Consensus and Disagreements in Investing: Fundsmith 2025 AGM
Key insights from Terry Smith and Julian Robbins at the Fundsmith 2025 Annual Shareholder Meeting, covering passive investing distortions, valuation, GLP-1 drugs, and incentive structures
Consensus and Disagreements in Investing
Fundsmith 2025 Annual Shareholder Meeting
Transcribed by Thomas Chua | March 16, 2025
Terry Smith: The British Buffett's Dilemma
On February 25, 2025, the day after Buffett's shareholder letter, Fundsmith held its 14th Annual Shareholder Meeting.
Fundsmith is the UK's largest equity fund, managing over £27 billion (~RMB 250 billion). Since its founding in 2010, founder Terry Smith has delivered annualized returns of 15.2%, outperforming the MSCI World Index by over 200 percentage points cumulatively.
This 100-minute meeting is a collision of investment consensus and disagreements.
I. Consensus: Passive Investing Has Severely Distorted Markets
Bogle's Prophecy Confirmed
Terry Smith opened with a candid admission:
"During 2023, more than 50% of assets under management worldwide were in passive funds, creating distortions."
Bogle stated in a 2017 Berkshire Hathaway interview:
"If index funds reach a certain proportion of total assets under management, will they distort markets? — Yes, inevitably."
Bogle couldn't give a specific number at the time, but Smith believes that threshold was long ago surpassed.
Passive Investing: A "Momentum Strategy"
Smith offered a counterintuitive view:
"Index investing is only passive in that there's no fund manager involved — it's actually a momentum-based strategy. Money going into index funds is allocated based on market weight, meaning the biggest companies get most of the inflows, boosting their share prices further."
More seriously:
"The flow between active and passive funds itself causes severe market distortion. When you move money from active funds holding Nvidia to index funds with high Nvidia exposure, Nvidia's stock price rises."
This is one of the main factors behind today's massive market distortions.
Evidence: Two S&P 500 Curves' Startling Divergence
Smith showed a chart of the past two years:
- Red line: Market-cap-weighted S&P 500 (Apple, Microsoft, Nvidia gains amplified)
- Gray line: Equal-weight S&P 500 (each company has equal weight)
The performance gap between the two is staggering — concentration in just a handful of large-cap stocks.
II. Consensus: Valuation Matters, But Quality Comes First
Smith was direct:
"We only invest in good companies, try not to overpay, and do nothing."
He acknowledged discomfort with some current valuations:
| Company | P/E Ratio | Smith's View |
|---|---|---|
| Nvidia | 53x | Unsatisfied |
| Microsoft | 38x | Unsatisfied |
| Amazon | 45x | Uncomfortable |
| Meta | 24x | Acceptable |
| Alphabet | 26x | Acceptable |
| Tesla | 99x | "I won't participate" |
"It's just a car company."
On Apple, Smith's assessment was most complex:
"When we first bought Apple, its valuation was half what it is now. Apple subsequently doubled in valuation, but the company's sales growth over two years was zero. It's hard for us to understand why the valuation doubled."
III. Consensus: Concentration of Returns Is Not Just a US Phenomenon
"In the German DAX, SAP contributed 41% of the index return. Apart from the top few companies, all others combined contributed only 2% of returns."
This means: if you didn't hold SAP, you couldn't outperform the German DAX index.
IV. Disagreement: Has Active Investing Come to an End?
Testing Betteridge's Law
Whenever someone asks "Has X come to an end?", the answer is usually "no."
Examples of Betteridge's Law in action:
- Can the bond market tame Trump? No
- Will Europe send ground troops to Ukraine? No
- Does your company need a Chief Value Officer? Certainly not
- Can France become a global AI power? Clearly not
Conclusion
"Has the game of active management ended?" — No, active management has not ended. We're just in a rather difficult period.
But Smith also acknowledged:
"Any active manager worth their salt dreams of being the last one standing when all other money is invested without consideration of quality or valuation. The challenge is surviving long enough to reap those benefits."
Historically, many investors deemed "wrong" by the market ultimately proved correct — but unfortunately didn't survive to enjoy the victory. Tony Dye, the "Doomster," was fired just before the internet bubble burst on the very day he was dismissed.
V. Terry and Julian's Brilliant Dialogue
Trump Tariffs: Impact Overstated
A shareholder asked about Trump tariffs on the portfolio (70%+ invested in US stocks).
"In 2017, at the height of the previous Trump tariff comments, it didn't make a blind bit of difference to market returns. We don't know what he's going to do — in fact, Trump probably doesn't know either."
"Forecasting clearly isn't helpful."
They focus instead on what truly drives company performance:
"Did you brush your teeth this morning? What are you drinking? What's your medical condition? What are you using for everyday communications? What services or products do you use daily?"
Are Politicians Too Worried About Market Reactions?
Questioner: Markets are treated as gospel — if market reaction is bad, the policy must be wrong.
Smith quoted James Carville, Bill Clinton's chief strategist:
"I used to think if there was reincarnation, I wanted to come back as the president, the Pope, or a 400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody."
"Governments control the printing press. The only two forces that truly constrain governments are the bond market and the foreign exchange market. These two markets serve as important checks on government behavior."
VI. GLP-1 Drugs' Impact: A Underestimated Structural Change
Novo Nordisk: The Portfolio's Most Controversial Holding
Fundsmith's current Novo Nordisk data:
| Metric | Data |
|---|---|
| 2024 Revenue | 290 billion DKK |
| Revenue Growth | ~25% (likely maintaining 20%+ in future) |
| Gross Margin | 85% |
| Operating Margin | 44% |
| Return on Capital (ROIC) | 69% |
| P/E Ratio | 28x |
| Free Cash Flow Yield | 27% |
For comparison: competitor Eli Lilly trades at 75x P/E.
The Disruption GLP-1 Drugs Are Bringing to Consumer Goods
The reason for selling Diageo is multifaceted:
First, GLP-1 weight loss drugs' impact
"Households using weight loss drugs have significantly reduced alcohol consumption. We have two consecutive years of data from 150,000 US households."
Second, marijuana legalization
"Many people drink for the relaxation and pleasure that alcohol provides. With marijuana legalization, it's becoming an increasingly popular alternative."
Third, Generation Z's drinking habits
| Generation | US Alcohol Consumption |
|---|---|
| Baby Boomers | $25 billion |
| Gen X | $23 billion |
| Millennials | $23 billion |
| Gen Z | $3.1 billion |
Gen Z is called the "sober curious generation."
VII. Incentive Mechanisms: Munger's Enlightenment
"Show me the incentive and I'll show you the outcome." — Charlie Munger
Examples of Wrong Incentive Structures
Nike's "peer group": American Express, Coca-Cola, Kimberly Clark, Disney (not Adidas or Puma)
Estée Lauder' peer group: Johnson & Johnson, Kimberly Clark (not L'Oréal)
"European CEOs are generally paid less than US companies. Selecting these 'peers' is no coincidence."
The Real Incentive Matrix
| Combination | Meaning |
|---|---|
| High ROIC + High Growth | Truly优质公司 |
| High ROIC + Low Growth | Cash cow (can only sustain dividends) |
| Low ROIC + Low Growth | Completely terrible company |
| Low ROIC + High Growth | Value destruction (endless investment destroying value, like airlines) |
The Problem with EPS Incentives
If management compensation is based on EPS growth without considering return on capital —
"You can achieve EPS growth without creating any real value for shareholders. You retain 75% of profits annually for reinvestment, and earnings per share will steadily grow 5% per year — but this growth creates no actual value."
The good incentive structure: Unilever's approach
- Short-term: 40% organic sales growth + 30% EBIT growth + 30% free cash flow
- Long-term: Includes both growth and ROIC metrics
VIII. Dividends vs. Retained Compounding?
"Good companies keep profits internally to 'roll the snowball' — this is the true power of compounding." — Terry Smith
Berkshire Hathaway's Extreme Case
Berkshire paid dividends only once in 1967 — 10 cents per share, totaling $10,755.
"Had that money not been paid out and kept in Berkshire, the $11,000 would now be worth $3.1 billion."
Smith's Response to "Dividend Necessity"
"Some financial advisors and 'yield fund managers' argue with me: 'No, dividends are the right way to make money from stocks!' When a company pays out half its profits as dividends, it's essentially equivalent to you 'selling half your earnings'! Isn't it the same?"
IX. Consensus and Disagreement Checklist
| Consensus | Disagreements/Unresolved |
|---|---|
| Passive investing has severely distorted markets | Timing of reversal unpredictable |
| High valuations affect future returns | But can't time the market |
| Quality is the primary stock-picking criterion | "Quality" definition evolves with era |
| Trump tariffs' impact is overstated | Short-term volatility unpredictable |
| GLP-1 drugs will disrupt consumer goods | Competitive landscape undecided |
| Incentive mechanisms determine everything | Perfect incentive structures barely exist |
| Compounding internally is better than dividends | Investors' real need for cash flow |
X. The Most Valuable Insights
Terry Smith's most认同的一句话:
"In 1987, Julian and I were running the financial desk at BZW Investment Bank when a colleague wrote a piece titled 'A Storm Warning for Markets' about the weakness of the US dollar and rising interest rates. On the day of the great hurricane, the US index went down 22%. We were sitting in the office, witnessing the entire process."
This tells us: Markets indeed matter. The collective intelligence and the "invisible hand" that markets possess often guide us to make the right decisions.
The most important disagreement:
"We have no clue how to time the market. You can clearly see this phenomenon reflected in market performance."
— Admitting you cannot predict is itself part of investment wisdom.
Source
This article is based on the Fundsmith 2025 Annual Shareholder Meeting transcript originally transcribed by Thomas Chua (March 16, 2025). Reprinted for educational purposes.
Transcribed by Thomas Chua | March 16, 2025 | Original source: steadycompounding.com