Terry Smith on Long-Term Ownership

It continued in 2025 and as a consequence, the top ten stocks were 39% of the value of the S&P 500 Index (‘S&P’) at the end of 2025 and provided 50% of the total return it delivered in USD. Is this different to the past? US Market Concentration Over Last 125 years Source: UBS Global Investment Returns Yearbook 2025 This second chart shows that the last time the US market value was this concentrated was in 1930. What happened next? It took until 1954 for the S&P to regain its 1930 high. Although this is regarded as prehistoric by most investors today it is wise to remember that the S&P (not the NASDAQ) did not regain its 2000 high until 2007 and then promptly lost it again in the Credit Crisis until 2013. When bubbles burst they can cause many lost years or even decades. It was difficult to even perform in line with the index in recent years if you did not own most of these stocks in their market weightings, and we would not do so even if we became convinced that they were all good companies of the sort we seek to invest in, which we are not. It would in our view represent too much of a portfolio risk to own them all, just as we would not own all five of the drinks companies we have in our Investible Universe even if we thought that prospects for the sector were good. Our Fund is a portfolio, not a sectoral bet. 2. The Growth of Assets in Index Funds The rise of the Magnificent Seven and the AI stocks also had a strong tailwind from the increase in assets held in index funds.

We won’t be buying shares in companies simply because they are large and dominate the index weightings and performance unless we become convinced that they are good businesses of the sort we wish to own which have long term relatively predictable sources of growth and more than adequate returns on the capital they invest. Whilst we are going to stick to our investment strategy we will of course seek to do it better. We are fans of many of the late Charlie Munger’s pronouncements but the one which best applies here is ‘Any year that you don't destroy one of your best-loved ideas is probably a wasted year.’ More to follow. Looking at individual stock contribution to performance in 2025 as usual I prefer to start with the problems. The bottom five detractors from the Fund’s performance in 2025 were: Stock Attribution Novo Nordisk -2.0% Greggs -1.7% Church & Dwight -1.5% Zoetis -1.2% Procter & Gamble -1.0% Source: State Street Novo Nordisk managed to reaffirm my belief that you should never say ‘Things can’t get any worse’. The company has parlayed a market leading position in what is probably the most exciting drug development for about three decades into a secondary position and has failed to prevent illegal generic competition in its core US market. One of our mantras has been that we should always invest in businesses which could be run by an idiot so that performance is not heavily reliant upon management.

collateral. Intangible assets can also last indefinitely if they are well maintained by advertising, marketing, innovation and product development and the duration of an asset is an important factor in figuring out its real returns. However, there are obvious problems in comparing businesses which rely on tangible assets with those that rely mostly on intangibles. Tangible assets appear on a company’s balance sheet. Cash is expended to purchase them or liabilities are assumed (debt or leases) and the assets are placed on the balance sheet. Only the depreciation charge, if any, enters the profit and loss account and there may be no impact on cash flow after the purchase. In contrast, intangible assets are mostly built through spending which goes through the profit and loss account and cash flow. Although some software development is capitalised, most is not and neither is brand development nor most research & development. Of course acquisitions skew this picture. The net result is that for any given level of investment in assets, the profitability of a company building an intangible asset is likely to be depressed versus a company building or buying a tangible asset. This makes a mockery of the comparison of their valuations which are done by some commentators and investors who simply compare their price- to-earnings ratios (‘PE’). In addition, the degree to which this needs to be taken into account in making such comparisons has been rising.in

The biggest of these in the past few years, in terms of number of news stories tracked by RepRisk, has been whether its talcum powder causes cancer and whether the company knew this. (The other lawsuits J&J has faced are around criticism it has received for its role in selling opioid painkillers and the safety of its mesh products). The Baby Powder talc lawsuits started in 2016, when J&J was ordered to pay $72m in damages by a court in Missouri to the family of Jacqueline Fox, a 62 year-old woman, who died from ovarian cancer in 2015. She had used the product for decades on her genitals and her family argued that J&J knew of the risks and failed to warn users. This was the first time damages were awarded by a US jury over talc claims. J&J appealed the verdict, which they later won, but it set a precedent for others to follow suit to claim damages against J&J for their ovarian cancer. The result of this trial would appear to show that J&J was responsible for miss-selling and irresponsibly sold a product that they knew contained asbestos and would cause the death of patients.41%

Despite the hysterical headlines this, in my opinion, falls well short of turmoil — a word frequently used to describe these events. October has been a notoriously bad month for stock markets in recent decades and an example of what might reasonably be described as market turmoil was so-called Black Monday 19th October 1987 when the Dow Jones Industrial Average Index (‘Dow Jones’ or ‘Dow’) fell 22.6% in a single day. That felt dramatic. I should know as I was in work that day on the trading floor of the investment bank BZW and when I went home I received a slew of sell orders from a large US client who rang me.had

is far from easy. Moreover, this activity has a transaction cost. Our strategy has the merit that inactivity is a benefit. If we have correctly identified the good companies whose stock can compound in value, we can hope to hold them indefinitely and still derive good investment performance from them with lower transaction costs. There are a couple of indices which tell you how value stocks perform. One is the MSCI Europe Value Index (GBP Net). In the 2007-09 financial crisis its maximum fall was 52%, which is 16 percentage points worse than the performance of the MSCI World Index (GBP Net) over that period. So much for the theory that value stocks protect you in a downturn. As you hopefully know by now, we have a simple four step investment strategy: • Buy good companies • ESG screen • Don’t overpay • Do nothing I will review how we are doing against each of these in turn. As usual we seek to give some insight into the first of those — whether we own good companies — by giving you the following table which shows what Fundsmith would be like if instead of being a fund it was a company and accounted for the stakes which it owns in the portfolio on a ‘look through’ basis, and compares this with the market, in this case the FTSE 100 Index and the S&P 500 Index (‘S&P 500’). We not only show you how the portfolio compares with the major indices but also how it has evolved over time.

Among the things which they are not recommending—a break-up of the company, a new CEO, replacement of any directors, taking on excessive leverage, pension benefits cuts, slashing of R&D, marketing or capital expenditure budgets, cost cuts which might impact product quality, moving out of Cincinnati. We like this approach. The next page reminded us that all Trian was seeking was that ‘Nelson become 1 of 11 (or 12)’ directors of P&G and that it is ridiculous to suggest that as one person out of 11 or 12, he would ‘derail’ P&G. The Trian presentation is 93 pages long and is all centred around P&G having a poor organizational structure—‘suffocating bureaucracy and complexity’—which means that no one is accountable, decisions take forever and so forth. When we sold our P&G stake the fact that the company is the overwhelming market leader with Gillette but was ranked no. 50 in online shave clubs struck as illustrating the sort of point Mr. Peltz was making. David Taylor, P&G CEO, went on Jim Cramer’s CNBC programme at one point calling some of Peltz’s proposals ‘very dangerous’. They strike me as more dangerous to Mr. Taylor than to P&G’s shareholders. Mr. Peltz succeeded in his bid to win a board seat even though P&G is said to have spent more than $100m of shareholders’ money to prevent it. We wish him well with his endeavours. His presence makes P&G more interesting to us.

There is also the question of what we might invest in as an alternative if we chose to sell the Fund’s holdings in defensive so-called bond proxy stocks or if you chose to redeem your shares in our Fund. The obvious suggestion, and it is one which would have worked well in the second half of 2016, is that you should switch into cyclical stocks such as banks. Buying cyclical stocks in anticipation of a rise in interest rates does pose a fairly obvious problem - won’t they perform worse than defensive stocks if the rise in rates causes an economic slowdown? There is also the fact that these stocks are in companies which over time do not create shareholder value by generating returns on capital above their cost of capital and growing by deploying more capital at such favorable returns, which is what the companies we seek to invest in accomplish. If you choose to invest in such companies then I would suggest it is not because you want to hold their shares indefinitely and allow them to compound in value but because you think you perceive an opportunity for a trade in which you buy them and then sell them for a higher price. If so I hope you have better luck with your timing in this game of Greater Fool Theory (in which you hope to buy from a seller who is less competent than you at spotting this opportunity and when the time comes you need to sell to a buyer who is similarly ill informed) than most people seem to have.

2015 was also the fifth anniversary for our Fund and so maybe a good moment to pause and reflect on the longer term performance. As well as outperforming the market with a compound return of +17.6% against +10.1% for the MSCI World Index, our Fund was the third best performing fund out of 203 in the Investment Association’s Global Sector. Why only third, you might ask? The two funds which performed better than ours are specialist healthcare funds which have benefited from the extraordinary boom in takeovers within the biotech sector in recent years. That won’t last indefinitely, at which point anyone who has benefited from investment in those companies and funds needs to find the next hot sector if that is their investment strategy. This is a game we profess no skill at and therefore will not be playing. This skill also seems to elude most other investors but that does not seem to stop them trying. 2015 was not a particularly bullish year for equity markets which were held back by the slowdown in China, setbacks in other Emerging Markets and the move on from the end of quantitative easing in America to the first rise in interest rates by the Federal Reserve (‘the Fed’) in nearly ten years. After all that the S&P 500 Index was down by -0.7% for the year. Trillions of pixels have been expended on the likely impact of this increase in interest rates and I do not intend to add much, if anything, to the debate. However, one aspect may be worth commenting upon.