Latest / On The Money / 100th episode special: the Terry Smith interview

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100th episode special: the Terry Smith interview · On The Money

• Kyle Caldwell, funds and investment education editor at interactive investor: So, Terry, I wanted to kick off with performance. Investors who’ve backed the fund since launch in November 2010, will surely have no complaints, as you have outperformed the wider global stock market and the vast majority of global equity funds. However, over the past couple of years the fund has underperformed the MSCI World index and you’re also slightly behind the average global equity funds. How much of a headwind to performance has it been being underweight the so-called Magnificent Seven stocks? Terry Smith, manager, Fundsmith Equity: That’s been a headwind. There’s no doubt about that. But equally, it’s not the only headwind. I mean, there’s quite a lot to say about this subject and just stop me when you’ve had enough, as it were. If you look at the performance, it really started to go in late 2021 with the rise in interest rates. So, they first started putting up rates in late 2021, and that continued through into 2023. That was an insuperable headwind to performance in anyone who manages money in the style of what we do, basically. We try to own good businesses, quality businesses. Markets are not completely efficient, in my humble opinion, but they’re not completely inefficient either. There’s quite a decent recent paper on it by Cliff Asness – we might come back to that as well. But the point is, they’re never going to price quality companies of the sort that we want to own at lower than the market average multiple. Which means, when rates go up, we’ve got this differential headwind caused by the fact that we own the equivalent of long-tail bonds where the prices of our companies are discounting their earnings or cash flows further out into the future. So, the rise in rates, which affects all valuations, affects what we’ve got, disproportionately. So, that was the beginning of this. Then we had the so-called Magnificent Seven, as you say, and we do own some of the Magnificent Seven, but we’re never going to own all the Magnificent Seven for a variety of reasons. One of them is just portfolio risk. And the second is, we don’t actually like some of them. I mean, we’re never going to own Tesla Inc (NASDAQ:TSLA). It simply doesn’t fit through what we do, for example. Then, in late 2021, the whole of 2022 and the early part of 2023, the interest rate rise. Then we had the rise of the Magnificent Seven, which was really the story of 2023. Then, just as you were about to breathe a sigh of relief and are thinking, “Oh, that’s that”, we have the AI boom, hype – whatever you want to call it – excitement anyway. Which obviously partly affects the Magnificent Seven, but also dragged in a number of other companies and gave it all another leg. The statistics on this are pretty stark in terms of what percentage of the index returns came from these companies during this period. A third of the return in the S&P 500 came from one stock – NVIDIA Corp (NASDAQ:NVDA). Didn’t own it. Pretty difficult to outperform, isn’t it? And there’s a group, they were half the performance of the index. So, this group of half a dozen companies were half the performance of the index. That was pretty much an insuperable obstacle, unless you were going to own those – and we don’t own all of them, rightly or wrongly. We just simply don’t. Then it’s kind of a bit of a handicap, really. Kyle Caldwell: As you’ve mentioned, due to the strong share price performance of a small handful of US technology companies, stock markets have become more and more concentrated. For example, in the S&P 500, those seven companies now account for over 30% of that index, and for the MSCI World index, those seven companies now account for just over 20% of the index. Does this make it harder for active funds, in general, to outperform? Terry Smith: Of course, yeah, absolutely. One of the things that I didn’t mention in answering about the background to our performance in recent years has been the rise – or continued rise – of passives. Basically, index funds have risen pretty much inexorably since the start of the period after the financial crisis. And more recently they crossed over to be more than half the market. They, of course, are investing in these in proportion to the index, and they represent the index which we’re being benchmarked against, not unreasonably. And it does represent, again, a difficult, if not possibly insuperable, problem in this regard. The problem with investment, in part, I think, as a subject area, is that we use labels, all of us, for things. Partly because we’re just given them to use by the industry, but they’re not always very helpful. So, when people talk about index investment, they talk about passive investment. Well, it’s passive in the sense that there’s no portfolio manager making active decisions to own some things and not other things. But it’s not actually passive. It’s a momentum strategy. Because as you put money into the index, it goes to the market cap-weighted companies more than any others – they’re the biggest ones. And then they outperform because of that, and then that attracts more money, typically, into the strategy. So, you have a self-fulfilling prophecy up to the moment when you’re done. That’s really what’s going on in terms of the rise of passives. There was an interview, I think it was between Cliff Asness and John Bogle – the founder of Vanguard – sometime back. They were basically debating at what point in terms of ownership of the market by passives it would become dysfunctional insofar as the pricing mechanism – the valuation of stocks – wouldn’t work. What we do know for sure is, if it was 100% passive, it would definitely be dysfunctional. We know that, right? So, there’s some number below that at which it starts to become dysfunctional, and maybe we’re at that. I don’t know. I’m not sure it’s easy to gauge that. The best way I can think of gauging it – and people have done quite a lot of work with this over time – is to look at the differential pricing between the bottom-quartile stocks and the top-quartile stocks in terms of valuation. Using sometimes very simple yardsticks such as price-to-book or price-to-earnings, sometimes using a whole battery of yardsticks to try and get a better picture. And we’ve certainly seen probably the most extreme episode on record of that disparity in recent times, in recent years. I think that’s been driven by a number of things. One of them being the interest-rate environment, but another being the rise of passives. I think that has actually driven it. The statistic that we calculated at mid-year – because you talk about outperformance versus the index, you talk about outperformance versus other funds, all good comparators – is that we didn’t outperform in the first half. We had decent performance, I think, 9%, but we didn’t perform in line with the index. You had to be in the 92nd percentile to outperform the index. Or to put that in English, you had to be in the top 8% of funds. It's like, OK, I get that the average active manager is going to underperform the index, right? They must do because they’ve got costs. So, we’re going to expect less than 50% of active managers to outperform over time. But 8%? It does suggest that there’s something a bit extreme going on when the guy who’s in the ninth percentile – so the top 10% of funds – underperforms the index. It’s like, “Hmm, that doesn’t sound quite right.” Kyle Caldwell: So, as lots and lots of money is going into index funds and ETFs, this is helping to bid up share prices, and when there’s a narrow cohort of stocks that are performing well, then the share prices just go up, maybe not relative to the fundamentals? Terry Smith: Yeah, absolutely. I think that’s definitely a factor that’s at work. And as I say to you, in judging that, I think what one’s got to bear in mind – among other considerations – is, index investing is not actually a passive strategy. It’s one without an active fund manager, but actually it directs the incoming funds to the largest stocks, because it’s market cap-weighted. And as a result of that they perform quite well. So, the index does well, and perhaps better than the active managers. So, it attracts more money from the active managers, and on it goes. And it goes on for as long – well, as it goes on really. Kyle Caldwell: And, of course, the star AI stock, since the start of 2023, has been Nvidia. I know it’s a stock that you don’t own. Is it one that you’ve considered owning in the past? Have you looked at it? Terry Smith: Yeah, we’ve had a look at it. Look, we could own it, it certainly fits our parameters around the investable universe. So, why don’t we own it? Well, probably just because we were wrong. Let’s start with the simplest answer. Because we’ve got to accept that that’s just one possibility. We’ve certainly been wrong so far, haven’t we? We were just wrong. So, what is it, if we are rational in not owning it that keeps us away from it? It’s a stock which has got a couple of characteristics that worry us. One of them is, it’s a company which has made – what people are calling in modern parts – a pivot twice in its business model, very successfully. You might say, what’s the problem? Well, because people who have to pivot in their business model sometimes get the pivot wrong. So, it moved from gaming chips to basically chips for digital currencies, very successfully. And then it moved from chips for digital currencies to GPUs [graphics processing units] for large language models and artificial [intelligence] – very successfully. Great. I mean, Jensen Huang – the founder, and the man who runs it – is clearly very clever – and they’ve done that very successfully, and all credit to them for doing that. However, bear in mind the following. On those two changes in the direction of what they were doing in the past, the stock went down 80% on both occasions. You’ve got to have a pretty strong stomach for that kind of stuff. And it does worry us that it’s not got the predictability that we seek in companies. One of the most important things we’re looking for is something that’s relatively predictable, and that doesn’t sound like it’s particularly predictable. Presumably at one time they may do that and it may go down 80% and it might not succeed. So that’s one thing. The second thing is that one of the mantras that people often say to us about our strategy is, “You’ve got a lot of consumer stocks.” We’ve got a fair number of consumer [stocks] – less than we used to have, but we do have [them]. They say, “Isn’t it dangerous being close to the consumer if there’s a downturn?” And I say, “Yeah, it’s dangerous. But there’s only one thing more dangerous than being close to the consumer in a downturn and that’s not being close to the consumer.” Because if you think it’s bad running a consumer products company in a downturn, when you might see a 5% to 10% downturn in demand, you can only begin to imagine what happens to people who are supplying to those consumer companies, particularly if they’re supplying capital equipment, which just goes on hold. They don’t have 5% to 10% downturns. They get properly strapped into the roller coaster at that point. That tends to be what happens to them. And there’s no doubt whatsoever that what Nvidia is doing is selling into a massive capital cycle. They’re building things which are going into people to put into data centres, to build models. They’re not selling direct to consumer. They’re two or three stages back from the consumer, basically here. So, at some point, if the end demand for this falls, or even just doesn’t go up as fast as it has been going up, there’s going to be an interesting outcome here. And the final part of it, I guess, is about AI. At the moment, I would have said that if we look back over the last 30 years, we can see some developments which definitely changed our world, the way that we operate. The internet, mobile telephony, search, social media. They’re all up there. Is AI one of them? I don’t know, and I certainly don’t think I’ve met anybody else who could convince me that they know yet either. Because I look at it and we read results from companies like Intuit Inc (NASDAQ:INTU), which just spoke at a conference, so I was reading the notes on that overnight. People ask them about AI and they say, “Yeah, we’re building AI into our accounting software”, and it’s like, OK, so they’ve got to put something into the accounting software that makes the business user willing to pay more for it. That’s point one. Well, there’s no sign of that just at the moment. Even if it does arise, they’re not the supplier of this. They’ve got to buy it via a couple of intermediaries, one of them being their supplier of the hyper-scale data centre with the GPUs in it. So, probably Microsoft Corp (NASDAQ:MSFT) or AWS or Google. And they, in turn, are sourcing the model from someone like Chat GPT for OpenAI, yeah. So, they’ve got to pay for all that. So, if Intuit does get you to pay 20 bucks a month more for your thing, that’s cool, but how much are they paying for all of that? So, at the moment, the business case is not proven. I don’t invest on this basis, but if I had to make a wild guess on what will happen here, it is that after the initial excitement about this, we will find that people will go, “Well, it’s not producing any revenue, is it? Rubbish.” And then we’ll see a very sharp downturn. That’s the point at which, I think, in terms of owning something like an Nvidia, we will have to sit there with a wet towel on our head and say, is this like the beginning of the internet, the beginning of mobile telephony, where there’s a start and then there’s a collapse after a hike? And then that’s the moment when you get in. If you get in at Amazon.com Inc (NASDAQ:AMZN) at the bottom in 2003, you make 600 times your money. That’s the sort of thing we live for, to find those kind of things once in a while. It’s a long, involved explanation, but that’s how we think about it. Kyle Caldwell: Now, I want to turn the attention to the stocks that you do own. You’re notorious for buying and holding for the long term, and this is evidenced by around 10 stocks still being held since the fund was launched around 14 years ago. You’ve got 29 stocks at the moment. When it comes to making buying and selling decisions, do you find it easier to identify new opportunities, or do you find it easier to sell? I often hear from investors that they find it harder to sell than to buy. Is this something that rings true with you? Terry Smith: Yeah, I think that is true. We’ve had mixed fortunes in recent times with selling. We’ve sold some things which have gone very well, in the sense that they definitely haven’t performed very significantly since we sold them. The only query about those is, should we have done it a bit earlier? But things like PayPal Holdings Inc (NASDAQ:PYPL), The Estee Lauder Companies Inc Class A (NYSE:EL), and Reckitt Benckiser Group (LSE:RKT) have all been things that have worked very well in terms of selling, and they’ve gone on to be very poor performers after that. But then we’ve sold a couple of things which haven’t worked very well. Intuit, which got the AI tailwind, Amazon and so on. We’ve spent quite a lot of time thinking about, what goes right and what goes wrong in terms of selling things. One of the things we’ve determined is that we’ve got to be careful about watching what people do, rather than what they say. So, if you take Amazon, for example, one of the things that worried us was Andy Jassy, when he was a relatively new CEO, saying he was going to go big in grocery, in online retail. This, in my view, is nonsense. It just doesn’t work. If you look at the purveyors of this, [firms] like Ocado Group (LSE:OCDO), it’s pretty disastrous, frankly. If I go to the reception of my apartment block and look at the deliveries that people are getting, it’s mainly shelf-stable stuff. It’s stuff like water, tissues and boxes of stuff. We don’t buy fresh groceries online. That’s not the way we do it. We actually like to go into the shop and have a look at it and so on. Of course, maybe we did a great service to Amazon shareholders, because we sold the stock and, of course, he’s never done anything. So, we’ve basically come to the conclusion that we have to wait until people actually pull the trigger on doing dumb stuff before we sell. So, after Reckitt bought Mead Johnson – the baby formula thing – it was time to go, basically. I always say, why do human beings have postmortems on certain cases of death? Well, because the cause of death is uncertain, and we like to know why people died, or how they died, to determine whether we need to do something about it. But when it comes down to selling, one of the [things] my colleagues have tried to drill into me over time, is that when I personally get pissed off with the management, it’s time to sell. I’m not saying this. I’m saying my colleagues say it. They say I’ve got good instincts. And when the management start talking gobbledygook about things to us, about what they’re doing and what’s gone wrong, and what they’re going to do about it, and I start shaking my head in meetings, they say, “It’s time to go. You’ve clearly spotted something, and it’s time to go.” Kyle Caldwell: Of course, you rarely make changes to the portfolio and you don’t respond to wider macroeconomic events. You’ve said a lot of times over the years that you can’t predict the macro, and anyone that tries to, you just cannot predict it successfully over time. But I was wondering if you could give us a run through of portfolio activity this year. I noticed quite recently that you’ve sold a longstanding holding in Diageo (LSE:DGE)? Terry Smith: Yeah, sure. That’s our only sell so far this year. Our thinking there was several fold. One of them is that we think that they’re quite challenged at the moment. They’re challenged by something which everyone knows about, which is they’ve had this problem with stock in Latin America, where they seem to have run into an overstock situation during a downturn in spirits consumption. And I’ve got to say, we’re very puzzled about it, mainly because it’s not the only drinks company that we follow. We follow them, Brown Forman, Davide Campari, Pernod Ricard and Rémy Cointreau, and none of the others can tell us what they’re talking about, basically. A bit worrying. Second, there is a general downturn in spirits consumptions in America, which the market, everybody, wondered whether people would drink as much during the Covid lockdown. The answer is they drank more, which perhaps is unsurprising when you think about it. But they had that high to come down off as well. And then something we might touch on a bit later, but we’ll see, is that I think we might be in the early stages of seeing the effects of the weight-loss drugs here. People are obviously very excited about the weight-loss drugs. Wegovy and Ozempic, by Novo Nordisk AS ADR (NYSE:NVO), and Zepbound and Mounjaro from Eli Lilly and Co (NYSE:LLY), and no doubt others in due course. And the positives are very evident in the performance of those stocks. But there are early signs that, unsurprisingly, these things work by cutting consumption. And that the area that they most directly affect in consumption is alcoholic beverages. I think we might be in the early stages of seeing that starting to take effect, basically. But if we are and it is going to be an effect, it’s going to be an interesting headwind, because Ozempic and Wegovy are only labelled in eight countries at the moment. So, when this really does become widely available, it could have a very interesting effect. Then you get on to the fact that we worry about the management in situations like this. If they’re facing a downturn in America, an incident in Latin America, that we don’t truly understand, and we don’t understand their explanations, and this possible headwind from weight loss, is the management good? I mean, are they going to react well to this or not? And we’ve had a recent change in management there, and we worry about that. Because we thought Sir Ivan Menezes – who retired and then sadly died very shortly afterwards – was a top guy. He understood the marketing of the spirits world, I thought, intimately, and I just don’t know whether the current incumbent does quite so well. So, we’ve got a kind-of untested pilot appear when we’re going through more than a bit of turbulence here. And then finally, the last thing I’ll bowl in there, is that we do own another drinks company. So, it’s not like we’re going more out of the sector. We own Brown-Forman Corp Class A (NYSE:BF.A) as well. So, if we’re completely wrong about all this, and America recovers, there’s not really a big problem in Latin America, and the weight-loss drugs are a complete red herring, we’ve still got a hold in the sector. It’s not like we haven’t got anything. Kyle Caldwell: In terms of new holdings, which ones have you introduced this year? Terry Smith: Texas Instruments Inc (NASDAQ:TXN) and Atlas Copco AB Class A (OMX:ATCO A). Texas Instruments is the manufacturer of analog semiconductors. So, it is in the semiconductor industry, it is in the chip business, but it’s at the opposite end of the chip business, if you like, to Nvidia, to some degree. It makes embedded devices that go into your everyday products. So, your toaster, your TV, etcetera, etcetera. And, look, it’s a company that’s got a flawless track record in capital allocation – it's very good at it. It’s clearly benefiting from the onshoring of chip manufacturing into the United States. It’s got a grant under the so-called Chips Act. And in any case, that’s happened because of the geopolitical risks associated with having chips manufactured in Taiwan. That’s clearly happening. And there is a semiconductor cycle, and if you look at that cycle, we’ve definitely had a down year and there’s never been two down years. Of course, that’s the moment when there will be a second down year. It gets a bit confusing, people go, “Well, how is Nvidia going up?” Well, Nvidia is in a slot of its own over there at the moment. The remainder of the industry is in a downturn, and we think, sooner or later – and probably sooner, because if you look at history, it doesn’t take long – it will pull out of that, and they’re investing ahead of that. So, we started purchasing that. And we started purchasing Atlas Copco, a Swedish industrial company. It makes compressors, vacuum equipment, various other things, tools. Great business. It’s got an outsource manufacturing model, which enables it to be a relatively low-capital intensity manufacturer. It mainly assembles things, rather than makes things to go into what it does, and it’s got a hugely diversified operating base. It’s got over 600 operating entities, which are centrally controlled, but operate in their own markets and operate very well. And we’ve got a bit of a soft spot for companies – particularly European companies – which have got family control but are listed, obviously. Some of them seem to have really a good long-term management perspective on their business. And this one, of course, has a controlling stake from the Wallenberg family because they’re an investor, aren’t they. So, we’ve had success with other companies like that, like L'Oreal SA (EURONEXT:OR) and Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC). It really is in the same pattern of that kind of business. So, we’ve just quite recently started buying that. We haven’t got a full holding yet. In fact, we haven’t got a full holding in either of those at the moment, but we think we’re going to get continuing buying opportunities. Sometimes we do that. We’ll buy about a third of a holding, because we can’t be certain about making a spot landing on these things. So we buy into them, particularly if it’s a profit warning – not that either of those are – but if it’s a profit warning-type situation, which sometimes you have these in really good businesses; we had it with Fortinet Inc (NASDAQ:FTNT) in cybersecurity. Our view is that they come in threes, so we’ve bought about a third of a holding on each one. So far, that seems to have worked, he said, touching wood rapidly while speaking. Kyle Caldwell: In terms of your watch list, which I think when we last spoke, you said there’s around 50 stocks typically on that list that fit all your criteria [and] that you’re examining constantly. You mentioned earlier this year that you were considering buying a bank. Is this still on the cards? Is this a one-off opportunity, or is it a change in view on a sector that I know you’ve been critical of in the past? Terry Smith: I’ve got no change of view on the sector. We’ve got no change in view on the sector. Julian Robins (co-founder of Fundsmith and head of research), and I were both bankers, for what it’s worth, and we haven’t changed our views on the sector. We just think we found one bank, maybe two, which are outliers in terms of the way that they’re run. There are reasons why they’re very particularly different to the majority of the sector. And so, we think we know what we’re doing, but we don’t do things because we think we know what we’re doing. We like to prove it to ourselves first. So, we’re watching them at the moment and seeing whether they really do behave in the way that we think they’ll behave, then we might consider it. If we do that, no doubt a lot of people will point to the fact that we’ve said we don’t own banks and so on, at which point I’ll quote the great Mr Buffett, who said, “Sometimes a man must rise above principle.” We’re interested in things that work for the right reasons. Kyle Caldwell: Next, I wanted to ask you about the UK. I’ve had no shortage of commentators and fund managers – and it’s not just UK managers talking up their own books – saying how cheap the UK stock market is relative to its history. Of course, it’s a very small part of the global index these days, but is it a market you’ve been looking at a bit more closely, given the valuations are looking cheaper than usual? Terry Smith: Not really. We just don’t think about things that way. I mean, we’ve got companies that are quoted in the United States in the portfolio that until very recently didn’t even operate in the US. The fact that [they are] listed there is largely irrelevant. We own, for example, Unilever (LSE:ULVR), which is listed in the UK. Their largest market is India. So, I think thinking about it in terms of the UK and the FTSE 100 is not particularly representative of the UK economy. Its largest external sort of companies are in the commodity and energy area, basically. So, look, I think they’ve got a point, the commentators who say this. It certainly has been derated relative to history. Of course, you’ve got to be very careful when you distinguish between price and value. A low rating doesn’t necessarily equal value and quite a lot of the things that have been derated in the UK, relative to the world at large, or relative to history, have been so for a good reason. See Thames Water for details, as it were, or Centrica (LSE:CNA), or any number of other companies that are in there. So, an index that’s dominated by banks, utilities, commodities and energy is not likely to produce a lot of high-quality companies. We’re really interested in those. And for us, there’s just over a handful of companies there that we regard as investable, and we’ve owned some of them in the past. We’ve owned Diageo, as we mentioned earlier, we’ve owned InterContinental Hotels Group (LSE:IHG), we’ve owned Reckitt Benckiser, we’ve owned Sage Group (The) (LSE:SGE). We still own the Unilever at the moment. And there’s a couple of others like RELX (LSE:REL) out there, which are interesting to us. But that’s about it. If you’re thinking about why the UK is lowly rated compared to the rest of the world, just think about one sector – and I realise it might be hyped at the moment, so it’s dangerous to go diving into it – but think about technology as a driver of performance. If you look back, not just over the last two or three years, but over the last two or three decades, it’s been a huge driver of performance. And what’s the UK quoted technology sector like? It barely exists. In the FTSE 100, it barely exists. That’s a bit of a marker in terms of the difference between the FTSE 100 and other places. Kyle Caldwell: A key draw for why many investors do invest in the UK is the income on offer. It’s one of the highest-yielding markets, globally. Now, you’ve said in the past that no one should invest in equities for income, so I wanted to reset the record on that and get your views on why you think investors should instead focus on total returns rather than paying themselves an income from the income generated by a company. Terry Smith: Well, if somebody pays you a dividend, they can’t invest that money in the company. Fairly obvious, isn’t it, really? The best investments are ones where they have great returns on capital and are able to invest all or most of their cash flow into growing the company like that. If you want an example of that Berkshire Hathaway Inc Class B (NYSE:BRK.B) has never paid a dividend. Would it have been better if Berkshire Hathaway had paid a dividend for investors and they’d been able to take an income? No. Why? Because Warren Buffett has been able to deploy the retained income at higher returns in the company. So, you should really look for companies which have got very high returns and invest in them. Don’t worry about getting a dividend and just sell a bit occasionally. Now the problem with that is, it unglues the mentality of most investors – “Oh, I’ve got to sell some of my investment. I’m disinvesting in equities.” What do you think you’re doing when they pay you a dividend, then? Do you think the money comes lowered through the clouds on a stick? It’s the company giving you cash which it can’t invest in the business anymore. It’s doing the same thing for you, and it’s also doing it, by and large, in a pretty tax-inefficient way. At least for the moment, capital gains tax is partly avoidable and at a lower rate than income tax. We’ll see what happens after the Budget in October, obviously, in that regard, but it’s tax-inefficient as well to get the dividend. The other thing that I’ve had cited back to me by (financial) advisers is, “Well, the problem with that is people would have to sell some of their stock continually to get their income, and they might be selling when the market turns down.” Again, coming back to it, when the company pays you a dividend when the markets turn, you don’t think that’s disinvesting in equities then, do you? You’ve got to have a strange view of where the cash comes from for a start. It comes from the company’s bank account, which they then can’t invest in the business. It’s the same effect as you selling some shares, basically. So, I maintain that nobody should invest in this for income. And people get terribly bent out of shape in their investment choices by doing it. By the fact that they are attracted to it, they end up buying stocks which have inadequate total returns, by and large. They don’t get to be high income stocks for no reason. Kyle Caldwell: Generally speaking, do you think that some companies do over-prioritise the dividend to satisfy income-seeking investors? And in terms of the companies you own if, for example, hypothetically, a company management team has signalled that they want to pay a higher dividend, and in your view, that income could be put to better use, [perhaps] reinvested back into the company or potentially to fund an acquisition, do you then potentially take action? Terry Smith: Yes. The answer to both your questions is yes. Do people over-prioritise to attract investors? Yes. And do we take action? Yes. Look, when we’re talking to company management about their business, the single most important area of discussion is the allocation of capital. Every year, these companies – the ones that we own – have got this lovely return, about 30% of return on capital. So, for every dollar of their capital we own – or a pound or a euro – up comes 30 pence or cents. But then our question is, what do you do with it and why? The best answer of all is “I’ve got something invested in this business where I can get another 30% return. That’s a great answer. The less-good answers are, “I can find something to buy”. I won’t do that because that, on average, doesn’t work. There are examples where it does, but it is a more testing kind of situation for them. And then the final one is, “we will distribute it to you”. At which point we’ve got a subset which is, well, how do you distribute it? You can distribute it by dividend or a share buyback. And we’d like to know how you choose between those two things. Because people go, “Oh, share buyback is great value.” Well, they only do if you’re buying the shares below their intrinsic worth. And the other thing you have to remember about share buybacks is that people say, “Well, I’m returning capital to shareholders.” Now, to be more exact, you’re returning it to exiting shareholders. And since, by and large, we’re going to be not exiting shareholders, we’d like to know that you’re buying those shares not above intrinsic value, where you’re transferring value from us, who are going to stay put, to those people over there who are leaving. So, it’s a slightly more complex decision tree – or whatever you want to call it – than most people think when you’re talking to them about it. But, yeah, we do take action.