1990s or the mid 1980s the portfolio would have looked very different because of the

definition because quality stocks would look very different and and even when we did start in 2010 um we you can see there that we had 62% of the companies

in consumer staples um and that was because in the preceding 10 15 years I'm not going to read out a lot of Statistics here but names like Nestle and Coca-Cola are done fantastically

well uh you can see that over the 15-year period the nature of uh the portfolio and where it's invested has changed pretty marketly so Consumer

Staples has come down from 62% to 18% another thing which happens uh uh concurrently with this is that is that companies or sectors which barely

existed when we started are now springing up very quickly and are eminently investable so um I wrote down some numbers here when we start so we are invested in the company called foret

which is a cyber security company and when we started in 2010 uh foret had 325 million of revenues and 2.4 billion of

uh market cap Palo Alto networks which is the largest cyber security company had 49 million of revenues and what it wasn't even quoted today paloalto has a

market cap of over 100 billion for net is just under 100 billion so so whole new sectors actually spring up uh which are suitable we think for us to invest

in and the definition and and companies that used to be uh regarded as quality are not as quality as they used to be I mean the companies like I mean when we

started or or in the 2030 years before we started companies like Campbell Soup and General Mills and Kelloggs had made people great Fortune things change habits change uh people don't like

eating sort of sugary breakfast cies anymore people's eating habits change so so one of the things I always remind people is just because we say we invest

in good quality good companies Quality Companies Quality Companies Chang some companies which were quality 100 years ago are not or even 20 years ago are not quality

today very good thanks next one is from Damiano cupone and he asks s which is the name in your portfolio around which there's been most debate and will it be

the same in 2025 so I'm going to start here so so uh this is also an approach we've done before which is to say would you want to own this company and I'm going to put up

the numbers here so this is a company uh in 2017 it had revenues of 28 billion Revenue growth had been 7% the year before it making these good gross

margins 64% uh has a return on invested capital of 52% uh over the next few years as you can see that revenues don't really grow very much even though the

gross margin retains remains quite High uh the invested Capital doesn't grow so one of the reasons one of the things we always talk about and we've talked about a lot tonight is how we like companies

that can reinvest some of their profits back into the business this company was not growing in investing Capital base and you can see that the PE went from 21

to uh to 15 and which tells you that the performance wasn't very good so this was a company that we were sort of arming and arring about but in in the company is Philip Morris International and what

was going on during this time was that the company what had um in 2014 had brought out this thing iOS heat not burn as an alternative to traditional

cigarettes in 2018 it was still 85% traditional cigarettes U fast forward to 2024 it is now 40% um uh uh getting its revenues and

its profits from nontrad traditional cigarette sources in 2022 uh it it was able to acquire

Swedish match um uh pretty cheaply uh we thought um and so it increased its invested Capital base and its return on Capital went down but its return on

capital is still pretty high um over the first uh between 2010 when we started uh and 20 uh April

2024 uh Philip Morris uh International had a total return of 275% which was quite significantly below the fund uh the share price has gone up

75% since then um so it's a classic example of the um of the tomato ketchup bottle where a lot comes out and thus as we sit here today we've had a return

Total return of 579 per since we started so it's a company that uh that when it was a traditional cigarette business was quite difficult to own I mean one of the issues was where is the market marginal

buyer in the days of sustainable funds ESG investing but it's a company that we uh we thought about quite a lot but we've kept Faith with and it's um I think it's certainly paid off recently yeah and then the second half the

question is what will be most controversial in 2025 and uh I thought I'd go back to our good old friends noo Nordisk uh once again so what have we got on our hands here we've got on our

hands a company which as you can see uh here at the uh at the end of 2024 had 290 billion uh in terms of uh Revenue is growing revenues at about 25% uh if you

had to ask us what's going to come over here 20% plus I think is the answer roughly speaking uh looking at the growth of this Market over time it's got

a gross margin of 85% remember the average of 64% in our portfolio 85% growth margin making stuff for 15 and selling it for 100 take out all the

other expenses and it's got a 44% uh operating margin it's ebit margin it's return on Capital uh we're quite proud of the the 30% Oro return on Capital that's sustained across our portfolio

over the years is a mere 69% uh for this company and we're able to buy at the moment on a PE of 28 uh or hold it on a PE of 28 and uh and on a a free cash

flow yield so free cash flow divided by the price employed of of 27 is that a reasonable rating for us to continue to hold this share with these kind of

performance metrics if it continues going forward well the thing about it investment is nothing's ever in a vacuum actually it's not whether something's good or bad it's not whether it's cheap or expensive you have to compare it with

other things you need yard sticks there's no such thing as absolutes in this area so what's the obvious comparator there's our friends Eli Lily who've got onethird of the weight loss drug Market currently so in this

particular case we've got revenues of $45 million we're in dollars here Revenue growth is a bit higher well I'm not surprised by that they've got one3 of the market and our friends at Nova got 2/3 of the market so it' be kind of

extraordinary if Nova were able to continue outpacing them so I'm not particularly worried about that if if that's if that's how this turns out it's okay I think the gross margins here are a bit lower still pretty impressive I

got to say uh the margins here are quite a bit lower and the returns quite a lot lower over here for this one and at the moment this is on 75 times

earnings uh discuss now I think that will continue to be a controversial situation for 2025 with the emergence of competition in this market with scares

about drug trials and what they uh what they mean um with the uh worries about Compounders who make these drugs uh without them when they're on patent it

sometimes illegally and so on so I'm sure we will continue to see lots of scares and alarms out there but at the moment I think that's well it's one we are continuing to hold and I think it's likely to be our most controversial

share that I can identify for 2025 great stuff thank you this next one comes from Henry Goble who obviously uh has followed funds Smiths fortunes very closely over the years he talks it's

quite a long question but he's essentially asking about he's concerned about the level of uh o overvaluation in the US market right now and he

recognizes obviously you you you've always assu Market timing but he says how are you reconciling your long-term approach with concerns about the US market being overvalued start with some

numbers on the on the relative size of the comparative companies Jules you want to that one yeah so um this is just reminding you that uh the uh the the opportunity set in the

technology sector in the US is just so much more significant you've got three3 trillion doll companies um in Europe you've got sap 348 billion we probably

should have put in asml which is 280 billion but other than that it goes down very fast and I think uh other than arm which is quoted in the US the largest

technology company in the UK is Sage which is 16 billion yeah um people often talk about the um American Market which is where this

question is pitched and they talk about it in relation to the footsie 100 so there is a a regular sort of article that seems to pop up about every 10 days which says the footsy 100 is much more LLY read in the S&P so we've got to buy

lots of footy 100 stocks and so here we've done what we think are some fairly um direct valuation so as I go down that group very quickly uh we've got in the

pharmaceutical sector we've got Astro zenica here on 16 times we've got fiza on 8.7 times so the uh UK equivalent is

a uh lot more expensive uh BP is somewhat cheaper than Exxon uh ba systems and loed Martin are pretty similar um Barkley is uh rather cheaper

than back of America and and very significantly cheaper than JP Morgan but I don't think that's particularly surprising uh if we go down onto the spirit sector in the middle diio and

brown Foreman are very similar if we go down to credit reporting these are two quite big companies Experia and Equifax they're both on 3132 so they're very they're very similar consumer Health

Products um the UK equ the UK version helon is actually more expensive than the Johnson and Johnson spin out Ken view uh InterContinental Hotels is is I

didn't I I mean this is quite surprising to me even though I sort of look at these numbers every InterContinental Hotels is actually more expensive than Marriot uh and uh airline companies International Airlines Group which is

British Airways uh is technically a little bit more expensive than American Airlines so uh it's certainly true to say that there are some I mean one of

the impacts of the um uh of uh index funds is to make the really big US Stocks uh trade on some

pretty eyw watering multiples so you know things like Walmart and Costco in particular um but but when you get down into more of these kind of uh regular large and midcap names the differences

are actually not as great as you would think yeah so I mean doesn't mean that the S&P is cheap uh but it does mean that when people say you know you've got to buy the footsy because it's a lot cheaper

than the S&P can we just look at the comparative companies not just the index versus what's in it and an awful lot of the stuff that's in the footy 100 you know is actually not very high quality

and should be very lowly rated uh even possibly more lowly rated and it is already once we start to get into comparisons where you've got similar companies here you can see here you know

we're talking about the uh the UK being on a p of 16 uh1 to 16.4 on average the Americans are on you know somewhere around 16 to 18 it's slightly more

expensive but an awful lot more expensive actually to buy compara comparable companies in America doesn't mean that I'm not worried about it with regard to the real question here let's assume for a moment that we were to

reach a conclusion it's expensive what would you do about it probably worry an awful lot but to be absolutely crystal clear for the I hope for the upth time about our strategy we

will always be fully invested in companies of the sort that we seek out there which are high quality companies that we think can p compounding value over the long term if you want to try

and timey the markets because you think they're expensive or cheap then please feel free we're not going to do it a because that's not the product we're selling and B because we have absolutely

no clue how to do it um which I think is actually quite a major advantage very good we're uh we're appro we're in the fin final in the final final um Hardy old perennial this from

Alex geraldin uh which of the shares in the portfolio do you think will perform best this year so so the lesson of uh previous years is that is that um we always try

to try to have a different one than the year before and and the lesson of previous years is that we should always always have the same one as the year

before uh so in 2022 our favor was meta last year we Sorry 2023 our favor it was meta last year we thought we should change it so we put in un lever we should have start with meta um I I will

tell you that Philip Morris International is actually up near 30% year to date so i''d be quite tempting to say that but but on G but on the basis of the new UN chief executive and

the fact that you lever is still um at a big discount to the other to its peer group I'm going to say you lever and I'm going to agree with him there you go thank

you here ladies and gentlemen uh it's uh terrific to see you all uh thank you for all the questions as I say if your questions weren't asked tonight feir not

you will be getting a response from the fundsmith team uh we do appreciate you taking the to join us at this event God willing we'll see you all next year

please thank Julian and Terry thank you [Music]