Fundsmith Annual general meeting 2024
A test for resiliency
For those who has followed my blog, you would have noted that Terry Smith is having a tough time outperforming its own benchmark (MSCI world index) for the past 4 years. I shared my personal views in the post below and I got to say that it exceeded my wildest expectation in terms of number of people reading it. I am glad that people love it!
In this annual shareholder meeting, he is set to explain why the fund underperforms but he is not worry about it in the long run. He and his long time partner, Julian also share plenty of interesting insights on investing. I am sure you would learn something in this 1 hour and 40 minutes video.
As usual, if you are a big fan of Fundsmith, you would love every single insight share by them. If not, you will at least learn something from a fund manager who is able to compound the fund return for 15.2% for the past 14 years.
Note: It is a very long read, read it at your own discretion!
Why his fund underperform?
I think that he actually discussed it quite a few times but it can be summarised into the 2 points below:
1.Concentration of return
He pointed out that in recent years, market returns have been heavily concentrated in a handful of companies. For instance, in 2024, the top five companies in the S&P 500: Nvidia, Apple, Meta, Microsoft, and Amazon, accounted for approximately 43.8% of the index’s annual return.
A similar pattern emerges in the DAX, Germany’s stock index, where the top five companies—SAP, Deutsche Telekom, Allianz, Siemens Energy, and Siemens—drove about 84% of the DAX’s 2024 annual return.
Missing out on these top performers makes it incredibly challenging to beat the market. This echoes Warren Buffett’s frequent advice that most investors would fare better with an index fund, which naturally segues into his next point.
2.Rise of passive funds
Passive funds have surpassed active funds as the dominant investment vehicle for investors, and Terry Smith argues that this shift toward indexation has distorted the market. He references John Bogle, the pioneer of index funds, who once cautioned that beyond a certain threshold of assets under management, passive investing could indeed warp market dynamics.
Terry Smith contends that index funds overlook critical factors like company quality and valuation(a point open to debate). Since most indexes are weighted by market capitalization, larger companies receive greater allocations, accelerating a self-reinforcing cycle: the big get bigger. This raises the question: could they become too big to fail?
To illustrate the impact of passive funds, he compares the returns of an equal-weighted fund versus a market-cap-weighted fund. The difference is stark: 28% versus 60% over the period from 2023 to 2025, highlighting a significant disparity driven by this dynamic
Is this the end of active investing?
The short answer is a solid “no” and he introduced the “Betteridge law”. This law explained that any headlines end in a question mark can be answered by the word no. Then, he showed some questions asked by Financial Times over time. Below is one of my favorite:
“Can anyone stop Elon Musk from the hostile takeover of the US government?” (FT: 7th Feb 2025)
He then shared his ambition to be the last active fund manager standing, aiming to build a resilient company capable of weathering any storm. The active investing industry undoubtedly faces significant headwinds, but as the timeless saying goes, 'Where there’s a will, there’s a way.' If there’s anyone I wouldn’t bet against, it’s Terry Smith!
One more interesting point before I dive into the Q&A is Terry Smith’s take on valuation. His portfolio companies have undeniably become more expensive over time, but the key question remains: Does a 14% year-over-year growth in free cash flow (FCF) justify their valuations? As quality investors, this is something we must continuously evaluate and challenge ourselves on
Q&A (I picked a few questions that I think is interesting to share with my reader!)
How might Trump Tariffs affect the portfolio given it has over 70% invested in the US?
The key takeaway is that their investment focus is on the business itself, not on fleeting market noise like Trump’s policies, AI trends, or exchange rates. They prioritize understanding the fundamental drivers of a company—how it generates revenue, sustains product or service quality, and fortifies its competitive moat.
One example they shared was Texas Instruments. A simple slide illustrated how the company is well-positioned to withstand challenges—primarily due to its status as the lowest-cost producer, the high switching costs for customers, and the relatively small expense its products represent in their customers' overall budgets.
With the advent of GLP1s, how do you see this impacting on the drinks and consumer goods companies? As well as question regarding Novo Nordisk ability to sustain its competitive advantage?
Let’s begin with a discussion about Novo Nordisk and its competitors. Currently, the weight loss market is dominated by Novo Nordisk (66%) and Eli Lilly (33%), effectively sidelining other illicit players.
One striking detail is that neither Novo nor Eli was considered a serious contender by larger pharmaceutical companies before their weight loss drugs took off—an astonishing oversight given their subsequent success. Having struck gold, they’ve now spurred competitors to develop their own weight loss drugs, intensifying the field’s competition while also expanding the total addressable market.
Their decision to invest in Novo hinges on its distinctive drug discovery process. They see Novo as having a robust moat, bolstered by its patents (though these will eventually expire, making them a weaker defense), its manufacturing scale and efficiency, and the potential for future label expansions (e.g., kidney function, Alzheimer’s, addiction). Above all, Novo’s head start in optimizing formulas and sourcing materials for its weight loss drugs gives it a significant edge.
Regarding their decision to sell Diageo, they believe the alcohol industry is encountering challenges, as mentioned in the above slide. Before anyone objects to their final point, noting that the youngest Gen Z cohort (born after 1997) is still just 13 and far from legal drinking age, they argue that the likelihood of this group adopting the same consumption patterns as prior generations is slim. Given such uncertainty, they prefer to step back from the game and watch from the sidelines.
Do you have any concerns about cloud providers such as Microsoft and Alphabet (both among the top 10 holdings in your fund) heavily investing in infrastructure? This shift could indicate a transition from an asset-light to an asset-heavy business model, with the returns on these infrastructure investments being less certain.
I raised this concern in my earlier post as well, and the significant increase in capital expenditure has clearly unsettled many investors. To match their historical return on capital employed, assuming a consistent 30% ROCE, they would need to generate roughly $84 billion in cash flow for the foreseeable future, provided capex remains stable. (Note: I am using 2026 capex as benchmark)
They see three potential outcomes:
Continue heavy investment and achieve outsized returns (unlikely, unless they can persuade consumers to bear the cost).
Scale back investment, impacting infrastructure players like Nvidia (less probable, given fierce competition and their substantial resources).
Persist with investment but deliver subpar returns (the most likely scenario).
If Terry had to make a guess (something he dislikes doing), he’d draw parallels to the dot-com bubble. These companies may have overbuilt their infrastructure, leading to poor returns for a time until a few standout firms eventually emerge from the aftermath.
I am curious on your views on management incentive structure, What does good incentive structure look like and which companies have exemplary ones?
"Show me the incentive, and I'll show you the outcome.” Charlie Munger
They start by pointing out something that frustrates them: peer remuneration comparisons. For example, with Nike and Estée Lauder, the companies they benchmark against are mostly U.S.-based and often operate in different industries. The logic is clear—U.S. counterparts earn higher pay than their European peers, so why bother comparing to lower-paid equivalents?
They also explained why they dislike earning per share growth because all management has to do is to retain a certain % of earnings and reinvest at similar return to get the EPS growth as shown from the above. There is no increase in return which we, as an investor should care about.
So, what are some of the best metrics to use when evaluating the management? They believe that return on investment and growth will be the best metrics to follow. They defined it as good company.
They cite Unilever as an example, though caution is warranted here due to their apparent bias, given their vested interest in the company. That aside, it seems their incentives align with what they seek: growth and strong returns. One noteworthy development is the unexpected replacement of Unilever’s CEO with the CFO in a short timeframe. Despite the surprise, they remain optimistic.
Julian highlighted that Fernando Fernandez, with 37 years at the company, ranks among the highest-quality managers he’s encountered in his 41-year investing career—no small feat, considering the charisma required to earn such praise. While this remains to be proven, it suggests Unilever is in capable hands.
In the FTSE 100 index there are a number of stocks with very high dividend yields. Would the Fund ever consider these to boost the distribution from the Fund? (Note: Their answer is going to be brutal for dividend investor, so please skip it in order not to get offended!)
"I spent a lot of money on booze, birds and fast cars. The rest I just squandered” George Best
They use Vodafone as an example to make their case. On the surface, the company offers a generous dividend yield, yet the total return for shareholders has been dismal. What went wrong? Echoing the earlier quote, it seems management likely misallocated retained earnings, ultimately eroding value in the process.
What truly matters to them is how a company can generate long-term value for shareholders, whether it pays dividends or not. Warren Buffett stands out as the ultimate example here. If Berkshire Hathaway had maintained its one-time 10-cents-per-share dividend—amounting to $101,000 in total—it would have grown to $3.1 billion by 2023.
Personally, I believe there’s no single 'best' way to invest; it’s about finding the approach that aligns with your risk tolerance and return expectations. The goal is to meet your own benchmarks, and for me, those expectations are modest. I invest because I genuinely enjoy it!
The fund underperformed the MSCI World Index in 2024. Beyond the concentration in technology stocks, do you think there are aspects of the fund’s approach that might need adaptation to thrive in increasingly tech-dominated markets? Are there lessons from the past decade that inform your approach to balancing focus on quality with capturing disruptive growth trends?
“It is very easy to disrupt the market but not easy to disrupt the real world” Julian Robins
This quote brings to mind Satya Nadella’s insight that AI is meaningful only if it creates tangible impacts on GDP. Anything less, he suggests, is mere fantasy.
The short answer is that while quality companies may evolve over time, the essence of a high-quality company remains constant. Whether old or new, high quality is defined by strong returns on investment and sustainable growth. The shift in allocation from consumer to technology stocks suggests that one sector is currently perceived as offering higher quality than the other.
They acknowledge that consumer brands like Kellogg's, Campbell's Soup, and General Mills generated significant wealth for investors in the past. However, times change, habits evolve, and adaptability is key. The lesson here is the importance of continuous learning to stay relevant and ahead of the curve. This is the secret behind Warren Buffett's ability to remain sharp and successful well into his later years.
Final Thoughts
At the end of the day, investing is as much about discipline and conviction as it is about adapting to change. Terry Smith’s underperformance over the past four years doesn’t invalidate his approach—it simply highlights the market’s evolving dynamics. While tech giants have driven most of the market’s gains, history reminds us that trends shift, and fundamentals eventually matter.
What I admire about Fundsmith’s philosophy is its unwavering focus on quality. The discussion on valuation, management incentives, and the risks of passive investing all point to a singular truth—great businesses win in the long run.
That doesn’t mean every decision will be perfect, nor that active investing is easy, but it does reinforce the importance of owning companies with durable moats, solid returns, and management that actually knows what they’re doing.
For those who have followed Terry Smith for years, this meeting was business as usual: thoughtful, brutally honest, and full of insights. Markets will do what they do, but as long as we stay rational, keep learning, and stick to sound principles, we’ll be just fine. Thanks for staying with me till the end!
Note: No summary will ever do full justice to the original presentation! If you truly want to appreciate the depth of insights shared, I highly recommend watching it in full. For those interested, you can also check out my coverage from 2023 below. (And yes, I know my older writing can be a bit messy—pardon me for that!)
Disclosure: I might own stocks that mentioned by them and so please do your own due diligence. I am not affiliated or have any role with the company. It is merely for education purpose and my passion for investing. Cheers!!!