Hello and welcome to The Download. I'm your host, Dave Richardson. And it is time to check in with my beloved cousin—and way better investor than me—Jeremy Richardson. Jeremy, welcome to the podcast.

Hi, cousin Dave. Happy New Year.

Happy New Year to you. For the Richardson family in Canada, fabulous Christmas and New Year. What about my family over in the UK? Was it a good Christmas holiday and New Year's celebration?

It was. We had a lovely time. I'm pleased to say that most of the UK-oriented family found themselves on Santa's good list, not the naughty list. I don't even need to update us about the family in Canada, I suppose, Dave?

Maybe we'll skip that one, Jeremy, and focus more on the good list for you. I had the privilege of attending a few of your investor presentations last year. And in those presentations, you usually throw in a couple of names that you like and don't like—but more focus of names that you like—so, the good list versus the naughty list. And just my recollection from some of the companies that you were talking about and some of the areas that you thought would be a good focus in 2025. 2025 was a pretty successful year to you. Is that the way you would look back on it?

Well, I think 2025, if we look back at the year, for me, it's a lesson of just how humble we should really be when we try and predict the future. Because I don't know if we did this last year, Dave, and there's a transcript that would embarrass us, but at that particular time, I remember we were all looking forward to this period of US exceptionalism as the President, the newcoming administration was coming in with a lot of hope, supply side policies to shake up the way that US government and regulations were done. There's a lot of optimism, particularly around small-town America, feeling the benefit of this broadening out of economic growth. Well, it didn't really work out that way, did it? As soon as we got into the new year, we tripped over ourselves with DeepSeek, which was a massive shock. And then we dealt with a lot more uncertainty with the announcement of the tariffs. So it was really not until the latter half of the year that I think there was a more positive market narrative which began to emerge, which is around the revitalization of the AI trade. But if anybody felt that they could just reach for the playbook from 2024 and dust it off and give it another go, it was different this time. It was similar but different because instead of just buy anything with AI in a PowerPoint presentation, this time it was focus on the winners and avoid the losers. It was much more discriminating. A very different year, I would say, than the one that we would have initially anticipated if we'd had this conversation at the beginning of last year. And that makes me a little bit circumspect about being too dogmatic about predictions for 2026. But I do feel that there are certainly things in play in capital markets at the moment which make 2026 quite an interesting year. I wouldn't necessarily deal with it in terms of predictions, but more in terms of probabilities, things that could happen rather than things that we expect to happen, if that makes sense.

So, Jeremy, 2025 was pretty good returns, and in the portfolio that you and the team manage, you have the ability to really go anywhere in the developed world. You stay fairly large cap, but within that mandate, you can go anywhere. So you can be all in the US, you could be all in Europe. And so if you look at last year, really, no matter where you went, it was a pretty good year. Even the US, which ended up finishing more towards the middle of the pack than the top of the pack, as had been more normal over the last decade, still double-digit returns, above average returns in the US. And then you get into Europe and emerging markets and Canada, even for Canadian investors. Really solid returns in the 20 to 30% range in Canadian dollar terms. So a pretty good year. And that is what you expected. But as you say, a good year, but different in that you had your winners and losers, and that was what you were really referring to.

Yeah. That currency point is an interesting one there because if we talk to North American investors, like you suggest, most of them are feeling pretty good about how 2025 turned out. In fact, the third year on the bounce, really, of near 20% returns in US dollar terms. So that's not to be sneezed at. But there are a lot of European-based investors who aren't feeling anywhere near so pleased with life because of the weakness of the US dollar. Share prices might have gone up, but they've given it all back on the currency. What one's experience has been of investing global equity markets is very much determined this year by the currency in which you're investing in. That, too, has been a change, because, yes, the US has been cutting interest rates, but there's also been a lot of narrative which has been shaping people's expectations about the direction of exchange rates. And that's been a contention that we haven't really had to think much about as investors for a long period of time. But of course, making predictions about exchange rates is really hard. And if I look at what people are expecting about for companies for next year, actually, it doesn't look too bad. I was just looking at some numbers the other day, actually. And for the US market, people are expecting roughly around about mid-teen % EPS growth. Call it 15%. About half of that for Europe, that might not be that exciting. But of course, you're not paying the same multiples for Europe. So in terms of those trade-offs, it's perhaps not too scruffy. And then when you look inside that 15% that you're getting in the US, twice that, about 30%, is coming from these tech companies. And although a lot of people are saying, well, look, hang on a minute, doesn't the US look expensive here because of all these tech stocks that have been going to the moon? And yes, of course, there are some absolute howlers in there. Some companies where the PE multiples look rather like my golf score. And that's not that attractive. But as a group, we looked at the average, you would think, well, hang on, I'm getting over 30% EPS growth, and I'm not having to pay that same handle in terms of the PE multiple. My peg is actually pretty good, below one. There are some things there, even within the current market, given everything that we've had the last three years, and yes, we have some outliers, there is still opportunity, we think, for finding attractive relative value, be that either absolute headline valuation where your PE multiple doesn't reflect the prospects of the company, or even actually, yes, you're paying a little bit more in terms of the multiple, but you're getting much more in terms of expected growth. We still think there's a world of opportunity out there. But as I was saying, it's a dynamic marketplace. Things are changing. One of the things that is fascinating us at the moment is this whole AI narrative that we've been seeing. It's been such a big dynamic, as I say, for the second half of last year, and there's a lot of expectations with this EPS growth for next year. But there is a degree of uncertainty within the market. So much of the industry has been driven by a comparatively small group of largely private companies, not public companies. And these private companies are not exposed to the same level of interrogation as some of the public companies are. And the decisions that those management teams make have the power to reshape these industries in ways that we may not completely understand because we're not privy to all of that information. So fascinating situation we find ourselves in. And it's a time for New Year's resolutions and predictions. I'm probably rubbish at both of those. The New Year's resolutions, I never try to make one of those because I always end up sticking with it. But I would be prepared to make some predictions, which is that I think some of those private companies are likely to be coming public over the course of 2026. Frankly, many of them need the money that they would get from going public, and they've got some big strategic choices ahead. We're getting to a size and stage in maturity where actually probably going public is the right thing for them to be doing. So it'll be interesting to see how they do that because with that, we'll get much more visibility about strategy, and we'll understand a little bit more detail about how this particular industry is evolving.

Generally, when you see more companies coming to market, in particular these big exciting companies, that tends to drive excitement around the market overall and tends to be pretty good for the market. Is that not the case?

Yeah, I think so. People buy a story, don't they? You need to have a story. It's not just about the numbers. You need to understand where those numbers are coming from. And stories are memorable. And when we get to the IPO market, there's going to be lots of people peddling good stories about some of these big companies. So that should be quite good news, I think, for getting everybody's attention. I'm sure we'll be getting stories around the size of addressable market and how these business models are evolving and changing, and how disruptive and exciting this is. But I think we need to be somewhat a little bit circumspect about this. We don't, as a team, do a lot in terms of initial public offerings. Because we understand with an IPO as a public investor, you're always at an information disadvantage. Whoever's selling the equity knows more than you do, particularly when you're buying something that used to be private. So caviar attempt? All right but buy and beware. You're buying something of somebody who knows a lot more about what they're selling than you do about what you're buying. And neither do you know anything about how it's going to trade on day two. You might know the price that you'd be able to get an allocation at, but you don't know how it's going to trade on the second day. That's yet to be proven. We'd like to be a little bit open-minded and circumspect about this, and much more interested in perhaps coming in after rather than rushing in on the IPO. The other thing, though, which is worth bearing in mind is that this will suck up a lot of people's attention and probably capital, too. If you want to participate in an IPO, you need cash at hand. That may mean selling pressure on some of those public companies if you want to participate in some of these upcoming IPOs. Then the other thing which is just worth reflecting on—I think being serious investors, this is probably more relevant—is the reasons why some of these companies are doing IPOs. For example, we own Alphabet in the portfolio, a company that listeners will be familiar with because they own Google, also own YouTube, a very successful company, one that we stepped back from after ten years of ownership last year because we had concerns for the impact of AI on Alphabets' search business, Google Search. But we brought back last year into the name because we could see that after the stumble they had with Bard—do you remember that? the AI launch that fell on its face—well, they came back very strongly in November with Gemini, which has been capturing the market's attention, particularly for text-based queries. And it's some indications that it's taking market share away from ChatGPT. Meanwhile, in the world of coding, not something that I'm particularly proficient of, I have to admit, but thank goodness, I won't have to learn it now because Anthropic's Claude model is brilliant at doing coding. And so if you've got Gemini from Google doing text-based stuff particularly well, and Anthropic's Claude model doing coding particularly well, what's ChatGPT good for? And that's a potential issue for OpenAI. So hence Sam Altman launching this code red, you might have read about at the end of last year, refocusing the market, the company's attention back on to try to get its mojo back. And so the next few months are going to be absolutely critical about how good its next update is going to be, because if it excites, well, then that gives OpenAI time. It will attract more capital. They're talking about a higher private valuation. If it struggles, then where are they going to get the money from? Maybe an IPO becomes more pressing. And do you really want to buy into an IPO where what's ChatGPT good for? That's the key question. So we don't know, because we're looking from the outside in and we can't see what's going on inside this private company and how their development is going. But if it's a big success, if the code red pays off, maybe they come out with something which gives help about something to think about. Something that gives Anthropic something to think about. Or maybe they don't. Or maybe they pivot and do something entirely different. We just don't know. So it's a really interesting area to pay attention to. We spend a lot of time thinking about this, and we've been trying to adapt quite quickly over the course of 2025, trying to make sure that we are staying on top and responding to the latest data points so that we think we're well positioned for the future. I could go on.

Yeah. I think one of the things that comes out of just what you're talking about is how quickly things can change and shift. I was speaking to one investment manager who had gone to Silicon Valley over the summer and came away with the impression that all of the other big firms that were pouring tons of money into developing AI, that they were very much scared of ChatGPT. They were scared of that business, that that was already over, that that was the dominant player. And then you suggest Google comes out in the fall and takes a leap forward, and then you're sitting there asking yourself, well, who is ahead? And then we know in these spaces, as we talked to Marcello and Rob, who work in the technology space that all of these areas are winner take most, generally. So being in the right space and making the right calls around it in terms of who's ultimately going to be the winner is somewhat important.

Yeah, absolutely right. I can't remember a period where we've had such dynamic market conditions in this respect, because even during the dot-com bubble, we weren't talking about companies in the size which we're talking about here. I mean, this is like billions of dollars turning on a sixpence. It's remarkable. But I would say, though, that if you think about the ingredients of success for the future, for some of these AI companies, particularly the large language model businesses or the data center companies, there are probably three elements as critical success factors they need to have. The first is a large language model, because if you have that running in your data center and you own that, I think your margins are going to be much better than somebody who doesn't have their own model. Secondly, you need to have the right type of data centers. We've gone from a world of just information retrieval. Think of when you're trying to stream a Netflix movie. Now, you're actually processing information, managing queries. That's much more complex. You need to have data centers just set up to be able to do that. And then thirdly, you need to have distribution. And you need a brand. You need a way of reaching consumers. You need a broad funnel at the top of your business. And each of those three things, different companies have different expertise at. But in our view, at the moment, at least, Alphabet probably has advantage over most of its public and private competitors in all three. So at the moment, at least, that's what we're thinking about, the rationale of why for us, this we think is going to be the industry winner, because even ChatGPT, even if they come up with a great model, they don't have the data center. They're dependent upon Oracle. Oracle is using a lot of debt to be able to do that. That's quite fragile, particularly as interest rates, spreads on that debt are rising. The market is less accommodating for that debt. And then it doesn't have the same level of distribution. ChatGPT has been largely grown by word of mouth, but it's not yet a verb like «to Google something» or Polyfilla or Sellotape or Hoover. It's not quite the same. It hasn't reached the same cachet yet, has it? So they got work to do there. So I think lots going on. Rapid, rapid change. We're paying close attention to it, but this is what keeps it so interesting, right? This is the cut and thrust of investing markets.

Well, again, I'm just going to step in and point out because we've had this as an ongoing theme as we've had different investment managers on. And what I always appreciate getting to spend time with you and others is just how fascinating you are as individuals and how curious you are, that intellectual curiosity to go into the depth and develop the depth of understanding that you have around this topic that you've just illustrated. But you could do this on about 100 different topics. And I made it akin to almost being an Olympic athlete. And they have that focus to be the best in that area. And to be the best in this area as a professional investment manager, you have to be able to take in tons of information, process it, understand it, and then do it again tomorrow. That's what makes a professional investment manager so special.

Those are characteristics that definitely help, but doing that globally is probably too big a job for one person to be able to do. This is a team sport. I'm very lucky that I've got a wonderful team that I work with who can make me sound vaguely intelligent when talking about these types of businesses because, frankly, I have the privilege of being able to talk to them about the work that they're doing on these topics. So Louise, for example, on AI, or I was just chatting with Ben earlier about these GLP-1 drugs which are coming now in pill form, Dave, this year. Very exciting market development which has the potential to improve the weight and lives, health outcomes of potentially millions and millions of patients with a simple daily pill. This could be the way in which we can solve obesity for the foreseeable future. And it may actually shift the cost curve of providing health care to millions of people for the indefinite future. It's potentially a really, really significant development in the industry. We own companies like Eli Lilly, for example, with the Orforglipron pill, which we've got great expectations for because unlike its competitors, you can take it any time of day. You don't have to wait until after you had your breakfast meal and take it exactly 30 minutes before or after. Whenever the mood takes you, Dave, you can be able to pop a pill. Imagine that.

Well, and one of the interesting articles that I was reading this week—I like to read, too. By the way, it's not just about having a great team. You can just come on a podcast with me, and then just in contrast, you're going to look very intelligent. Because I'm going to throw in the article I was reading, how pizza has gone from being the number two favorite fast food in the US to number six over the last year, which ties into this GLP, weight loss, fitness, obesity, diabetes, all these things that these companies, like Eli Lilly or Novo Nordisk, again, they're deeply involved, and other companies as well, developing drugs. And then you roll AI on top of that in terms of what it might be able to do in terms of the process of identifying new medicines. It's just an incredible place to be in history. But from an investment perspective, it's how do you identify where to place your investors' money?

Yeah, absolutely. Because a lot of people get excited by the growing-end market. We see this all the time, right? We get excited by the demand. We get excited by the story. But actually, to get a successful investment outcome, you also need to think about the supply as well, because if demand creates its own supply, people enter the market because they, too, get excited by that same story, then your investment returns are going to get competed away, and you'll end up with something which doesn't look particularly exciting, and actually, you could end up losing money on that. I remember going to China many years ago, looking at consumer companies and being shocked by the level of price competition in a lot of Chinese consumer products. Everybody could see the growth, expanding middle classes, the great story that there was there. So they're all developing these consumer products, beer, diapers, all sorts of different products. But it was everybody had exactly the same strategy, which was to cut prices, to grow volumes, to out-compete, to be the last man standing, to consolidate that market. And only then maybe years later, could you actually see rising in return. So a lot of growth. Industries seeing fantastic acceleration, but the investment return sucks. They were terrible. And so you need to have not just that end market growth, but you also need to have an attractive market structure as well. Where are these pinch points going to be in the supply? Is that around technology? Is it about innovation? Is it about something in the supply chain? Is it about the access to capital? Is it regulation? Whatever that is that gives you the ability then to be able to extract an economic rent whilst participating in that opportunity to capture that expanding market. So Orforglipron with Eli Lilly, could be a really interesting example of that because it's a very regulated industry, healthcare, right? If you and I decided that we wanted to do a pill, they probably wouldn't let us, Dave. I'm sad to say, they probably wouldn't let us. But by golly, be sure we definitely can do pizza. The barriers to entry there are pretty low. I'm sure your pizza will be better than mine. Mine's gone pretty flat.

I'd say I'm world-class on pulling an espresso shot, but it stops there. To come back to where we were a couple of minutes ago, this is really the challenge for AI and these AI companies overall. As AI goes out into the economy with the intention that it's going to increase productivity and thus increase margins and blah, blah, blah, this is maybe the year to prove that. And I think you talked a little bit about that in some of the presentations I saw last year in terms of what's then the next phase. What is the next phase of companies that benefit from the AI evolution?

Yeah. So that's an interesting point. I mean, if you wanted to be really cynical about AI, we've seen a lot of activity, but really, you can argue that it's a solution in search of a problem. Nobody has yet really demonstrated a particularly good way of actually making money out of this. I think the consensus is that it's like having a graduate-level assistant next to you who's working, helping to process information. But you wouldn't dare let the AI make its own decisions because of all the hallucinations. And a lot of companies who so far have experimented with AI have been doing it, trying to find ways of actually growing revenues rather than actually addressing their costs. And maybe this will be the year where they actually pivot and actually start thinking about using AI to manage their costs more effectively. Now, that's probably going to be good for shareholders if they're able to hang on to some of those margins, but it may not be good for employees. It may not be great for aspects of the broader consumer economy. We need to be a little bit mindful about that. Of course, every action has always an equal in opposite reaction, according to Newton, doesn't it? So you can just see a world where AI goes from being a wonderful story, a great narrative, IPOs, left, right, and center, to actually getting some consumer pushback because it's disrupting jobs and it's forcing electricity prices up higher. And so there will be some contingent liabilities here that wise companies will need to manage. So I think other more good reasons for being circumspect. I think one area, though, that is probably worth keeping half an eye on, though, is on software relating to robotics, because as I mentioned before, I spoke of the text-based models and coding-based models, but we are seeing the emergence of real-world models as well, which is essentially using AI to try and teach a robot, a computer, how to work in the real world. There are two ways of doing this. You could either take the physics textbook and load that into a computer. Here's the thing, this is everything you need to know about quantum mechanics, and the robot will know that in a second. It's a bit like the Matrix when you want to fly a new helicopter, you know everything. But of course, nobody has that level of knowledge in order to be able to program that computer as well as that. And yet, if you think about how you do this in the real world, nobody has to teach a baby about gravity. The baby grows up knowing gravity, it intuits what gravity is. It gets an understanding of gravity without having ever studied quantum mechanics. And the great thing about what we are at the moment is that with AI, we have the ability to learn potentially from hundreds of billions of uploaded videos on the likes of Facebook and social media and YouTube, which can train computers into how to work, how to be babies, what is gravity? If I let go of something, what's going to happen to it? Is it going to fall or is it going to rise? It falls, right? The videos will teach the computer that. If we combine that with the motors, the actuators, the sensors, you've got the beginnings of an architecture, beginnings of a system where we might see quite sophisticated, quite big advances in robotics over the course of the next few years. Which also raises all sorts of really interesting questions about the roles of manufacturing and the returns on labor. Being optimistic about this, if you give productive enhancing tools to labor, it makes the labor worth more because that person could do more. They can control an army of robots working for them rather than just be responsible for their own piece action in a factory. So that person is now entirely paid more because they're producing more with the help of these robots. But at the same time, maybe not everybody has those skills in order to be able to run this army of robots. So there will be some transition costs within an economy. And so that's where we need policy makers to come along side by side to manage some of those costs of transition so that we end up with a smooth social system and a content economy that works for most people. Lots of variables, a lot of big ideas. We don't have the answer to these things, but it's interesting to see how some of these contingent assets, some of this knowledge, which at the moment, if you looked in the Alphabet share price, this wonderful repository of YouTube videos which can be used to train literally Android software to run Androids, it's not probably being adequately valued by external investors. But we would argue, actually, this is a repository of future knowledge, which actually can really help drive labor productivity into the future.

Yeah, including this podcast right here, which will be available on YouTube in just a few hours after we finished the discussion. And Jeremy, I've always said, or it's my belief, that the best podcasts—and what I'm hoping we achieve as we have these different conversations with different investment managers—is when it feels like the listener just gets to sit in on a conversation that you and I might be having in London over a nice meal, a coffee, or, God forbid, a beer. And this is just exactly what this was. The way we sit when we're together and just chat about things—mostly with me listening, because I can learn a lot more from you than you from me—but I think the listeners really got that feeling from the conversation. And it went in a completely different direction. Initially, we were going to have you pull out your crystal ball and make a bunch of predictions. But I think there's a lot more depth and things that people can take away with respect to the things you need to think about and almost a process of how you think through those things as you're making long-term investment decisions, which is what you do. We want to be clear. When you're investing, which is different from a lot of investment managers, you are buying businesses and your intention when you invest is to be involved in that business because you've gone through such a painstaking process to select that business to invest in. You plan to be there for a while. So this thinking and depth of thinking across, not just you, as you mentioned, across the team, is what is critical to making that decision.

Absolutely. Well, I appreciate that, Dave. I've enjoyed the conversation, too. It's always a treat to be able to spend time.

Well, you're going to be over in Canada, and I'm going to be over in the UK several times through the spring. So I'm looking forward to reconnecting. But again, I think the listeners got a treat listening to you today. Jeremy, thank you so much always for being so generous with your time and joining us today.

Absolute pleasure. Speak soon.

Take care.