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Annual Report
for the year ended 31 December 2018
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A member of the Association of Investment Companies
Fundsmith Emerging Equities Trust plc
33 Cavendish Square, London W1G 0PW
www.feetplc.co.uk
Perivan Financial Print 252772
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Contents
1
1
Strategic Report
2
4
5
8
9
12
19
22
Company Summary
Financial Highlights
Chairman’s Statement
Investment Objective and Policy
Investment Portfolio
Investment Manager’s Review
Investment Philosophy
Business Review
3
Financial Statements
46
54
55
56
57
58
Independent Auditor’s Report
Income Statement
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
2
Governance
28
30
35
39
Board of Directors
Corporate Governance Report
Report of the Directors
Statement of Directors’
Responsibilities
Audit Committee Report
Directors’ Remuneration Report
Directors’ Remuneration
Policy Report
40
43
45
4
Further Information
73
74
Shareholder Information
Alternative Investment Fund
Managers Directive Disclosures
Glossary of Terms
How to Invest
Notice of Annual General Meeting
Explanatory Notes
to the Resolutions
Company Information
77
79
81
87
90
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Company Summary
Strategic Report
Fundsmith Emerging Equities Trust plc (“FEET” or
the “Company”) aims to provide shareholders with
an attractive return by investing in a portfolio of
shares issued by listed or traded companies which
have the majority of their operations in, or revenue
derived from, Developing Economies* and which
provide direct exposure to the rise of the consumer
classes in those countries.
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Company Summary
The Company
The Company is an investment trust and its shares are listed on the
premium segment of the Official List and traded on the main market
of the London Stock Exchange. The Company is a member of the
Association of Investment Companies.
Total assets less current liabilities as at 31 December 2018 were
£322.5 million (2017: £310.7 million) and the market capitalisation
was £314.0 million (2017: £324.1 million).
Management
The Company employs Fundsmith LLP (‘Fundsmith’) as Investment
Manager and Alternative Investment Fund Manager (‘AIFM’). Further
details of the terms of these appointments are provided on page 22.
Performance is measured against the MSCI Emerging and Frontier
Markets Index measured on a net sterling adjusted basis.
Capital Structure
The Company’s capital structure is composed of Ordinary Shares.
Further details are given in note 12 to the financial statements on
page 67.
ISA Status
The Company’s shares are eligible for Individual Savings Accounts
(‘ISAs’) and for Junior ISAs.
Retail Investors advised by IFAs
The Company currently conducts its affairs so that its shares can
be recommended by Independent Financial Advisers (‘IFAs’) in the
UK to ordinary retail investors in accordance with the Financial
Conduct Authority (‘FCA’) rules in relation to non-mainstream
investment products and intends to continue to do so. The shares
are excluded from the FCA’s restrictions which apply to non-
mainstream investment products because they are shares in an
investment trust.
*See Fundsmith’s Investment Philosophy on page 19 for further information.
Further details of the Company’s investment policy are set out in the Strategic Report on page 8.
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Financial Highlights
Strategic Report
Performance Summary
Share price
Net asset value per share
(Discount)/premium of the share price
to the net asset value per share
Ongoing charges ratio
Net asset value per share total return
Share price total return
Benchmark total return1
As at
31 December 2018
As at
31 December 2017
1,190.0p
1,222.0p
(2.6%)
1.5%
1,314.0p
1,259.7p
4.3%
1.7%
For the year ended
31 December 2018
For the year ended
31 December 2017
-3.0%
-9.4%
-9.3%
+21.2%
+24.5%
+25.3%
1MSCI Emerging and Frontier Markets Index (measured on a net sterling adjusted basis)
Please refer to the Glossary on pages 77 to 78 for definitions of these terms and the basis of their calculation.
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Chairman’s Statement
5
Introduction
I am pleased to present our fifth Annual Report covering the year ended
31 December 2018.
Manager’s confidence in these high-quality companies whose
strong underlying characteristics will ultimately determine the long-
term growth in the net asset value of the Company. In particular, the
Board closely monitors the position in India, where we continue to
be fully invested.
Share Capital
Continued demand for the Company’s shares led to the issue of a
total of 1,727,500 new shares during the year (2017: 1,700,000
shares), raising gross proceeds of £21.5 million (2017: £19.2
million), at an average price of £12.46 per share (2017: £11.32).
As at 31 December 2018, the Company had 26,390,056 shares of
1p each in issue (2017: 24,662,556), an increase of 7.0%. Such
proceeds are raised only when the shares are at a premium to NAV
and the Investment Manager has advised that they can be invested
within the objectives. The net increment to the Company’s NAV
arising from the share issues was approximately £0.4 million in
the year.
Since the financial year-end, to 20 March 2019 (the latest
practicable date prior to publication of this report), a further
200,000 shares have been issued, raising £2.4 million so that at
the date of this report there were 26,590,056 shares in issue.
As previously noted, the share issuance programme:
• allows the Company to issue shares tactically, so as to manage
the premium to NAV per share at which the shares trade;
• increases the size of the Company, thereby spreading operating
costs over a larger capital base which should reduce the
ongoing charges ratio;
Performance
The Company’s net asset value (NAV) per share for the year
decreased by 3.0% (2017: +21.2%). The share price fell by 9.4%
(2017: +24.5%) in line with the MSCI Emerging and Frontier Markets
Index, measured on a net sterling adjusted basis, which fell by 9.3%
over the same period (2017: +25.3%).
A decrease in absolute terms over the year in both our measures of
shareholder return is disappointing, although the NAV return for
which our Investment Manager is directly responsible has not
declined significantly. The Investment Manager provides a thorough
explanation of performance to shareholders and a comprehensive
analysis of the performance of the Company’s portfolio during the
year in their report beginning on page 12. Although we report in
pounds sterling, the economic exposure of investments is to a
number of currencies and fluctuations here will affect the sterling
return. This is also covered in the Investment Manager’s report.
Shareholders should continue to be reassured by the positive
returns on capital and also by profit margins generated by the
underlying investee companies, details of which can be found in the
Investment Manager’s report. Your Board shares the Investment
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Chairman’s Statement
Strategic Report
“Demand for the Company’s shares led to the issue of a total of 1,727,500
new shares during the year, raising £21.5 million”
• enhances the NAV per share of existing shares through share
issuance at a premium to the prevailing cum-income NAV per
share; and
Subject to shareholder approval at the forthcoming AGM, a final
dividend of 2p per ordinary share will be paid on 29 May 2019 to
shareholders on the register on 26 April 2019. The associated
ex-dividend date is 25 April 2019.
• potentially improves the liquidity in the market for the shares.
In addition, the shareholder authorities under which the Company
issues shares are limited so that issuance can only occur when the
result of the fundraising would not cause the Company to have more
than 10% of its assets in cash, which protects investors from so-
called “cash-drag” i.e. the negative impact on equity returns of
having uninvested cash in a rising equity market.
At the last Annual General Meeting (“AGM”) in May 2018,
shareholders granted the Board authority to issue up to 10% of the
Company’s issued share capital without pre-emption rights. The
Board will ask shareholders to renew similar authorities again at
this year’s AGM. Further details of these resolutions are set out on
pages 81 to 89 of this report. We look forward to receiving
shareholder support for these resolutions which your Board
unanimously believes to be in the best interests of shareholders.
Dividends
Shareholders will note that in 2018 the Company made a revenue
profit and that revenue losses from previous years have now been
reversed. As a result, the Board recommends to shareholders for
their approval a small dividend so that the Company complies with
the investment trust rules regarding distributable income. It is
recognised that such relatively small dividends are not material to
many shareholders but, having looked into the possibility of a
dividend reinvestment plan, the Board has concluded that it is not
practical given the relative quantum of share price and dividend.
The Company’s objective remains to provide capital growth rather
than income and any dividends and distributions will, subject to the
investment trust rules, continue to be at the discretion of the Board
from time to time.
Investment Policy
I reported in the Company’s last annual report that the Board had
been considering whether it may be appropriate to increase the
single jurisdiction limit contained in the Investment Policy from 40%
of gross assets (at the time each investment is made), to allow the
Company to take advantage of compelling investment opportunities,
as they arise. At the time and after consultation with major
shareholders, the Board decided not to go ahead with such a
change in policy.
Since then, the question has arisen whether the Investment
Manager should be allowed to make changes to holdings subject to
the single jurisdiction limit once holdings have exceeded the 40%
threshold. This would allow the Investment Manager to make
changes to the size of holdings in a jurisdiction in which investments
overall have been successful and have increased in value since their
original purchase. In such a scenario, the Investment Manager
would increase the size of a holding (or invest in a new company)
while decreasing the size of another holding in the same jurisdiction
by the same monetary amount. Accordingly, the Board has decided
to make a minor amendment to the investment policy to permit such
actions. The Board believes that it is in the best interests of
shareholders that the Investment Manager has this flexibility and,
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“The previous year was a turbulent one in many respects in many parts of the
world and your Board believes that this volatility will continue in 2019.
However, the Board believes your Company is well diversified to protect and
sustain value within the international constraints of its Investment Policy.”
having consulted with its advisers, that the changes to the
investment policy are not material (and therefore do not require the
consent of the Company's shareholders). Accordingly, the Board
approved the relevant change to paragraph (ii) of the Investment
Policy (see page 8) on 21 March 2019.
The Board
As mentioned in the half-yearly report, Rachel de Gruchy joined the
Board on 1 June 2018, bringing with her lengthy and broad-based
experience in international investment and financial markets. She
will stand for election at the forthcoming AGM, along with all other
Directors, in accordance with our policy of annual re-election. You
will find the appropriate resolutions in the Notice of the AGM
beginning on page 81.
The Directors will continue to keep the size and composition of the
Board under review.
This year we have not included paper forms of proxy to accompany
the notice of AGM at the end of this report. Shareholders can
vote online by visiting www.myfeetshares.co.uk and following
instructions. However, any shareholders who require a hard copy
form of proxy may request one from the registrar, Link Asset
Services. Instructions are provided on page 84.
The AGM provides shareholders with an opportunity to meet the
Directors and to receive a presentation from our Investment
Manager and we hope as many shareholders as possible will attend.
I look forward to meeting you at that time, together with my Board
colleagues. The Board wishes to highlight to any shareholders not
able to attend the AGM in person, that an edited video of the
Investment Manager’s presentation will be available on the
Company’s website, www.feetplc.co.uk. If any shareholders are
unable to attend or wish to raise a matter with the Board, please
contact me through the Company Secretary whose details are set
out on page 90.
Outlook
The previous year was a turbulent one in many respects in many
parts of the world and your Board believes that this volatility will
continue in 2019. However, the Board believes your Company is well
diversified to protect and sustain value within the international
constraints of its Investment Policy.
Martin Bralsford
Chairman
21 March 2019
Annual General Meeting
The Company’s AGM, to be held on Wednesday, 22 May 2019 at
1.00pm, will again be held at the Barber-Surgeons’ Hall, Monkwell
Square, Wood Street, London EC2Y 5BL. Further details can be
found on pages 81 to 89.
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Investment Objective and Policy
Strategic Report
Investment Objective
To provide shareholders with an attractive return by investing in a
portfolio of shares issued by listed or traded companies which have
the majority of their operations in, or revenue derived from,
Developing Economies* and which provide direct exposure to the
rise of the consumer classes in those countries.
Investment Policy
issuer
The Company maintains a portfolio diversified by
concentration and the Company’s portfolio will normally comprise
35 to 55 investments.
The Company complies with the following restrictions at the time
each investment is made:
(i) not more than 5% of the Company’s gross assets can be
invested in shares issued by any single company. This limit rises
to 10% in respect of up to 40% of gross assets;
jurisdiction. Where, as a result of
(ii) not more than 40 per cent. of the Company’s gross assets can
be invested in shares issued by companies domiciled in any
single
investment
performance, the total value of the companies in a particular
jurisdiction exceeds 40 per cent. of gross assets, this restriction
shall not apply to a portfolio rebalancing transaction (an
investment funded from the proceeds of a disposal of shares
in a company domiciled in the same jurisdiction, executed at
the same time).
(iii) not more than 20% of the Company’s gross assets can be in
deposits held with a single bank or financial institution. In
applying this limit all uninvested cash (except cash representing
distributable income or credited to a distribution account that
the Depositary holds) should be included;
(iv) not more than 20% of the Company’s gross assets can consist
of shares and approved money market instruments issued by
the same group. When applying the limits set out in (i) this
provision would allow the Company to invest not more than 5%
in the shares of each of four group member companies, or 10%
in two of them (if applying the 40% limit);
(v) the Company’s holdings in any combination of shares or
deposits issued by a single company or fund must not exceed
20% of the Company’s gross assets overall;
(vi) the Company must not acquire shares issued by a company
and carrying rights to vote at a general meeting of that company
if the Company has the power to influence significantly the
conduct of business of that company (or would be able to do
so after the acquisition of the shares). The Company is to be
taken to have power to influence significantly if it exercises or
controls the exercise of 20% or more of the voting rights in that
company; and
(vii) the Company must not acquire shares which do not carry a right
to vote on any matter at a general meeting of the company that
issued them and represent more than 10% of these securities
issued by that company.
Uninvested cash or surplus capital or assets may be invested on a
temporary basis in:
• cash or cash equivalents, money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a single-A (or equivalent) or higher credit
rating as determined by an internationally recognised rating
agency; or
• any “government and public securities” as defined for the
purposes of the FCA rules.
In general, the Company will not use portfolio management
techniques such as interest rate hedging and credit default swaps.
However, the Company may use currency hedging, through
derivatives if necessary, as a portfolio management technique.
Whilst the Company, generally, will not hedge its currency exposure,
it does reserve the right to do so in the circumstances where, in the
opinion of the Investment Manager, a significant depreciation of a
currency has become likely but the Investment Manager wishes to
continue owning the companies in the portfolio denominated in that
currency and where the cost of hedging that currency is unlikely, in
the opinion of the Investment Manager, to extinguish any gains from
hedging.
*See Fundsmith’s Investment Philosophy beginning on page 19 for further information
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Investment Portfolio
9
Investments held as at 31 December 2018
Security Country of incorporation Fair value £’000
Vitasoy International Holdings Ltd Hong Kong 17,835
Britannia Industries Ltd India 15,947
Godrej Consumer Products Ltd India 13,157
Foshan Haitian Flavouring China 13,117
Eastern Tobacco Egypt 12,770
Marico Ltd India 12,462
Travelsky Technology Ltd China 11,815
Hindustan Unilever Ltd India 10,808
Asian Paints Ltd India 10,668
Hypera SA Brazil 10,640
% of investments
5.5
5.0
4.1
4.1
4.0
3.9
3.7
3.3
3.3
3.3
Top 10 Investments 129,219
40.2
Eris Lifesciences Ltd India 10,589
Philippine Seven Corp Philippines 10,369
Nestlé India Ltd India 9,694
Colgate Palmolive (India) Ltd India 9,387
Havells India Ltd India 9,066
Dali Foods Group Co Ltd China 8,522
Vietnam Dairy Products JSC Vietnam 8,162
Walmart De Mexico SAB de CV Mexico 6,947
Procter + Gamble Hygiene India 6,806
Emami Ltd India 6,761
3.3
3.2
3.0
2.9
2.8
2.7
2.5
2.2
2.1
2.1
Top 20 Investments 215,522
67.0
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Investment Portfolio
Strategic Report
Investments held as at 31 December 2018 – continued
Security Country of incorporation Fair value £’000
Integrated Diagnostics Holdings Plc Jersey 1 6,684
Mr Price Group Ltd South Africa 6,629
Ceylon Tobacco Co Plc Sri Lanka 6,590
Nestlé Nigeria Plc Nigeria 6,420
Dabur India Ltd India 6,144
Bim Birlesik Magazalar AS Turkey 5,950
DP Eurasia NV Netherlands 2 5,512
PT Unilever Indonesia Tbk Indonesia 5,501
Thyrocare Technologies Ltd India 5,320
British American Tobacco Bangladesh 5,138
% of investments
2.1
2.1
2.1
2.0
1.9
1.9
1.7
1.7
1.6
1.6
Top 30 Investments 275,410
85.7
Dr Lal Pathlabs Ltd India 4,679
PT HM Sampoerna Tbk Indonesia 4,506
Clicks Group Ltd South Africa 4,386
Mercadolibre Inc Argentina 4,199
Eicher Motors Ltd India 4,108
Tiger Brands Ltd South Africa 4,103
Ajanta Pharmaceutical Ltd India 4,019
East African Breweries Ltd Kenya 3,700
Edita Food Industries Reg Egypt 3,007
PT Prodia Widyahusada Tbk Indonesia 2,709
Top 40 Investments 314,826
Nestlé Pakistan Ltd Pakistan 2,519
Fan Milk Ltd Ghana 1,682
Nigerian Breweries Plc Nigeria 1,603
Guinness Nigeria Plc Nigeria 604
Edita Food Industries SAE Egypt 259
Total Investments 321,493
1 Principal place of business Egypt
2 Principal place of business Turkey
1.5
1.4
1.4
1.3
1.3
1.3
1.2
1.1
0.9
0.8
97.9
0.8
0.5
0.5
0.2
0.1
100.0
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Portfolio Distribution
as at 31 December 2018
By Sector (based on net asset value)
2%
1%
3%
3%
11
By Geography (by Country of Incorporation)
6.8%
5%
9%
11%
14%
22%
as at 31 December 2017
By Sector (based on net asset value)
2%
2%
1%
3%
3%
30%
19.8%
● Food & Beverage
● Fast Moving Consumer
Goods
● Healthcare
● Retail
● Tobacco
● IT
● Chemicals
● Industrials
● Fast food
● Auto
30.1%
43.3%
● India
● Asia (ex India)
● Eastern Europe, Middle
East and Africa
● Latin America
By Geography (by Country of Incorporation)
8.9%
9%
30%
22.3%
11%
15%
24%
● Food & Beverage
● FMCG
● Healthcare
● Retail
● Tobacco
● Fast Food
● IT
● Chemicals
● Auto
● Industrial
Top 10 Purchases and Sales in 2018
DP Eurasia NV
Travelsky Technology Ltd
Bim Birlesik Magazalar AS
Hypera SA
Havells India Ltd
Eris Lifesciences Ltd
Top 10 Purchases
Security
1
2
3
4
5
6
7 Mercadolibre Inc
Eastern Tobacco
8
9
Dali Foods Group Co Ltd
10 Thyrocare Technologies Ltd
Country of incorporation
Netherlands1
China
Turkey
Brazil
India
India
Argentina
Egypt
China
India
39.6%
● India
● Asia (ex India)
● Eastern Europe,
Middle East and Africa
● Latin America
29.2%
Famous Brands Ltd
Raia Drogasil SA
Kimberly-Clark de Mexico SAB de CV
Spur Corporation
Biotoscana Investments SA
Dabur India Ltd
Olympic Industries
Top 10 Sales
Security
1
2
3
4
5
6
7
8 Matahari Department Store
9
10 Guinness Nigeria Plc
AVI Ltd
Country of incorporation
South Africa
Brazil
Mexico
South Africa
Luxembourg2
India
Bangladesh
Indonesia
South Africa
Nigeria
1 Principal place of business Turkey 2 Principal place of business Uruguay
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Investment Manager’s Review
Strategic Report
“The relative performance of Fundsmith Emerging Equities Trust plc (“FEET”)
improved markedly in 2018”
Performance in more detail is shown below:
%
2018 2017 2016 2015 2014* inception Annualised
Since
FEET NAV 1 -3.0 +21.2 +12.0 -7.0 +0.1
+22.7
+4.6
FEET share
price 2 -9.4 +24.5 +10.5 -10.9 +7.2
Emerging
markets 3 -9.3 +25.3 +32.4 -10.0 +0.5
UK bonds 4 +1.2 +1.4 +6.5 +1.0 +7.4
UK cash 5 +0.7 +0.4 +0.5 +0.6 +0.3
+19.0
+3.9
+36.1
+18.5
+2.5
+7.1
+3.8
+0.5
Table 2:
1 Net of fees, priced at UK market close (source: Fundsmith)
2 At LSE close (source: Fundsmith)
3 MSCI Emerging & Frontier Markets Index (£ Net) priced at close of business US
EST (source: www.msci.com)
4 Bloomberg/EFFAS Bond Indices UK Govt 5-10yr (source: Bloomberg)
The relative performance of Fundsmith Emerging Equities Trust plc
(“FEET”) improved markedly in 2018:
5 3m £ LIBOR Interest Rate (source: Bloomberg)
* From 25 June 2014
Total return
1 January – 31 December %
FEET Net asset value per share -3.0
FEET share price -9.4
MSCI Emerging & Frontier Markets Index -9.3
Table 1: Source: MSCI/Bloomberg
The Net Asset Value fall of 3% outpaced the benchmark Index by
over 5%. The share price tracked the Index fall as the premium to
NAV at which the shares traded was eroded during the year.
Whilst this performance is obviously not as good in some respects
as outperforming the Index when it is rising, it is nonetheless a
welcome indication that our strategy may be capable of delivering
an essential characteristic which is the preservation of value in a
downturn.
In some respects, I remain surprised that the performance over the
past year has been that good for two related reasons.
First, as we have discussed before, is the fact that more than 100%
of the inflows into emerging markets since 2015 have gone into
Exchange Traded Funds or ETFs. This trend continued in 2018.
Cumulative EM fund flows since 2012
175
150
125
100
75
50
25
n
b
$
0
2012
-25
-50
-75
-100
2013
2014
2015
2016
2017
2018
ETF only
Non-ETF
FEET IPO
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2018
Figure 1: Source: EPFR Global
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13
“The composition of the MSCI Emerging and Frontier Markets Index is very
different to our Company, so these ETF flows are mostly going into stocks and
sectors which we do not and will not own”
The obvious issue is that the composition of the MSCI Emerging and
Frontier Markets index is very different to our Company, so these
ETF flows are mostly going into stocks and sectors which we do not
and will not own. This is shown below:
Secondly, to compound the problem and probably linked to the first
point about ETF inflows, the best performing emerging market last
year was Qatar (+38%), a stock market dominated by banks and
property companies, in which FEET has no holdings:
FEET GICS Sector Split
Consumer Staples
Health Care
Consumer Discretionary
Information Technology
Materials
Industrial
Cash
MSCI GICS Sector Split
Financials
Communication Services
IT
Consumer Discretionary
Energy
Materials
Consumer Staples
Industrials
Real Estate
Health Care
Utilities
Weight %
69.7
13.8
6.3
3.7
3.3
2.9
0.3
100
Weight %
25.2
14.1
14.0
10.2
7.9
7.6
6.8
5.5
3.2
2.8
2.7
100
Table 3: Source: Fundsmith, Bloomberg
There have been some alterations to the MSCI sector classification
which makes the benchmark look less dominated by technology
stocks than it has been in the past. MSCI moved some of the larger
internet companies (such as Tencent and Baidu) to Communication
Services from IT; Tencent itself is almost 5% of the Index.
FEET country breakdown
India
China (incl. Hong Kong)
Egypt
South Africa
Indonesia
Turkey
Other Emerging Markets
Frontier Markets
Cash
MSCI E+FM Index country breakdown
China (incl. Hong Kong)
South Korea
Taiwan
India
Brazil
Other Frontier + Emerging Markets
Weight %
43.3
15.9
7.0
4.7
3.9
3.6
9.5
11.8
0.3
100
Weight %
29.7
13.5
11.1
9.2
7.3
29.2
100
Table 4: Source: Bloomberg, MSCI
None of the top ten constituents of the MSCI Emerging and Frontier
Markets Index, which collectively represent 23% of that Index are,
in our opinion, of sufficient quality for inclusion in our Company’s
portfolio, as they consist of Chinese banks, a Chinese insurer,
ecommerce platforms, consumer electronics and semiconductor
manufacturers. These companies bring with them risks of cyclicality,
leverage, opaque accounting, lack of clear ownership rights,
technological obsolescence and inadequate financial returns:
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“FEET owns shares in good companies – companies which have returns on
capital, profit margins and growth which are superior to the companies in the
benchmark Index and which convert far more of their profits into cash”
Top 10 MSCI E+FM Index constituents Weight % ROCE %
24
Tencent
22
Taiwan Semiconductor
13
Alibaba
24
Samsung Electronics
-1
Naspers
8
China Construction Bank
12
China Mobile
8
ICBC
18
Ping An Insurance
3
Reliance Industries
13
Total Average
4.7
3.7
3.6
3.4
1.8
1.6
1.2
1.0
0.9
0.9
22.8
Table 5: Source: MSCI, Bloomberg
Although we continue to analyse some of these stocks to try to
determine whether their fundamental characteristics have improved
sufficiently for us to own them, none pass muster.
To make matters even more difficult, the returns generated in
emerging markets in 2018 were extremely concentrated – 32% of
the MSCI Emerging and Frontier Markets Index total return came
from just three stocks: Tencent (and Naspers which owns a stake
in Tencent), Alibaba and Samsung, none of which we own or wish
to own.
Faced with this background, I am pleasantly surprised by how the
FEET portfolio performed.
It is an essential part of our investment strategy – in fact the most
important part – that FEET owns shares in good companies –
companies which have returns on capital, profit margins and growth
which are superior to the companies in the benchmark Index and
which convert far more of their profits into cash. They need to be
able to accomplish this with much less debt or leverage than the
companies in the benchmark Index. If these characteristics persist
then sooner or later they will be reflected in the share prices.
The characteristics of the FEET portfolio as at 31 December
compared with the companies in the benchmark Index were:
LTM ROCE
LTM ROCE (ex-goodwill)
LTM Gross margin
LTM Operating margin
LTM NFCF conversion
LFY Revenue growth
LFY NFCF growth
MSCI E+FM
Index
FEET (ex-Financials)
%
15
N/A
31
18
84
19
9
%
46
50
50
21
106
14
12
Table 6: Source: Fundsmith, MSCI, Bloomberg
Abbreviations: LTM: last twelve months, LFY: last full year, ROCE:
return on capital employed, NFCF: neutral free cash flow.
This would seem to demonstrate that FEET owns stakes in
companies which are at the very least superior to the index in terms
of their financial characteristics. Although the revenue and Neutral
Free Cash Flow (“NFCF” – Free Cash Flow after adding back capital
expenditures in excess of depreciation to avoid valuing all
companies that can invest their free cash flow to grow as having a
reduced FCF) growth for the Index stocks looks comparable or
superior to our portfolio, this is also very concentrated. 68% of the
growth in NFCF last year in the entire MCSI EM Index came from just
two stocks – Tencent and Alibaba. Without this, the NFCF growth for
the Index was just 3%.
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“Valuation is not likely to be the main determinant of the outcome of our
strategy. The quality of the companies in our portfolio is, at least over the
long-term”
By sector, the breakdown of FEET at 31 December 2018 as we
would describe the sectors rather than those used by the Index
(which are rather unspecific) was:
Sector (%) 2018 2017
Food & Beverage 30 30
Fast Moving Consumer Goods 22 23
Healthcare 14 15
Retail 11 11
Tobacco 9 9
Fast food 2 3
IT 5 3
Chemicals 3 2
Auto 1 2
Industrials 3 1
Cash 0 1
100 100
Table 7: Source: Fundsmith
In terms of contribution to the performance, the table below shows the
top five contributors to and detractors from our performance by stock:
Top Five Contributors Country %
Vitasoy Hong Kong 2.1
Foshan Haitian China 0.9
Nestlé India India 0.9
Hindustan Unilever India 0.8
Britannia Industries India 0.8
Top Five Detractors Country %
Emami India -1.3
DP Eurasia1 Netherlands -1.0
Vietnam Dairy Products Vietnam -0.9
Tiger Brands South Africa -0.7
Fan Milk Ghana -0.6
Table 8: Source: Fundsmith
1 Principal place of business Turkey
Emami was the only one of our Indian stocks in the top five
detractors. Its relatively high dependence on wholesale distributors
has been a handicap post the implementation of the Goods &
Services Tax (“GST”). We used the weakness caused by events in
Turkey to add significantly to our stake in DP Eurasia, the Domino’s
Pizza master franchisee in Turkey and Russia.
What about the valuation of our portfolio? The table below shows
the price/earnings (“PE”) ratio, Neutral Free Cash Flow yield and
dividend yield for the portfolio for the last twelve months (“LTM”)
compared with companies in the benchmark Index:
LTM PE ratio
LTM NFCF yield
LTM Dividend yield
MSCI E&FM
Index
(ex-financials)
22.2x
5.3%
2.5%
FEET
43.9x
3.5%
1.8%
Table 9: Source: Fundsmith, MSCI, Bloomberg
Our stocks are significantly more highly rated than the Index based
upon the PE ratio and the Neutral Free Cash Flow yield, which is our
preferred measure, and which we believe is a much better
comparator. However, neither could be regarded as lowly-rated,
although that is a different concept to being “cheap” – a stock can
be lowly-rated but not cheap if it is justifiably low and a highly rated
stock might not be “expensive” if its prospects – such as its growth
rate and incremental returns – can justify the rating.
Moreover, valuation is not likely to be the main determinant of the
outcome of our strategy. The quality of the companies in our portfolio
is, at least over the long term. If we have succeeded in assembling
a portfolio of companies which can deliver and sustain a 46% Return
On Capital Employed and invest about half (which equates to
dividend cover of 2x-FEET’s portfolio and was 2.1x at the end of
2018) of their earnings at this rate of return, which is currently three
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Investment Manager’s Review
Strategic Report
“Weakness in emerging market currencies adversely affected our performance”
times the ROCE of the Index, this will be a much bigger determinant
of the outcome of our investment than the valuation.
concentrating our portfolio in fewer stocks in which we have the
greatest confidence.
It is interesting that the stocks in FEET are only about 12.5% more
expensive than the stocks in the Fundsmith Equity Fund, which had
a Free Cash Flow yield of 4.0% at the end of 2018. Yet the returns
they are generating and the revenue growth they are delivering are
materially higher. The Fundsmith Equity Fund is perhaps a better
comparison than the Index given that the Fundsmith Equity Fund
owns comparable companies based in the developed world, several
of which are the parent companies of companies in the FEET
portfolio.
The ongoing charges figure (“OCF”) for 2018 was 1.5% compared
with 1.7% in 2017. However, the OCF does not include the cost of
dealing. The Total Cost of Investment (“TCI”) in 2018 including
trading commission and taxes was 1.6% (2017: 1.8%). Some of the
turnover was involuntary insofar as it resulted from the investment
of funds raised from shares issued during the year. The spread
incurred from voluntary dealing in which we decided to buy or sell
without any inflows was 0.18% (2017: 0.18%) which gives another
perspective on our dealing activity.
The top ten purchases and sales in the year are listed on page 11
of these accounts.
Our portfolio turnover during 2018 of 19.3%, ignoring turnover
caused by inflows from share issues, was materially lower than the
34% turnover in 2017. Whilst this remains higher than we would
ideally like it to be, it is heading in the right direction and we aim to
reduce it further in 2019.
A few other purchases and disposals during the year are noteworthy.
Weakness in emerging market currencies adversely affected our
performance. The largest positive currency impact upon our
performance was from the Egyptian Pound but the negative impacts
were much greater and the largest detractor was the Indian Rupee:
Top Five
Egypt
Hong Kong
Nigeria
Mexico
Kenya
%
0.3
0.3
0.1
0.1
0.1
Bottom Five
India
South Africa
Brazil
Sri Lanka
Pakistan
%
-1.0
-0.4
-0.4
-0.2
-0.2
We bought and sold one stock during the period – 3M India as the
stake we could get was so small and the rating to which it went was
so high that we could not build a meaningful stake.
Table 10: Source: Fundsmith
We purchased a new stake in BIM, the Turkish discount retailer that
we have owned before.
We sold our entire stakes in Kimberly-Clark de Mexico, AVI, Famous
Brands, Biotoscana, Spur, Olympic Industries, Raia Drogasil, and
Matahari Department Stores. This was partly a policy of
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“In India we are now experiencing strong company results as the disruptive effects
of the GST implementation have waned and its benefits have become apparent”
As at 31 December 2018, the FEET portfolio’s geographic
breakdown was as follows:
Region
Asia (ex-India)
Eastern Europe, Middle East and Africa
India
Latin America
Cash
%
30.0
19.6
43.3
6.8
0.3
100.0
Table 11: Source: Fundsmith
In India we are now experiencing strong company results as the
disruptive effects of the GST implementation have waned and its
benefits have become apparent. This is in spite of some
deterioration in the macro economic situation caused by rising input
costs and political uncertainty ahead of the general election due
this year.
India remains by far the largest single country exposure and is over
40% of the portfolio. This is not a breach of our country limits as it
arose because of the relatively strong performance of our Indian
stocks and not as a result of additional purchases.
India has seen some dramatic reforms in recent years under Prime
Minister Modi. We have remarked upon two of these at length in
previous reports, namely “demonetisation” in November 2016 in
which the highest denomination bank notes, the Rs500 and
Rs1,000 notes (roughly £6 and £12) were declared no longer to be
legal tender. This was followed on 1 July 2017 by the
implementation of a countrywide Goods and Services Tax (“GST”)
which replaced state taxation (India is comprised of 29 states). This
was, in our view, a massive step towards turning India into a single
economy for the first time and has undoubtedly begun to reap
benefits in terms of efficiency for manufacturers and distributors.
At a recent conference Sanjiv Mehta, who runs Hindustan Unilever,
opined that the 20 countries he was responsible for when he ran
Unilever’s operations in the Middle East and Africa division were
more homogeneous than the 29 states of India. It is clear that a
Herculean effort is required to alter this from an economic
perspective and it is being applied.
However, as we also pointed out in previous reports, the near-term
performance of our Indian investee companies in the light of these
dramatic changes was highly likely to be, shall we say, bumpy.
Having some 85% of banknotes by value withdrawn without warning
is obviously disruptive to economic activity. So was the
implementation of the GST. Aside from the fact that the new GST
regime was almost certainly initially too complex with too many
bands, it led to stocking up in advance of implementation in some
sectors and destocking in others, depending upon the view of how
the GST would affect them. Even the revenue and cost numbers
produced by many companies are not truly comparable with their
pre-GST numbers because of changes in the way some of their
goods are treated for input and output tax. The informal sector of
the economy has been hardest hit by this and whilst we might
applaud that as the modern retail sector is of growing importance
to our investee companies and GST could be expected to stimulate
it, some of their sales do rely upon wholesalers and informal
retailers who might have cash flow issues and problems with having
previously (shall we say) under-reported their sales and profits.
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Investment Manager’s Review
Strategic Report
“We hope and expect that the combination of these reforms will help to
transform India’s economy to the benefit of our investee companies as well as
ordinary Indians”
The good news is that we passed the anniversary of GST
implementation in mid-2018, some simplification of its application
has begun and both Indian businessmen and consumers have
begun to understand how it works. We hope and expect that the
combination of these reforms will help to transform India’s economy
to the benefit of our investee companies as well as ordinary Indians.
The pattern of FEET’s performance in 2018 is shown by this graph:
As we have pointed out several times before, markets do not deliver
their performance evenly. FEET’s shares rose 25% in 2017. 2018’s
performance has been about minimising losses. Who knows what
2019 holds? We certainly have a general election in the country to
which we have the largest exposure – India – which seems certain
to bring some nervousness. However, ultimately we hope for an
outcome which will allow the country and our companies to continue
to progress.
Terry Smith
Fundsmith LLP
Investment Manager
21 March 2019
1350
1300
1250
1200
1150
1100
1050
1000
Share Price
Net Asset Value (NAV)
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Figure 2: Source Bloomberg
The bear run in emerging markets which began in July seemed to
have passed by the time the major markets started to experience
major jitters both in October and December, and in the last two
months of the year a reasonably sharp recovery set in.
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Investment Philosophy
19
Fundsmith Emerging Equities Trust plc (‘FEET’) invests in companies
which have the majority of their operations in, or revenue derived
from, Developing Economies* and which provide direct exposure to
the rise of the consumer classes in those countries.
Fundsmith LLP applies a three step investment process to
implement that strategy:
1. We aim to invest in high quality businesses
In our view, a high quality business is one which can sustain a high
return on operating capital employed in cash.
We are seeking a sustainable high rate of return. An important
contributor to this is repeat business, usually from consumers. A
company that sells many small items each day is better able to earn
consistent returns over the years than a company whose business
is cyclical, like a steel manufacturer, or “lumpy”, like a property
developer, a movie studio or even a drugs company. This approach
rules out most businesses that do not sell directly to consumers or
which make goods which are not consumed at short and regular
intervals.
Capital goods companies and
industrial suppliers make
components, ingredients and packaging to sell to businesses.
Business buyers are able to defer purchases of such products when
the business cycle turns down. Moreover, business buyers employ
staff whose sole raison d’être is to drive down the cost of purchase
and lengthen their payment terms. In contrast we as consumers
have no direct bargaining power.
An important contributor to resilience is a resistance to product
obsolescence. This means that we try not to invest in industries
which are subject to rapid technological innovation. Innovation is
often sought by investors but does not always produce lasting value
for them. Developments such as canals, railroads, aviation,
microchips and the internet have transformed industries and
people’s lives. They have created value for some investors, but a lot
of capital gets destroyed for others, just as the internet has
destroyed the value of many traditional media industries, most
notably newspapers, as well as quite a lot of capital invested in the
internet companies that didn’t make it and at the peak of bubbles
such as the Dotcom boom.
Even when a company sells to consumers, it is unlikely to fit our
criteria if its products have a life which can be extended. When
consumers hit hard times, they can defer replacing their cars,
houses and appliances, but not food, toiletries, cosmetics and
cleaning products. Hence we do not
in
manufacturers of consumer durables.
intend to
invest
We seek to invest in businesses whose assets are intangible and
difficult to replicate. It may seem counter-intuitive to seek
businesses which do not rely upon tangible assets. The businesses
we seek to invest in do something very unusual: they break the rule
of mean reversion that states returns must revert to the average as
new capital is attracted to business activities earning above-average
returns.
They can do this because their most important assets are not
physical assets, which can be replicated by anyone with access to
capital, but intangible assets which can be very difficult to replicate,
no matter how much capital a competitor is willing to spend.
Moreover, it’s hard for companies to replicate these intangible
assets using borrowed funds, as banks tend to favour the (often
illusory) comfort of tangible collateral. This means that the business
does not suffer from economically irrational (or at least innumerate)
competitors when credit is freely available. To be fair, during equity
market “bubbles”, some irrational competition can be funded by
equity which seems to require no foreseeable return, but such
Dotcom style phenomena mostly seem to attract capital to
technology, biotech, social networking, e-tailing and online
businesses and not the less glamorous world of consumer non-
durables.
The kinds of intangible assets we seek are brand names,
trademarks, dominant market shares, patents, licenses, franchises,
intellectual property or know how, distribution networks, supply
chains, client relationships and installed bases of equipment or
software that lock in clients for service, spares, repairs, renewals,
consumables and transactions. Some combination of such
intangibles defines a company’s franchise. Since stock markets
*Where we refer to our investments in Developing Economies or Emerging Markets we mean countries other than those included in
the MSCI World Index, i.e. in the widest possible sense. Clearly when referring to others’ references to emerging markets, developing
economies or the developing world their own definition applies.
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Investment Philosophy
Strategic Report
typically value companies on the not unreasonable assumption that
their returns will regress to the mean, businesses whose returns do
not do this can become undervalued. Therein lies our opportunity
as investors.
We avoid companies that have to use leverage to make an adequate
return on equity. We only invest in companies that earn a high return
on their capital on an unleveraged basis. The companies we invest
in may well have leverage, but they don’t require borrowed money
to function. For example, financial companies (such as banks,
investment banks, credit card lenders or leasing companies)
typically earn a low unleveraged return on their assets. They then
have to lever up that capital several times over with money from
lenders and depositors in order to earn what they deem to be an
acceptable return on their shareholders’ equity. This means that not
only are their unlevered equity returns inadequate, but periodically
the supply of credit
is withdrawn, often with disastrous
consequences given the illiquidity of their asset base. In assessing
leverage, we include off-balance sheet finance in the form of
operating leases, which are common in some sectors, such as
retailing.
The businesses we seek must have growth potential. It is not
enough for companies to earn a high unlevered rate of return. Our
definition of growth is that they must also be able to reinvest at least
a portion of their excess cash flow back into the business to grow,
while generating a high return on the cash thus reinvested. Over
time, this should compound shareholders’ wealth by generating
more than a pound of stock-market value for each pound
reinvested. In our view, growth cannot be thought about sensibly in
isolation from returns. Rapid growth may be good news or it may be
bad news. It depends on how much capital you have to invest to
generate that growth.
The source of growth is also a factor to consider. Growth in profits
from increasing prices can simply build an umbrella beneath which
competitors can flourish. We are more interested in companies
which have physical growth in the merchandise or service sold than
simply pricing power, although having both is nice.
2. We try not to overpay for shares when investing
We only invest when we believe the valuation is attractive. We
estimate the free cash flow of every company after tax and interest,
but before dividends and other distributions, and after adding back
any discretionary capital expenditure which is not needed to
maintain the business. Otherwise we would penalise companies
which can invest in order to grow. Our aim is to invest only when free
cash flow per share as a percentage of a company’s share price (the
free cash flow yield) is high relative to long-term interest rates and
when compared with the free cash flow yields of other investment
candidates both within and outside the portfolio. Our goal is to buy
securities that we believe will grow and compound in value, which
bonds cannot, at yields that are similar to or better than what we
would get from a bond.
3. We aim to buy and hold
We aim to be long-term, buy-and-hold investors. We seek to own only
stocks that will compound in value over the years. Accordingly, we
try to be very careful about the stocks we pick. We do not have a
good new investment idea every day, or indeed, not even every year.
Even when we are able to find a new company we would like to invest
in, we have to wait, sometimes forever, for a price and valuation at
which we can justify investing. The resulting low level of dealing
activity also minimises the frictional costs of trading, a cost which is
often overlooked by investors as it is not normally disclosed as part
of the costs of running funds.
Our investment philosophy is also defined by a number of things we
don’t do:
(A) We try never to engage in so-called “Greater Fool Theory”
We really want to own all of the companies that we invest in. We do
not buy them knowing that they are not good businesses or are over-
valued in the hope that someone more gullible will come along and
pay an even higher price for them. We assume that there is no
greater fool than us.
(B) Indices are not used for portfolio construction
We are interested in indices in order to benchmark our performance
but not as a tool to aid our portfolio construction.
The simplest reason for this is that we wish to perform better than
the relevant indices and the majority of fund managers who hug the
index composition with their portfolio selections. As the legendary
investor Sir John Templeton said “If you want to have a better
performance than the crowd, you must do things differently from
the crowd.”
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(D) Corporate Governance
Investment in Emerging Markets has dangers which might loosely
be labelled as problems of corporate governance. There are
examples of companies which have had assets confiscated by
governments, which have had their know-how taken by a local joint
venture partner who has set up in competition with them, of minority
investment in business controlled by local families which have gone
awry.
We do not intend to bring enlightenment to Emerging Markets in the
form of improved corporate governance via our investments. We are
minority investors and we will assume that the corporate
governance landscape we see is the one we have to deal with rather
than assuming we can change it. Then we will select investments
in that environment the same way that porcupines make love –
carefully.
We are helped in this regard by the fact that about a fifth of the
companies in our Investable Universe and about a quarter of the
portfolio for FEET are quoted subsidiaries, associates or franchisees
of the multinational companies. This certainly helps from a due
diligence/corporate governance standpoint.
(E) Currencies
Our policy is generally not to hedge FEET’s currency exposure. The
exception in FEET would be in the circumstances where we believe
significant depreciation of a currency has become likely but we wish
to continue owning the companies in FEET denominated in that
currency and we are comfortable that we can put in place a hedge
the cost of which will not extinguish any gains from hedging. Such
a combination of circumstances is unusual.
Terry Smith
Fundsmith LLP
Investment Manager
21 March 2019
There is also the problem that the MSCI Emerging Markets Index is
dominated by companies of a sort that we would never own.
The top ten companies in the MSCI Emerging Markets Index are all
in the banking, energy, technology and telecoms sectors. They all
fall into sectors which we would never invest in because they are
cyclical, rely on leverage to deliver an adequate return, are subject
to rapid and unpredictable change and/or have returns controlled
by governments.
In contrast, under 10% of the Index is in Consumer Staples, which
is the bedrock of the Fundsmith strategy and a consistent producer
of shareholder value with high unlevered returns on capital in cash.
(C) We do not attempt market timing
Once we are fully invested we will not attempt to manage the
percentage invested in equities in our portfolio to reflect any view
of market levels, timing or developments. Getting market timing
right is a skill we do not possess. We assume that if you own shares
in FEET you have already taken the decision to invest that portion
of your portfolio in Emerging Market equities, managed in the
manner we describe.
Our inability and unwillingness to try to make market timing calls is
one factor which prevents us from investing in sectors which are
highly cyclical. It is possible to deliver performance from such
investments, but it requires a good sense of timing for the economic
cycle and how the market cycle relates to it. It also requires strong
nerves, because such investments are often counter-intuitive, as
exemplified in the investment adage “Only buy cyclicals when they
look expensive”. This is because when they have little or no
earnings, and so look expensive on the basis of their price/earnings
ratio, they are at, or close, to the bottom of the cycle. The converse
applies: you should sell them when they look cheap, as they are
then at, or close, to peak earnings.
We are not sure we have either the skill set or the constitution for
such investing. In any event, investing in cyclical businesses has one
big disadvantage. They are mostly poor quality businesses which
struggle to make adequate returns on their capital. Whilst you wait
to see whether you have got your timing right, the underlying value
of your investment is more likely to erode than compound whilst you
await the upturn, and of course occasionally they do not survive a
cycle at all.
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22
Business Review
Strategic Report
The Strategic Report on pages 2 to 27 has been prepared to provide
information to shareholders to assess how the Directors have
performed their duty to promote the success of the Company.
The Strategic Report contains certain forward-looking statements.
These statements are made by the Directors in good faith based on
the information available to them up to the time of their approval of
this report and such statements should be treated with caution due
to the inherent uncertainties, including both economic and business
risk factors, underlying any such forward-looking information.
Business Model
The Company is an externally managed investment trust and its
shares are premium listed on the Official List and traded on the
main market of the London Stock Exchange.
its
The Company’s strategy is to create value for shareholders by
is to provide
investment objective, which
addressing
shareholders with an attractive return by investing in a portfolio of
shares issued by listed companies which have the majority of their
operations in, or revenue derived from, Developing Economies and
which provide direct exposure to the rise of the consumer classes
in those countries.
The Company is an alternative investment fund (“AIF”) under the
European Union’s alternative investment fund managers’ directive
(“AIFMD”) and has appointed Fundsmith LLP as its alternative
investment fund manager (“AIFM”).
As an externally managed investment trust, all of the Company’s
day to day management and administrative functions are
outsourced to service providers. As a result, the Company has no
executive directors, employees or internal operations.
The Board is responsible for all aspects of the Company’s affairs,
including setting the parameters for monitoring the investment
strategy and the review of investment performance and policy. It
also has responsibility for all strategic policy issues, including share
issuance and buy backs, share price and discount/premium
monitoring, corporate governance matters, dividends and gearing.
Further information on the Board’s role and the topics it discusses
with the Investment Manager is provided in the Corporate
Governance Report beginning on page 30.
Investment Management and Alternative
Investment Fund Manager (“AIFM”)
Fundsmith LLP (“Fundsmith”) under the terms of the Investment
Management Agreement provides, inter alia, the following services:
• seeking out and evaluating investment opportunities;
• recommending the manner by which monies should be
invested, disinvested, retained or realised;
• advising on how rights conferred by the investments should be
exercised;
• analysing the performance of investments made;
• advising the Company in relation to trends, market movements
and other matters which may affect the investment policy of
the Company; and
• acting as AIFM to the Company.
Fundsmith receives a periodic fee equal to 1.25% p.a. of the
Company’s net asset value. The
Investment Management
Agreement may be terminated by either party giving notice of not
less than 12 months.
Depositary
During the year, Northern Trust Global Services SE (the
“Depositary”) acted as the Company’s depositary in accordance
with the AIFMD on the terms and subject to the conditions of the
depositary agreement between the Company, Fundsmith and the
Depositary (the “Depositary Agreement”). Under the terms of the
Depositary Agreement, the Depositary is entitled to receive an
annual fee of the higher of (i) £25,000; or (ii) an amount equivalent
to 0.015% of the net assets of the Company.
The Depositary provides the following services:
• safekeeping and custody of the Company’s custodial
investments and cash;
• processing of transactions and foreign exchange services;
• taking reasonable care to ensure that the Company is managed
in accordance with the AIFMD, the FUND sourcebook and the
Company’s articles of association in relation to the net asset
value per share and the application of income of the Company;
and
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23
• monitoring the Company’s compliance with
investment
restrictions and leverage limits set in its offering documents.
important comparator to be the MSCI Emerging and Frontier Markets
Index measured on a net, sterling adjusted basis.
The Depositary Agreement may be terminated upon three months’
written notice from the Company to the Depositary or the Depositary
to the Company.
During the year under review the Company’s net asset value per
share total return was -3.0%, outperforming the benchmark by 6.3%
(2017: 21.2%, underperforming the benchmark by 4.1%).
Custodian
The Depositary has delegated the custody and safekeeping of the
Company’s assets to The Northern Trust Company which in turn
appoints sub-custodians in each of the jurisdictions in which the
Company’s assets are held. The liability of the Depositary is not
affected by the fact that it has delegated safekeeping to a third
party.
The Depositary is entitled to a variable custody fee which depends
on the type and location of the custodial assets of the Company.
Variable transaction charges are also chargeable.
Key Performance Indicators
The Company’s Board of Directors meets regularly and at each
meeting reviews performance against a number of key measures,
as follows:
• Net asset value return against the MSCI Emerging and Frontier
Markets Index measured on a net sterling adjusted basis;
• Share price total return;
• Premium/discount of share price to net asset value per share;
and
• Ongoing charges ratio.
Please refer to the Glossary beginning on page 77 for definitions of
these terms and an explanation of how they are calculated.
Net asset value return against the benchmark
The Company’s net asset value per share is shown on the Statement
of Financial Position on page 55. The Directors regard the Company’s
net asset value return as being the overall measure of value
long-term. Fundsmith’s
delivered to shareholders over the
investment style is such that performance is likely to deviate from
that of the benchmark index. The Board considers the most
A full description of performance during the year under review is
contained in the Investment Manager’s Review commencing on
page 12 of this annual report.
Share price total return
The Directors also regard the Company’s share price total return to
be a key indicator of performance. This is monitored closely by the
Board.
During the year under review the Company’s share price total return
was -9.4%, underperforming the benchmark by 0.1% (2017: 24.5%,
underperforming the benchmark by 0.8%).
Premium/discount of share price to net asset value per share
The Board undertakes a regular review of the
level of
premium/discount and consideration is given to ways in which
share price performance may be enhanced, including the
effectiveness of marketing, share issuance and buy-backs, where
appropriate. The making and timing of any share issuance and/or
buy-backs is at the discretion of the Board.
As at 31 December 2018, the discount of the Company’s share price
to the net asset value per share was 2.6% (2017: premium of 4.3%).
It is the Board’s view that the ability to issue new shares at a
premium to net asset value plays an important part in ensuring that
the level of premium does not reach excessive levels. To this end,
the Board has implemented a share issuance programme. Further
details are provided in the Chairman’s Statement on pages 5 to 7.
Ongoing charges ratio
The Board continues to be conscious of expenses and works hard
to maintain a sensible balance between good quality service and
costs. As at 31 December 2018 the ongoing charges ratio was 1.5%
(2017: 1.7%).
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Business Review
Strategic Report
Risk Management
The Board is responsible for the ongoing identification, evaluation
and management of the principal risks faced by the Company and
the Board has established a process for the regular review of these
risks and their mitigation. This process accords with the UK
Corporate Governance Code and the FRC Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting. The Directors have carried out a robust assessment of
the principal risks facing the Company, including those that would
threaten its business model, future performance, solvency and
liquidity. The risks are broadly unchanged from the previous year.
The Board has categorised the risks faced by the Company under
five headings as follows:
• Investment activity and strategy;
• Financial;
• Shareholder relations and corporate governance;
• Operational; and
• Accounting, legal and regulatory.
The following sections detail the risks the Board considers to be the
most significant to the Company under these headings:
Principal Risks and Uncertainties
Mitigation
Investment Activity and Strategy
An unsuccessful investment strategy leads to
underperformance against
the Company’s
benchmark index and peer companies, thereby
failing to achieve the Company’s investment
objective.
The Board regularly reviews the Company’s investment mandate and its long-
term investment strategy in relation to market and economic conditions, and
the performance of the Company’s peers. Fundsmith provides an explanation
of stock selection decisions and an overall rationale for the make-up of the
portfolio. Fundsmith discusses current and potential investment holdings with
the Board on a regular basis. The Board sets appropriate investment
restrictions and guidelines.
The departure of a key individual at Fundsmith may
affect the Company’s performance.
The Investment Manager reports to the Board on developments at Fundsmith
including succession and business continuity plans.
Financial
The financial risks associated with the Company
include market risk (including counterparty risk),
liquidity risk and credit risk.
A counterparty fails adversely affecting the
Company through either delay in settlement or loss
of assets.
As the Company’s shares are denominated and
traded in sterling, the return to shareholders will
be affected by changes in the value of sterling
relative to those foreign currencies.
The Company’s assets comprise liquid securities, which can be sold to meet
funding requirements, if necessary. Further information on financial
instruments and risk can be found in note 15 to the financial statements
beginning on page 67.
The most significant counterparty to which the Company is exposed is the
Depositary, which is responsible for the safekeeping of the Company’s custodial
assets. The Company’s Investment Manager is responsible for undertaking reviews
of the credit worthiness of the counterparties that it uses. The Board reviews the
Investment Manager’s approved list of counterparties and their internal control
reports.
The Board sets the Company’s policy on hedging, which is detailed on page 8.
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Principal Risks and Uncertainties
Mitigation
Shareholder Relations and Corporate
Governance
The Board receives regular reports on shareholder activity and is kept informed of
shareholder sentiment. Regular contact is maintained with major shareholders.
The Company becomes unattractive to investors,
leading to the Company’s shares trading at a
significant discount to the net asset value per
share.
Poor adherence to corporate governance best practice
or errors or irregularities in published information
could lead to censure by the FCA and/or result in
reputational damage to the Company.
Operational
Disruption to, or failure of, accounting, dealing or
payments systems in place at the Company’s
service providers, including the Custodian and
appointed sub-custodians and the Depositary,
could prevent accurate reporting and monitoring
of the Company’s financial position.
Accounting, Legal and Regulatory
The regulatory environment in which the Company
operates may change, affecting the Company’s
modus operandi.
In consultation with its advisers the Board also undertakes a regular review
of the level of share price premium or discount to net asset value per share
and consideration is given to ways in which share price performance may be
enhanced, including the effectiveness of marketing, share issuance and share
buy-backs, where appropriate.
Details of the Company’s compliance with corporate governance best practice,
including information on relations with shareholders, are set out in the
Corporate Governance Report beginning on page 30.
The Board reviews both the internal controls and the disaster recovery
procedures put in place by its principal service providers on a regular basis.
The Audit Committee receives annually internal control reports from the AIFM
and the Registrar. The Audit Committee also reviews a summary of the SOC1
report from the Custodian. These reviews include consideration of the
associated cyber security risks facing the Company. Further details of the
Board’s internal controls are set out in the Audit Committee Report on
page 41.
The Board relies on the services of its external advisers to ensure compliance
with applicable law and regulations including the Companies Act, the
Corporation Tax Act and the UKLA Listing Rules. The Board is aware of changes
to the regulatory environment in the year ahead. With regard to the UK’s exit
from the European Union (“Brexit”), the Board believes that this does not pose
a unique risk to the Company and is unlikely to affect the Company’s share
price or how its shares are sold. However, the Board will continue to monitor
regulatory developments.
Failure to comply with appropriate law and
regulations could expose the Company to serious
financial loss and reputational damage.
The Company’s Depositary reports twice yearly to the Audit Committee
confirming that the Company has been managed in accordance with the
AIFMD, the FUND Sourcebook and the Company’s Articles of Association.
The Directors attend conferences and events to keep up to date on regulatory
changes and the Board has appointed a specialist investment trust Company
Secretary who provides industry and regulatory updates at each meeting.
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Business Review
Strategic Report
Brexit
The Board has considered whether the UK’s exit from the European
Union (“Brexit”) poses a unique threat to the Company. Despite the
proximity of the deadline, there is still considerable uncertainty
around both the process and the effects of Brexit. This makes any
analysis necessarily general at this stage.
The effect of even a no-deal Brexit is likely to be very limited on our
investee companies as they have an immaterial exposure to the UK
market. As the Company is priced in sterling, however, sharp
movements in exchange rates can affect the net asset value (see
page 70 for the foreign currency sensitivity analysis). This is clearly
not a reflection on the underlying value of the companies in their
base currencies but may lead to an increase or decrease in the
Company’s net asset value simply because of movements in sterling.
Further, whilst the Company’s current shareholders are predominantly
UK based holders, sharp or unexpected changes in investor sentiment,
or tax or regulatory changes, could lead to short term selling pressure
on the Company’s shares which potentially could lead to the shares
trading at a discount to the net asset value per share.
Overall, however, the Board believes that, over the longer term, Brexit
is unlikely to affect the Company’s business model or whether the
shares trade at a premium or discount to the net asset value per
share. The Board will continue to monitor developments as they occur.
Viability Statement
In accordance with the UK Corporate Governance Code and the
Listing Rules, the Directors have assessed the prospects of the
Company over a longer period than the 12 months required by the
‘Going Concern’ provision. Taking account of the anticipated
investment holding periods and the medium term prospects of the
Company’s investment portfolio, the Board decided that a four year
period was appropriate for their assessment.
In reviewing the Company’s viability, the Board considered the
Company’s position with reference to its business model, the
principal risks and uncertainties as detailed on pages 24 to 25 of
this report, and its present and expected financial position. In
considering the Company’s financial position, the Board reviewed
the liquidity of the Company’s portfolio and the Company’s forecast
expenses and cash flows. In addition, the Board considered the
appropriateness of the Company’s current investment objective in
the prevailing investment market and environment.
The Board regularly reviews the prospects for the Company’s
portfolio and receives reports from the Investment Manager on the
opportunities for new investments. The Board also reviews the
Company’s financing arrangements at least quarterly to ensure that
the Company is able to continue to meet its liabilities as they fall
due.
The Directors have assumed that:
• the Board and the Investment Manager will continue to adopt
a long-term view when making investments;
• investors will continue to wish to have exposure to listed
companies in emerging markets;
• there will continue to be demand for investment trusts;
• regulation will not increase to a level that makes the running
of the Company uneconomical; and
• the performance of the Company will continue to be
satisfactory.
Based on the results of this review, the Directors have formed a
reasonable expectation that the Company will continue in its
operations and meet its expenses and liabilities as they fall due over
the next four years.
Non-financial Information
Anti-Bribery and Corruption Policy
The Board has adopted a zero tolerance approach to instances of
bribery and corruption. Accordingly it expressly prohibits any Director
or associated persons, when acting on behalf of the Company, from
accepting, soliciting, paying, offering or promising to pay or authorise
any payment, public or private in the UK or abroad to secure any
improper benefit for themselves or for the Company.
The Board applies the same standards to its service providers in
their activities for the Company.
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A copy of the Company’s Anti Bribery and Corruption Policy can be
found on its website at www.feetplc.co.uk. The policy is reviewed
annually by the Audit Committee.
An overview of the main trends and factors affecting the
performance of the Company is set out in the Investment Manager’s
Review beginning on page 12.
Prevention of the Facilitation of Tax Evasion
In 2017, in response to the implementation of the Criminal Finances
Act 2017, the Board adopted a zero-tolerance approach to the
criminal facilitation of tax evasion. A copy of the Company’s policy
on preventing the facilitation of tax evasion can be found on the
Company’s website www.feetplc.co.uk. The policy is reviewed
annually by the Audit Committee.
The Directors continue to believe that the emerging markets sector
together with Fundsmith’s investment strategy should provide good
returns for the long-term investor.
It is expected that the Company’s overall corporate and investment
strategies will remain unchanged in the coming year.
This Strategic Report on pages 2 to 27 has been signed for and on
behalf of the Board.
Martin Bralsford
Chairman
21 March 2019
Social, Human Rights and Environmental Matters
The Company is an externally-managed investment trust, with no
employees and four non-executive Directors. Therefore, the
Company has no material, direct impact on the environment or the
community and the Company itself has no environmental, human
rights, social or community policies. In carrying out its activities and
in relationships with suppliers, the Company aims to conduct itself
responsibly, ethically and fairly.
The Directors, through the Investment Manager, encourage
companies in which investments are made to adhere to best
practice with regard to corporate governance. The Investment
Manager’s approach to corporate governance in emerging markets
is set out in their Investment Philosophy beginning on page 19.
As an investment company, the Company does not provide goods
and services in the normal course of business and does not have
customers or employees. Accordingly, the Company falls outside the
scope of the Modern Slavery Act 2015. The Company’s suppliers
are typically professional advisers and the Company’s supply chains
are considered to be low risk in this regard.
Performance and Future Developments
The Board concentrates its attention on the Company’s investment
performance and the Investment Manager’s investment approach,
and on factors that may have an effect on this approach. The Board
is regularly updated on wider investment trust industry issues and
discussions are held at each Board meeting concerning the
Company’s future development and strategy.
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Board of Directors
Governance
Martin Bralsford
Chairman
Martin was articled with Pannell Kerr Forster & Co, London, qualifying as a chartered accountant in 1970 and
obtained a masters degree at the London Business School in 1974. Until July 2007 he was Chief Executive of
C.I. Traders, taking up this role in August 2002 when it acquired Le Riche Group. Prior to this he had been
Chairman of Premier Brands and held a number of financial and general management appointments in Calor
Gas, Rank Group, SmithKline Beecham and Cadbury Schweppes. He has served as an independent member
of the boards of a number of commercial, banking and investment companies including Gartmore Capital
Strategy Fund Limited and Acorn Income Fund Limited. He is a trustee of a number of charitable trusts; including
the Durrell Wildlife Conservation Trust of which he is a Life Trustee.
Rachel de Gruchy
Appointed to the Board of Directors on 1 June 2018, Rachel has over thirty years of international investment
industry experience having held senior roles in Jersey and Australia. She began her career with Laurie, Milbank
& Co in Jersey and was a Director of Matheson Securities (Cl) Ltd (owned by the Jardine Matheson Group) from
1993 to 1997, subsequently moving to a role specialising in advisory and client portfolio management services
with Wilson Investment Group Ltd in Australia. From 2013 to 2018 Rachel was Managing Director, Jersey Branch
of IAM Advisory, which provides an independent investment advisory service, including performance
measurement and manager research, to professional trustees, charities, sovereign wealth and UHNWI clients.
Rachel is a Chartered Fellow of the Chartered Institute for Securities and Investment (CISI), having been
previously elected a Member of the London Stock Exchange in 1989 and is a designated Chartered Wealth
Manager. She holds the CISI Diploma and has a Masters of Applied Finance, the Institute of Directors (loD)
Diploma in Company Direction and is a Member of the loD.
David Potter
Chairman of the Management Engagement Committee and Senior Independent Director
After 35 years in the City (CSFB, Montagu, Midland, Guinness Mahon, Investec) David has spent the last
18 years as a chairman, non-executive director, trustee and advisor in a wide range of companies and
institutions. He is currently Chairman of Gresham House Strategic PLC and Illustrated London News Limited, a
member of the Council of The Centre for the Study of Financial Innovation and Chairman of the Bryanston and
National Film & TV School Foundations.
John Spencer
Chairman of the Audit Committee
John Spencer qualified as a chartered accountant in 1966 and worked with KPMG from 1966 to 1969. He
joined Barclays Bank in 1969 and held a variety of posts, including President of Barclays Bank of New York
and chief executive of the USA Banking division. He returned to the UK in 1990 as deputy chief executive of
BZW and chief executive of the Global Markets division and was appointed a member of the Group Executive
Committee. He was Non-Executive Chairman of Regent Inns plc from 1995 to 1998 and served as Non-
Executive Chairman of Softtechnet.com plc, a director of Numerica Group plc and Chief Executive of Snell &
Wilcox Limited, a private company. He was appointed Director of Tullett Prebon (originally Collins Stewart) in
2000 until 2007 where he was the Senior Independent Non-executive Director and a member of the Audit,
Remuneration and Nominations Committees. He is a Non-executive Director of tpSEF Inc, ICAP SEF (US) LLC
and ICAP Global Derivatives Limited.
All Directors are members of the Audit and Management Engagement Committees.
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Meeting Attendance
The number of Board and Committee meetings held during the year to 31 December 2018, and each Director’s attendance, is shown
below:
Type and number of meetings
held during the year ended 31 December 2018
Martin Bralsford
Rachel de Gruchy (appointed 1 June 2018)
David Potter
John Spencer
Directors’ Interests
Board
(4)
4
2
4
4
Audit Committee
(2)
2
1
2
2
Management
Engagement
Committee
(1)
1
1
1
1
The beneficial interests of the Directors and their families in the Company were as set out below:
Martin Bralsford
Rachel de Gruchy
David Potter
John Spencer
Shares of 1p each
31 December 2018
100,000
2,000
14,511
5,000
There have been no changes in the above Directors’ interests to the date of this report.
Manager’s Interests
As at the date of this report, Terry Smith of Fundsmith LLP, the Company’s Investment Manager, held interests in 580,000 (2017: 530,000)
shares in the Company.
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Corporate Governance Report
Governance
Corporate Governance
Statement of Compliance
The Company has complied with the recommendations of the 2016
AIC Code and the relevant provisions of the UK Code except as set
out below.
The UK Code includes provisions relating to:
– the role of the chief executive;
– executive directors’ remuneration; and
– the need for an internal audit function.
For the reasons set out in the AIC Guide, and as explained in the
UK Code, the Board considers these provisions are not relevant to
the position of the Company as it is an externally managed
investment company. In particular, all of the Company’s day-to-day
management and administrative functions are outsourced to third
parties. As a result, the Company has no executive directors,
employees or internal operations. The Company has therefore not
reported further in respect of these provisions.
The Board has considered the principles and recommendations of
the 2016 AIC Code of Corporate Governance (the “AIC Code”) by
reference to the AIC Corporate Governance Guide for Investment
Companies (the “AIC Guide”). The AIC Code, as explained by the AIC
Guide, addresses all the principles set out in the 2016 UK Corporate
Governance Code (the “UK Code”), as well as setting out additional
principles and recommendations on issues that are of specific
relevance to the Company.
The Board considers that reporting against the principles and
recommendations of the AIC Code will provide better information to
shareholders and the Financial Reporting Council has confirmed
that by following the AIC Code and the AIC Guide, boards of
investment companies will meet their obligations in relation to the
UK Code and paragraph 9.8.6 of the UK Listing Rules.
During 2018, a new UK Corporate Governance Code was published
by the Financial Reporting Council, which applies to companies with
financial years beginning on or after 1 January 2019. A corresponding
AIC Code of Corporate Governance was published at the beginning
of February 2019, also applying to companies with financial years
beginning on or after 1 January 2019. The Company will report
against the principles and recommendations of the new AIC Code
in its next annual report.
The AIC Code and the AIC Guide can be viewed on the AIC’s website
www.theaic.co.uk and the UK Code can be viewed on the Financial
Reporting Council website www.frc.org.uk.
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The Board and Committees
Responsibility for effective governance lies with the Board. The governance framework of the Company reflects the fact that as an investment
company, it has no employees and outsources investment management, risk management, company management, company secretarial,
administrative and marketing services to third parties.
Copies of the full terms of reference, which clearly define the responsibilities of each committee can be obtained from the Company Secretary,
will be available for inspection at the Annual General Meeting, and can be found on the Company’s website at www.feetplc.co.uk.
The Directors have decided that, given the size of the Board, it is unnecessary to form separate remuneration and nomination committees;
the duties that would ordinarily fall to those committees are carried out by the Board as a whole. However, the Chairman takes no part in
discussions involving his own remuneration.
Chairman – Martin Bralsford
Three additional non-executive Directors, all considered independent.
The Board
Key roles and responsibilities:
– to provide leadership and set strategy within a framework of prudent, effective controls which enable risk to be assessed and
managed;
– to ensure that a robust corporate governance framework is implemented; and
– to challenge constructively and scrutinise performance of all outsourced activities.
Management Engagement Committee
Audit Committee
Chairman – David Potter
All Directors
Chairman – John Spencer
All Directors
Key roles and responsibilities:
– to review regularly the contracts, the performance and the
remuneration of the Company’s principal service providers.
Key roles and responsibilities:
– to review the Company’s financial reports;
– to oversee the risk and control environment; and
– to review the performance of the Company’s external
Auditor.
Risk Management and Internal Controls
A description of the Company’s risk management systems and the Board’s review of internal controls is provided in the Strategic Report
on pages 24 and 25 and the Audit Committee Report on page 41.
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Corporate Governance Report
Governance
Board of Directors
Directors’ Independence
The Board consists of four non-executive Directors, each of whom
is independent of Fundsmith. No member of the Board is a Director
of another investment company managed by Fundsmith, nor has
any Board member been an employee of the Company, Fundsmith
or any of its service providers. Accordingly, the Board considers that
all the Directors are independent and there are no relationships or
circumstances which are likely to affect or could appear to affect
their judgement.
Board Evaluation
During the course of 2018 the performance of the Board, its
committees and individual Directors (including each Director’s
independence) was evaluated through a formal assessment process
led by the Chairman.
In addition, prior to the appointment of Rachel de Gruchy as a
Director of the Company on 1 June 2018, a detailed skills review
was undertaken to ensure that the Board would have an appropriate
balance of skills, knowledge and experience, and that the Directors
would work well together and have a good rapport.
The Chairman and the Directors are satisfied that the structure and
operation of the Board continues to be effective and relevant and
that there is a satisfactory mix of skills, experience, length of service
and knowledge of the Company.
All Directors submit themselves for election and annual re-election
respectively by shareholders. Following the evaluation process, the
Board recommends that shareholders vote in favour of their re-
election at the Annual General Meeting.
Succession Planning
The Board regularly considers its structure and recognises the need
for progressive refreshments.
The Board has an approved succession planning policy to ensure
that (i) there is a formal, rigorous and transparent procedure for the
appointment of new directors to the Board; and (ii) the Board is
comprised of members who collectively display the necessary
balance of professional skills, experience, length of service and
industry/Company knowledge. The plan is reviewed annually and at
such other times as circumstances may require.
Appointments to the Board
The rules governing the appointment and replacement of directors
are set out in the Company’s Articles of Association and the
aforementioned Succession Planning Policy. Where the Board
appoints a new director during the year, that director will stand for
election by shareholders at the next Annual General Meeting. The
minimum number of directors is two and the maximum is 10. When
considering new appointments, the Board will review the skills of the
Directors and seek to add persons with complementary skills, or
skills and experience which fill any gaps in the Board’s knowledge,
and who can devote sufficient time to the Company to carry out their
duties effectively. The Company is committed to ensuring that any
vacancies arising are filled by the most qualified candidates.
During the year, Rachel de Gruchy was appointed as a Director
following the Board’s annual review of its composition, diversity,
efficacy and length of service. Having regard to the Company’s Articles
of Association and the Board’s Succession Planning Policy, and after
discussions with two executive search agencies, the Board drew up a
list of desirable skills and industry experience for a new director.
Ms de Gruchy has attended and contributed to FEET Board and
Committee meetings since 2015 as part of a Board apprentice
scheme. In view of her valued contributions, extensive international
investment and financial markets experience, and her relevant
qualifications as summarised in her biography on page 28, the Board
decided that Ms de Gruchy would be the best candidate for the role.
tenure necessarily
reduces his ability
Policy on Director Tenure
The Board subscribes to the view expressed within the 2016 AIC
Code that long-serving directors should not be prevented from
forming part of an independent majority. It does not consider that a
directors’
to act
independently. The Board’s policy on tenure is that continuity and
experience are considered to add significantly to the strength of the
Board and, as such, no limit on the overall length of service of any
of the Directors, including the Chairman, has been imposed. In view
of its non-executive nature, the Board considers that it is not
appropriate for the Directors to be appointed for a specified term,
although new Directors will be appointed with the expectation that
they will serve for a minimum of three years subject to shareholder
approval.
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Board Diversity
The Company is supportive of the recommendations of Lord Davies’
Report that the performance of corporate boards can be improved
by encouraging the appointment of the best people from a range of
differing perspectives and backgrounds. The Company recognises
the benefits of diversity on the Board, including gender, and will take
this into account in its Board appointments. The Company is
committed to ensuring that any Director search process actively
seeks persons with the right qualifications so that appointments
can be made on the basis of merit against objective criteria from a
diverse selection of candidates. To this end the Board will consider
diversity during any Director search process. The Board is currently
comprised of three men and one woman, meeting Lord Davies’
original recommendation.
the Company’s
Induction/Development
New appointees to the Board are provided with a full induction
programme. The programme covers the Company’s investment
strategy, policies and practices. Directors are also given key
information on
regulatory and statutory
requirements as they arise including information on the role of the
Board, matters reserved for its decision, the terms of reference for
the Board committees, the Company’s corporate governance
practices and procedures and the latest financial information.
Directors are encouraged to participate in training courses where
appropriate.
Exercise of Voting Powers
The Board has delegated authority to Fundsmith (as AIFM and
Investment Manager) to vote the shares owned by the Company that
are held on its behalf by its custodian, The Northern Trust Company.
The Board has instructed that Fundsmith submit votes for such
shares wherever possible. This accords with current best practice
whilst maintaining a primary focus on financial returns. Fundsmith
may refer to the Board on any matters of a contentious nature.
Conflicts of Interest
In line with the Companies Act 2006, the Board has the power to
authorise any potential conflicts of interest that may arise and
impose such limits or conditions as it thinks fit. A register of
interests and potential conflicts is maintained and is reviewed at
every Board meeting to ensure all details are kept up to date. It was
resolved at each Board meeting during the year that there were no
direct or indirect interests of a Director that conflicted with the
interests of the Company. Appropriate authorisation will be sought
prior to the appointment of any new director or if any conflicts or
potential conflicts arise.
Independent Professional Advice
The Board has formalised arrangements under which the Directors,
in the furtherance of their duties, may seek independent
professional advice at the Company’s expense.
The Company has also arranged Directors’ and Officers’ Liability
Insurance which provides cover for legal expenses under certain
circumstances. This was in force for the entire period under review
and up to the date of this report.
Company Secretary
The Directors have access to the advice and services of a Company
Secretary through its appointed representative which is responsible
to the Board for ensuring that the Board procedures are followed
and that the Company complies with applicable rules and
regulations. The Company Secretary is also responsible for ensuring
good information flows between all parties.
Board Meetings and Relations with the
Investment Manager
The Board meets regularly throughout the year and a representative
from Fundsmith is in attendance at each Board meeting to address
questions on specific matters and to seek approval for specific
transactions which Fundsmith is required to refer to the Board. The
Chairman encourages open debate to foster a supportive and co-
operative approach for all participants.
The primary focus at regular Board meetings is the review of
investment performance and associated matters, including gearing,
asset allocation, marketing/investor relations, peer group
information and industry issues. The Board reviews key investment
and financial data, revenue and expenses projections, analyses of
asset allocation, transactions, performance comparisons, share
price and net asset value performance.
The Board reviews the discount or premium to net asset value per
share of the Company’s share price at each Board meeting and
considers the effectiveness of the Company’s marketing and
communication strategies, as well as any recommendations on
share buybacks and issuance.
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Corporate Governance Report
Governance
The Board is responsible for strategy and reviews the continued
appropriateness of the Company’s investment objective, strategy
and investment restrictions at each meeting.
votes received in respect of each resolution will be made available to
shareholders at the meeting and will also be published on the
Company’s website, www.feetplc.co.uk.
Shareholder Communications
Shareholder Relations
Representatives of Fundsmith regularly meet with institutional
shareholders and private client asset managers to discuss strategy
and to understand their issues and concerns and, if applicable, to
discuss corporate governance issues. The results of such meetings
are reported at the following Board meeting.
An analysis of the shareholder register of the Company is provided
to the Directors at each Board meeting. Reports from the Company’s
broker are submitted to the Board on investor sentiment and
industry issues.
to provide shareholders with a
Shareholder Communications
The Company aims
full
understanding of the Company’s investment objective, policy and
activities, its performance and the principal investment risks by
means of informative annual and half yearly reports. This is
supplemented by the daily publication through the London Stock
Exchange of the net asset value of the Company’s shares.
The Company’s website (www.feetplc.co.uk) is regularly updated
with monthly fact sheets and provides useful information about the
financial reports and
Company,
announcements.
the Company’s
including
importance on communications with
The Directors welcome the views of all shareholders and place
considerable
them.
Shareholders wishing to communicate with the Chairman, or any
other member of the Board, may do so by writing to the Company
Secretary at the offices of Frostrow.
Significant Holdings and Voting Rights
Details of the substantial interests in the Company’s shares, the
Directors’ authorities to issue and repurchase the Company’s
shares, and the voting rights of the shares are set out in the Report
of the Directors on pages 35 to 38.
Nominee Share Code
Where shares are held in a nominee company name, the Company
undertakes:
• to provide the nominee company with multiple copies of
shareholder communications, so long as an indication of
quantities has been provided in advance; and
• to allow investors holding shares through a nominee company
to attend general meetings, provided the correct authority from
the nominee company is available.
Nominee companies are encouraged to provide the necessary
authority to underlying shareholders to attend the Company’s
general meetings.
All substantive communications regarding any major corporate
into account
issues are discussed by the Board taking
representations from Fundsmith, the Company Secretary, the
Auditor, legal advisers and the Corporate Stockbroker.
The Board supports the principle that the AGM be used to
communicate with private investors. It is the intention that the full
Board will attend the AGM under the chairmanship of the Chairman
of the Board. All shareholders are encouraged to attend the AGM,
where they are given the opportunity to question the Chairman, the
Board and representatives of Fundsmith. Fundsmith will make a
presentation to shareholders covering the investment performance
and strategy of the Company at the forthcoming AGM. Details of proxy
By order of the Board
Frostrow Capital LLP
Company Secretary
21 March 2019
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Report of the Directors
35
The Directors present their annual report on the affairs of the
Company together with the audited financial statements and the
ended
Independent
31 December 2018.
Auditor’s Report
year
the
for
report. Disclosures
The Corporate Governance report on pages 30 to 34 forms part of
future
relating
this
developments and risk management can be found in the Strategic
Report on pages 2 to 27.
to performance,
Business and Status of the Company
The Company is registered as a public limited company in England
and Wales (Registered Number 08756681) and is an investment
company within the terms of Section 833 of the Companies Act
2006 (the ‘Act’). Its shares are listed on the premium segment of
the Official List and traded on the main market of the London Stock
Exchange.
The Company has applied for and been accepted as an approved
investment trust under sections 1158 and 1159 of the Corporation
Taxes Act 2010 and Part 2 Chapter 1 of Statutory Instrument
2011/2999. The Directors are of the opinion that the Company has
conducted its affairs so as to be able to retain such approval.
Investment Policy
In order to achieve its investment objective, the Company invests in
a portfolio of shares issued by listed or traded companies which
have the majority of their operations in, or revenue derived from,
Developing Economies and which provide direct exposure to the rise
of the consumer classes in those countries.
Further details concerning the Company’s investment policy and
strategy can be found in the Strategic Report on page 8 and the
Investment Philosophy beginning on page 19.
Results and Dividend
The results attributable to shareholders for the year are shown on
page 54.
to be paid to allow the Company to comply with those rules. The
Company’s objective remains to provide capital growth rather than
income and, subject to the investment rules any dividends and
distributions will continue to be at the discretion of the Board from
time to time.
Subject to shareholder approval at the forthcoming AGM, a final
dividend of 2p per ordinary share will be paid on 29 May 2019 to
shareholders on the record on 26 April 2019. The associated
ex-dividend date is 25 April 2019.
Information on the Company’s dividend policy is also detailed in the
Chairman’s Statement on page 6.
Alternative Performance Measures
the Company’s
The Financial Statements (on pages 46 to 72) set out the required
financial
statutory reporting measures of
performance. In addition, the Board assesses the Company’s
performance against a range of criteria which are viewed as
particularly relevant for investment trusts, which are summarised
on page 2 and explained in greater detail in the Strategic Report,
under the heading ‘Key Performance Indicators’ on page 23. The
Directors believe that these measures enhance the comparability
of information between reporting periods and aid investors in
understanding the Company’s performance. The measures used for
the year under review have remained consistent with the prior year.
Definitions of the terms used and the basis of calculation adopted
are set out in the Glossary on page 77 to 78.
Gearing
The Company has the power to borrow using short-term banking
facilities to raise funds for short-term liquidity purposes or for
discount management purposes including the purchase of its own
shares, provided that the maximum gearing represented by such
borrowings shall be limited to 15% of the Company’s net assets at
the time of the draw down of such borrowings. The Company is not
currently geared.
In 2018 the Company made a revenue profit, and revenue losses
from previous years have now been reversed. Under investment
trust rules regarding distributable income, a final dividend will have
Leverage
For the purposes of the Alternative Investment Fund Managers
(AIFM) Directive, leverage is any method which increases the
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36
Report of the Directors
Governance
Company’s exposure, including the borrowing of cash and the use
of derivatives. It is expressed as a ratio between the Company’s
exposure and its net asset value and can be calculated on a Gross
and a Commitment method. The current maximum permitted limit
under the Gross and Commitment methods is 115%. Up to date
information is available in the Investor Disclosure Document on the
Company’s website www.feetplc.co.uk. Further information can be
found in the Alternative Investment Fund Managers Directive
Disclosures beginning on page 74.
Continuing Appointment of the Investment
Manager and AIFM
The Board has reviewed the continuing appointment of the
Investment Manager and AIFM and has concluded that it is in
shareholders’ interests that Fundsmith, acting as both the
Investment Manager and AIFM, continues in its roles. The review
undertaken by the Board considered the Company’s investment
performance together with the quality and adequacy of other
services provided.
The Board also reviewed the appropriateness of the terms of the
Investment Management Agreement, in particular the length of the
notice period and the fee structure.
Going Concern
The content of the investment portfolio, trading activity, the
Company’s cash balances and revenue forecasts, and the trends
and factors likely to affect the Company’s performance are reviewed
and discussed at each Board meeting. The Directors, having made
relevant enquiries, are satisfied that it is appropriate to continue to
adopt the going concern basis in preparing the financial statements
as the assets of the Company consist mainly of liquid securities and,
accordingly, the Company has adequate financial resources to
continue in operational existence for at least the next 12 months.
Continuation Vote
The Company’s constitutional documents require that, if after the
end of the fourth financial year of the Company’s existence (being
the year ended 31 December 2018) or any subsequent year, the
Company’s Ordinary Shares have traded, on average, at a discount
in excess of 10 per cent. of Net Asset Value per Ordinary Share in
that year, the Directors will consider proposing a special resolution
at the Company’s next annual general meeting that the Company
ceases to continue in its present form. As the Company’s shares
traded at an average premium of 1.0 per cent. during the year
ended 31 December 2018, no such resolution will be proposed at
the forthcoming AGM.
Directors
The Directors of the Company who held office during the year and
up to the date of signature of the financial statements are shown
below. Further information on the Directors can be found on page 28.
Martin Bralsford (Chairman)
Rachel de Gruchy (appointed 1 June 2018)
David Potter
John Spencer
All Directors seek election or re-election respectively by shareholders
at each Annual General Meeting.
Directors’ & Officers’ Liability Insurance Cover
Directors’ & officers’ liability insurance cover was maintained by the
Company during the year ended 31 December 2018. It is intended
that this policy will continue for the year ending 31 December 2019
and subsequent years.
Directors’ Indemnities
As at the date of this report, indemnities are in force between the
Company and each of its Directors under which the Company has
agreed to indemnify each Director, to the extent permitted by law,
in respect of certain liabilities incurred as a result of carrying out
his or her role as a Director of the Company. The Directors are also
indemnified against the costs of defending any criminal or civil
proceedings or any claim by the Company or a regulator as they are
incurred provided that where the defence is unsuccessful the
Director must repay those defence costs to the Company. The
indemnities are qualifying third party indemnity provisions for the
purposes of the Companies Act 2006.
A copy of each deed of indemnity is available for inspection at the
Company’s registered office during normal business hours and will
be available for inspection at the Annual General Meeting.
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Substantial Share Interests
The Company was aware of the following substantial interests in the voting rights of the Company:
Shareholder
Hargreaves Lansdown
Mr Simon Justin Nixon
Alliance Trust
AJ Bell Securities
Interactive Investor
Mr Duncan Cameron
Charles Stanley Group
28 February 2019
31 December 2018
Number of
shares
3,106,260
2,000,000
1,314,515
1,211,193
1,049,249
1,000,000
809,061
% of issued
share capital
11.68
7.52
4.94
4.56
3.95
3.76
3.04
Number of
shares
3,108,429
2,000,000
1,233,258
1,233,254
1,053,910
1,000,000
769,498
% of issued
share capital
11.78
7.58
4.67
4.67
3.99
3.79
2.92
As at 31 December 2018 the Company had 26,390,056 shares in issue. As at 20 March 2019 (the latest practicable date before publication
of the Annual Report) the Company had 26,590,056 shares in issue.
Beneficial Owners of Shares – Information Rights
Beneficial owners of shares who have been nominated by the
registered holder of those shares to receive information rights under
section 146 of the Companies Act 2006 are required to direct all
communications to the registered holder of their shares rather than
to the Company’s registrar, Link Asset Services, or to the Company
directly.
Capital Structure
The Company’s capital structure is summarised in note 12 on
page 67.
Share Capital
At the start of the year under review, the Directors had shareholder
authority to issue up to 5,000,638 ordinary shares of 1 penny each
on a non-pre-emptive basis. At the Company’s annual general
meeting held on Wednesday, 23 May 2018, this authority expired
and a new authority to allot up to 2,523,755 ordinary shares
(representing 10% of the Company’s issued share capital) on a
non-pre-emptive basis was granted. Authority to repurchase up to
3,783,109 ordinary shares was also granted.
In the meeting notice of the 2018 AGM, the Board had sought
authority from shareholders to issue a further 15% of the
Company’s issued share capital without pre-emption rights in a
separate resolution. This additional authority had, in the past,
facilitated the smooth running of the share issuance programme.
However, as a significant number of the proxy votes received before
the meeting were against granting this further authority, the
proposed resolution was withdrawn before the meeting. After
discussion with the Company’s advisers and major shareholders,
the Board has decided that it will no longer propose that
shareholders grant this further authority.
During the year, the Company issued 1,727,500 ordinary shares at
a minimum premium of 1.5% to the last published cum-income net
asset value per share. Details are provided in notes 12 and 13 to
the Financial Statements on page 67. Since the year-end and to the
date of this report, a further 200,000 new shares have been issued
under the same issuance criteria.
No shares were repurchased during the year and there are no
shares held in Treasury.
The giving of powers to issue or buy-back the Company’s shares
requires the relevant resolutions to be passed by Shareholders.
Proposals for the renewal of the Board’s powers to issue and
buy-back shares are set out in the Notice of Annual General Meeting
beginning on page 81.
Voting Rights in the Company’s shares
Details of the voting rights in the Company’s shares at the date of
this Annual Report are given in note 9 to the Notice of Annual
General Meeting on page 84.
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Report of the Directors
Governance
There are no restrictions concerning the transfer of securities in the
Company; no special rights with regard to control attached to
securities; no restrictions on voting rights; no agreements between
holders of securities regarding their transfer which are known to the
Company; and no agreements which the Company is party to that
might affect its control following a successful takeover bid.
Political Donations
calculating the risks, costs and potential returns in the KID are
prescribed by EU law and the Company has no discretion over the
format or content of the document. The illustrated performance
returns in the KID cannot be guaranteed and, together with the
prescribed cost calculation and risk categorisation, may not reflect
figures for the Company derived using other methods. Accordingly,
the Board recommends that investors also take account of
information from other sources, including the Annual Report.
The Company has not made, and does not intend to make, any
political donations.
Annual General Meeting
The Company’s Annual General Meeting (“AGM”) will be held at the
Barber Surgeons’ Hall, Monkwell Square, Wood Street, London
EC2Y 5BL on Wednesday, 22 May 2019 at 1.00pm.
Explanatory notes to the proposed resolutions can be found on
pages 87 to 88.
The Board considers that the resolutions relating to the proposed
items of special business are in the best interests of the
shareholders as a whole. Accordingly, the Board unanimously
recommends to the shareholders that they vote in favour of the
resolutions to be proposed at the forthcoming AGM as the Directors
intend to do in respect of their own beneficial holdings.
By order of the Board
Frostrow Capital LLP
Company Secretary
21 March 2019
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic
Reports and Directors’ Reports) Regulations 2013, including those
within its underlying investment portfolio.
Listing Rule 9.8.4
The Directors confirm that there are no disclosures to be made in
regard of Listing Rule 9.8.4.
Common Reporting Standard (CRS)
CRS is a global standard for the automatic exchange of information
commissioned by the Organisation for Economic Cooperation and
Development and incorporated into UK law by the International Tax
Compliance Regulations 2015. CRS requires the Company to
provide certain additional details to HMRC in relation to certain
shareholders. The reporting obligation began in 2016 and is an
annual requirement. The Company’s registrar, Link Asset Services,
has been engaged to collate such information and file the reports
with HMRC on behalf of the Company.
Key Information Document
The European Union’s Packaged Retail Investment and Insurance-
based Products (PRIIPs) Regulations cover investment trusts and
require Boards or AIFMs to prepare a Key Information Document
(KID) in respect of their companies. FEET’s KID is available on the
Company’s website. Investors should note that the processes for
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Statement of Directors’ Responsibilities
39
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the Directors have elected
to prepare the financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union. Under company law the directors must not approve the
financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the company and of the profit
or loss of the company for that period. In preparing these financial
statements, the Directors have:
• selected suitable accounting policies and then applied them
consistently;
• made
judgements and accounting estimates that are
reasonable and prudent;
• presented information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provided additional disclosures when compliance with the
specific requirements in IFRS were insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the Company’s financial position and
financial performance; and
• prepared the financial statements on a going concern basis.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Disclosure of Information to the Auditor
The Directors at the time of approving the Report of the Directors
are listed on page 36. Each Director in office at the date of this
report confirms that:
• to the best of each Director’s knowledge and belief, there is no
information relevant to the preparation of their report of which
the Company’s Auditor is unaware; and
• each Director has taken all the steps a director might
reasonably be expected to have taken to be aware of relevant
audit information and to establish that the Company’s Auditor
is aware of that information.
Statement of Directors’ Responsibilities:
The Financial Statements are published on the Company’s website
(www.feetplc.co.uk). The maintenance and integrity of the website
is the responsibility of the AIFM. The work carried out by the Auditors
does not involve consideration of the maintenance and integrity of
the website and, accordingly, the Auditors accept no responsibility
for any changes that have occurred to the Financial Statements
since they were initially presented on the website. Visitors to the
website need to be aware that legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
The Directors consider that the Annual Report, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.
Each of the Directors, who are listed on page 36 confirm that, to
the best of their knowledge:
• the financial statements, which have been prepared in
accordance with applicable accounting standards, give a true
and fair view of the assets, liabilities, financial position and net
return of the Company for the year ended 31 December 2018;
and
• the Strategic Report includes a fair review of the development
and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that it faces.
On behalf of the Board
Martin Bralsford
Chairman
21 March 2019
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Audit Committee Report
Governance
Statement from the Chairman
I am pleased to present the Audit Committee report for the year
ended 31 December 2018. The Committee met twice during the
year. Attendance by each Director is shown in the table on page 29.
The Committee also met on 12 March 2019 to consider this report.
The role of the Committee is to ensure that shareholder interests
are properly protected in relation to the application of financial
reporting and internal control principles and to assess the
effectiveness of the audit. The Committee’s role and responsibilities
are set out in full in its terms of reference which are available on
request from the Company Secretary and can be seen on the
Company’s website (www.feetplc.co.uk). A summary of the
Committee’s main responsibilities and how it has fulfilled them is
set out below.
4. To consider any non-audit work to be carried out by the
auditor. The Audit Committee reviews the need for non-audit
services to be performed by the Auditor in accordance with the
Company’s non-audit services policy, and authorises such on a
case by case basis having given consideration to the cost-
effectiveness of the services and the objectivity of the Auditor.
During the year, Deloitte provided tax compliance services to the
Company for a fee which is not considered material. An analysis
of the Auditor’s remuneration can be found on page 62.
5. To consider the need for an internal audit function. Since
the Company delegates its day-to-day operations to third parties
and has no employees, the Committee has determined there
is no requirement for such a function.
Meetings and Business
Composition
The following matters were dealt with at the Committee’s meetings:
The Audit Committee comprises all the Directors whose biographies
are set out on page 28. The Committee considers that each
member has recent and relevant experience in accounting or
auditing and that the Committee as a whole has experience relevant
to the investment trust industry.
Responsibilities
The Committee’s main responsibilities during the year were:
1. To review the Company’s half-year and annual financial
statements. In particular, the Committee considered whether
the annual financial statements were fair, balanced and
understandable, allowing shareholders to more easily assess
the Company’s strategy, investment policy, business model,
position and financial performance.
2. To review the risk management and internal control
processes of the Company and its key service providers. As
part of this review the Committee again reviewed the
appropriateness of the Company’s anti-bribery and corruption
policy.
3. To recommend the appointment of an external auditor and
agree the scope of its work and its remuneration, reviewing its
independence and the effectiveness of the audit process.
February 2018
– Review of the Committee’s terms of reference and non-audit
services policy;
– Review of the Company’s annual results;
– Approval of the annual report and financial statements;
– Review of risk management, internal controls and compliance;
and
– Review of the outcome of the audit and discussion of matters
arising.
July 2018
– Review of the Auditor’s plan and terms of engagement for the
2018 audit;
– Review of risk management, internal controls and compliance;
– Review of the Company’s anti bribery and corruption policy and
the measures put in place by the Company’s service providers;
– Review and approval of formal audit tender guidelines;
– Review of the Company’s half-year results; and
– Approval of the half-year report.
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Financial Statements
The Board has asked the Committee to confirm that in its opinion
the Board can make the required statement that the Annual Report
taken as a whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
Company’s financial position, performance, business model and
strategy. The Committee has given this confirmation on the basis of
its review of the whole document, underpinned by involvement in
the planning for its preparation and review of the processes to
assure the accuracy of factual content.
Significant Reporting Matters
The Committee considered key accounting issues, matters and
judgements in relation to the Company’s financial statements and
disclosures relating to:
Valuation and ownership of the Company’s Investments
The Committee reviews the valuation and existence of investments
every six months. Controls are in place to ensure that valuations are
appropriate and existence is verified through reconciliations with
the Depositary.
Recognition of Revenue from Investments
The Committee took steps to gain an understanding of the
processes in place to record investment income and transactions.
The Committee sought confirmation that all dividends receivable
have been accounted for correctly.
the financial statements on the going concern basis. Further detail
is provided on page 36.
Risk Management and Internal Controls
The Directors have identified (Strategic Report pages 24 to 25) five
main areas of risk: Investment Activity and Strategy, Financial,
Shareholder Relations and Corporate Governance, Operational and
Accounting, Legal and Regulatory and have set out the actions
taken to evaluate and manage these risks. The Committee reviews
the various actions taken and satisfies itself that they are sufficient:
in particular the Committee reviews the Company’s schedule of key
risks at each meeting and requires amendments to both risks and
mitigation actions if appropriate. There were no changes to the
Company’s risk management processes during the year and no
significant failings or weaknesses were identified from the
Committee’s most recent risk review.
The Board has overall responsibility for the Company’s risk
management and systems of internal controls and for reviewing
their effectiveness. In common with the majority of investment
trusts, investment management, accounting, company secretarial
and custodial services have been delegated to third parties. The
effectiveness of the internal controls is assessed on a continuing
basis by the Investment Manager, the Depositary and the Company
Secretary. Each maintains its own system of internal controls and
the Audit Committee receives regular reports from them. The
Committee is satisfied that appropriate systems have been in place
for the year under review and up to the date of approval of this
report.
Accounting Policies
The current accounting policies, as set out on pages 58 to 61, have
been applied consistently throughout the year and the prior period
where applicable. Two new standards were applied during the year:
IFRS 9 – Financial Instruments replacing IAS 39, and IFRS 15 –
Revenue from Contracts with Customers. For further details please
see page 61.
External Auditor
Meetings:
This year the nature and scope of the audit together with Deloitte
LLP’s audit plan were considered by the Committee on 24 July
2018.
Going Concern
Having reviewed the Company’s financial position and liabilities, the
Committee is satisfied that it is appropriate for the Board to prepare
The Committee met Deloitte LLP (the “Auditor”) on 12 March 2019
to review the outcome of the audit and the draft 2018 Annual
Report and financial statements.
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42
Audit Committee Report
Governance
Independence and Effectiveness:
In order to fulfil the Committee’s responsibility regarding the
independence of the Auditor, the Committee reviewed:
on the Company’s financial statements and the audit firm would not
place significant reliance on the work for the purposes of the
statutory audit. In addition, non-audit fees must not exceed 70% of
the average audit fees paid in the last three years.
– the senior audit personnel in the audit plan for the year;
– the Auditor’s arrangements concerning any potential conflicts
of interest;
Details of the fees paid to the Auditor for audit services and non-
audit services are set out in note 5 to the Financial Statements on
page 62.
– the extent of any non-audit services;
– the statement by the Auditor that they remain independent
within the meaning of the regulations and their professional
standards; and
– the Auditor’s independence.
In order to consider the effectiveness of the audit process, the
Committee reviewed:
– the Auditor’s fulfilment of the agreed audit plan;
– the report arising from the audit itself; and
– feedback from Frostrow Capital LLP (as Company Secretary)
and Fundsmith LLP (as AIFM) on the conduct of the audit.
The Committee is satisfied with the Auditor’s independence and the
effectiveness of the audit process, together with the degree of
diligence and professional scepticism brought to bear.
Non-Audit Services
The Audit Committee monitors the level of non-audit work carried
out by the Auditor, if any, and seeks assurances from the Auditor
that they maintain suitable policies and procedures ensuring
independence, and monitors compliance with the relevant
regulatory requirements on an annual basis.
The Company operates on the basis whereby the provision of non-
audit services by the Auditor is permissible where no conflicts of
interest arises, where the independence of the Auditor is not likely
to be impinged by undertaking the work and the quality and the
objectivity of both the non-audit work and audit work will not be
compromised. In particular, non-audit services may be provided by
the Auditor if they are inconsequential or would have no direct effect
Audit Tendering
Deloitte LLP has been the appointed Auditor, and Stuart McLaren
the designated audit partner, since the Company’s launch in 2014.
Deloitte carried out the audit for the years ended 31 December
2014-2018 and was considered independent by the Board. This
audit is Stuart McLaren’s last audit for the Company. He will be
succeeded by Chris Hunter as Audit Partner.
As a public company listed on the London Stock Exchange, the
Company is subject to mandatory auditor rotation requirements. The
Company will put the external audit out to tender at least every
10 years, and change auditor at least every 20 years. The
Committee will, however, continue to consider annually the need to
go to tender for audit quality or independence reasons.
The Committee has adopted formal audit tender guidelines to
govern the audit tender process.
Auditor Reappointment
The Committee conducted a review of the performance of the
Auditor during the year and concluded that performance was
satisfactory and there were no grounds for change.
Deloitte LLP have indicated their willingness to continue to act as
Auditor to the Company for the forthcoming year and a resolution
for their re-appointment will be proposed at the Annual General
Meeting.
John Spencer
Chairman of the Audit Committee
21 March 2019
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Directors’ Remuneration Report
43
Statement from the Chairman
Single Total Figure of Remuneration (audited)
I am pleased to present the Directors’ Remuneration Report to
shareholders. An Ordinary Resolution for the approval of this report
will be put to shareholders at the Company’s forthcoming Annual
General Meeting. The law requires the Company’s auditor to audit
certain disclosures provided in this report. Where disclosures have
been audited, they are indicated as such and the Auditor’s audit
opinion is included in its report to shareholders on pages 46 to 53.
The Board considers the framework for the remuneration of the
Directors on an annual basis.
the ongoing
appropriateness of the Company’s remuneration policy and the
individual remuneration of Directors by reference to the activities
of the Company and comparison with other companies of a similar
structure and size. This is in-line with the AIC Code.
reviews
It
Directors’ fees during the year were: £30,000 for the Chairman and
£25,000 for Directors. In addition, Directors who chair a Board
committee receive an additional £2,000 per annum.
All levels of remuneration reflect both the time commitment and
responsibility of the role.
The projected fees for 2019 are set out on page 45.
Directors’ Fees and Expenses
The Directors, as at the date of this report, received the fees listed
in the table above. These exclude any employers’ national insurance
contributions, if applicable. No other forms of remuneration were
received by the Directors and so fees represent the total
remuneration of each Director.
No payments were made to former directors of the Company during
the year (2017: nil).
Date of
Appointment
to the Board
Fees
2018 (£)
Fees
2017 (£)
23 May 2014
1 June 2018
23 May 2014
23 May 2014
30,000
14,600
27,000
27,000
98,600
25,000
N/A
20,000
20,000
65,000
Martin Bralsford
(Chairman)
Rachel de Gruchy
David Potter
John Spencer
Total
Sums paid to Third Parties (audited information)
Fees due to Mr Bralsford were paid to Marbral Limited (a company
of which he is a director), otherwise none of the fees referred to in
the above table were paid to any third party in respect of the
services provided by any of the Directors.
Other Benefits
Taxable Benefits – Article 149 of the Company’s Articles of
Association provides that Directors are entitled to be reimbursed
for reasonable expenses incurred by them in connection with the
performance of their duties and attendance at Board and General
Meetings.
Pension related benefits – Article 158 permits the Company to
provide pension or similar benefits for Directors and employees of
the Company. However, no pension schemes or other similar
arrangements have been established and no Director is entitled to
any pension or similar benefits pursuant to their Letters of
Appointment.
Loss of Office
Directors do not have service contracts with the Company but are
engaged under Letters of Appointment. These specifically exclude
any entitlement to compensation upon leaving office for whatever
reason.
Share Price Total Return
A performance comparison is required to be presented in this
report. As the Company was incorporated on 31 October 2013 and
commenced trading on 25 June 2014, the performance comparison
is shown for the period from 25 June 2014 to 31 December 2018
using the MSCI Emerging and Frontier Markets Index on a net
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Directors’ Remuneration Report
Governance
sterling adjusted basis, which the Board has adopted as the
measure for both the Company’s performance and that of the
Investment Manager for the period.
Relative Cost of Directors’ Remuneration
The bar chart below shows the comparative cost of Directors’ fees
compared with the level of dividend distribution and Company
expenses for the years ended 31 December 2017 and 2018.
Statement of Voting at the Annual General Meeting
At the AGM held on 23 May 2018, 2,565,481 votes (99.19%) were
received in favour of the resolution seeking approval of the
Directors’ Remuneration Report, 7,182 (0.28%) were against, and
11,763 votes were withheld; the percentage of votes excludes votes
withheld.
Directors’ Interests in the Company’s Shares as at
31 December 2018 (audited)
£’000
6000
5000
4000
3000
2000
1000
0
5,523
5,457
2018
2017
99
65
Directors’
Fees
Company
Expenses
335
0
Dividends
Total Shareholder Return for the period 25 June 2014 to
31 December 2018
Martin Bralsford (Chairman)
Rachel de Gruchy
David Potter
John Spencer
Total
Ordinary shares
of 1p each
2018
2017
100,000
2,000
14,511
5,000
100,000
N/A
14,511
5,000
121,511
119,511
Directors are not required to hold shares in the Company.
No changes have been notified to the date of this report.
Martin Bralsford
Chairman
21 March 2019
%
160
150
140
130
120
110
100
90
80
Launch
Jun-1 4
Aug-1 4
Oct-1 4
D ec-1 4
Feb-1 5
Apr-1 5
Jun-1 5
Aug-1 5
Oct-1 5
D ec-1 5
Feb-1 6
Apr-1 6
Jun-1 6
Aug-1 6
Oct-1 6
D ec-1 6
Feb-1 7
Apr-1 7
Jun-1 7
Aug-1 7
Oct-1 7
D ec-1 7
Feb-1 8
Apr-1 8
Jun-1 8
Aug-1 8
Oct-1 8
D ec-1 8
MSCI EM + FM
FEET
Source: MSCI/Bloomberg
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Directors’ Remuneration Policy Report
45
The Company’s Remuneration Policy provides that fees payable to
the Directors should reflect the value of the time spent by the Board
on the Company’s affairs and the responsibilities borne by the
Directors and should be sufficient to enable candidates of high
calibre to be recruited. Directors are remunerated in the form of
fees payable monthly in arrears, paid to the Director personally or
to a specified third party. There are no long-term incentive schemes,
share option schemes or pension arrangements and the fees are
not specifically related to the Directors’ performance, either
individually or collectively. Directors’ remuneration comprises solely
Directors’ fees. Directors are authorised to claim reasonable
expenses from the Company in relation to the performance of their
duties. Directors may also earn a pro rata day rate in connection
with extraordinary corporate events or transactions requiring them
to commit significant extra time to the Company. The current and
projected Directors’ fees for 2018 and 2019 are shown in the table
below. The Company does not have any employees.
No communications have been received from shareholders
regarding Directors’ remuneration.
The remuneration for the non-executive Directors is determined
within the limits set out in the Company’s Articles of Association.
The present limit is £250,000 in aggregate per annum.
It is the Board’s intention that the Remuneration Policy will be
considered by shareholders at the Annual General Meeting at least
once every three years. This policy was last approved by
shareholders at the AGM held on 23 May 2018. 2,563,535 votes
(99.63%) were received in favour, 9,628 (0.37%) were against, and
11,263 votes were withheld; the percentage of votes excludes votes
withheld. Accordingly, an Ordinary Resolution for the approval of this
policy will be considered again by shareholders at the Annual
General Meeting in 2021. Further details are provided in the notice
of the meeting beginning on page 81.
Directors’ Fees Projected and Current
Martin Bralsford
Rachel de Gruchy
David Potter
John Spencer
Total
Fees
2019 (£)
30,000
25,000
27,000
27,000
109,000
Fees
2018 (£)
30,000
14,600
27,000
27,000
98,600
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Independent Auditor’s Report
Financial Statements
Report on the audit of the financial statements
Opinion
In our opinion the financial statements of Fundsmith Emerging Equities Trust plc (the
‘Company’):
● give a true and fair view of the state of the Company’s affairs as at 31 December 2018
and of its profit for the year then ended;
● have been properly prepared in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union; and
● have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
● the income statement;
● the statement of financial position;
● the statement of changes in equity;
● the statement of cash flows; and
● the related notes 1 to 17.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European
Union.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements
in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited
by the FRC’s Ethical Standard were not provided to the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
● Valuation of investments
● Ownership of investments
● Revenue recognition
Within this report, any new key audit matters are identified with
and any key audit
matters which are the same as the prior year identified with
.
The materiality that we used in the current year was £3.2 million which was determined on
the basis of 1% of net assets as at 31 December 2018.
We scope our audit work by assessing the risks of material misstatement through using
both quantitative and qualitative factors relating to the account balances, classes of
transactions and disclosures.
Materiality
Scoping
Significant changes in our approach
There were no significant changes to our audit approach from the prior year.
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Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed the Directors’ statement in note 1a to the financial statements about whether they
considered it appropriate to adopt the going concern basis of accounting in preparing them and their
identification of any material uncertainties to the company’s ability to continue to do so over a period
of at least twelve months from the date of approval of the financial statements.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
We considered as part of our risk assessment the nature of the Company, its business model and
related risks including where relevant the impact of Brexit, the requirements of the applicable financial
reporting framework and the system of internal control. We evaluated the Directors’ assessment of
the Company’s ability to continue as a going concern, including challenging the underlying data and
key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions
in relation to their going concern assessment.
We are required to state whether we have anything material to add or draw attention to in relation to
that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent
with our knowledge obtained in the audit.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were consistent with
the knowledge we obtained in the course of the audit, including the knowledge obtained in the
evaluation of the Directors’ assessment of the Company’s ability to continue as a going concern, we
are required to state whether we have anything material to add or draw attention to in relation to:
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
● the disclosures on pages 24-25 that describe the principal risks and explain how they are being
managed or mitigated;
● the Directors’ confirmation on page 24 that they have carried out a robust assessment of the
principal risks facing the company, including those that would threaten its business model, future
performance, solvency or liquidity; or
● the Directors’ explanation on page 26 as to how they have assessed the prospects of the Company,
over what period they have done so and why they consider that period to be appropriate, and their
statement as to whether they have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
We are also required to report whether the Directors’ statement relating to the prospects of the Company required by Listing Rule 9.8.6R(3)
is materially inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the
audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
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Independent Auditor’s Report
Financial Statements
Valuation of Investments
Key audit matter description
As an investment entity, the Company holds investments of £321 million as at
31 December 2018 (2017: £307 million) which has increased by 4.6% from the prior
year-end. These represent the most quantitatively significant financial statement line on the
balance sheet. The Company engaged Northern Trust as administrator, custodian and
depositary from 2 January 2018.
In addition, the investments held at fair value through the income statement are the main
driver of the Company’s performance and net asset value. The portfolio of investments has
a wide geographical spread and there is a risk that investments within the portfolio may not
be actively traded and the prices quoted may not be reflective of fair value. This may result
in a material misstatement within the investments held at fair value through the income
statement and also the fair value hierarchy for investments disclosures.
Refer to note 1e for the accounting policy on investments and details of the investments
are disclosed in note 9. The valuation of investment risk is included within the Audit
Committee report on page 41.
How the scope of our audit responded
We performed the following procedures to address the valuation of investments risk:
to the key audit matter
Key observations
● We critically assessed the design and implementation of controls in place to value the
investment portfolio within the Northern Trust service organisation controls report. In
addition, we assessed whether the service auditors were professionally competent and
that the scope of the controls tested were appropriate to gain assurance over the risk
identified;
● We agreed 100% of the last traded prices of quoted investments on the schedule of
investments at year-end to closing bid prices published by an independent pricing source
and investigated total portfolio difference that is above the reporting threshold;
In addition, we performed the following procedures to address whether the investment
portfolio was actively traded and designated with the correct fair value hierarchy:
● We identified investments that were not actively traded and considered indicators of
impairment;
● We monitored the post year-end volume of trade data, the number of ‘zero trade’ days
and also the bid-ask spreads on investment holdings that were not traded out within
10 business days from the year end; and
● We assessed the fair value designations had been correctly assigned and presented in
the financial statements.
There were no differences that exceeded the reporting threshold between the prices used
by the Company for valuing its listed investments and the independent pricing sources used
in our valuation testing.
We found from our analysis detailed above that eight investments (2017: five) held at the
year end with a total fair value of £38.7 million (2017: £20.8 million) were not trading
actively. This indicated that a level 2 fair value should be applied to these investments.
Management changed the fair value categorisation from level 1 to level 2 for these
investments in the financial statements. We are now satisfied that the liquidity and fair value
categorisation of investments at year end has been appropriately disclosed in note 9 of the
financial statements.
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49
Ownership of Investments
Key audit matter description
The Company holds investments of £321 million as at 31 December 2018 (2017: £307 million)
which has increased by 4.6% from the prior year-end. These represent the most
quantitatively significant financial statement line on the balance sheet. There is a risk that
investments recorded may not be owned by the Company at year end. The Company
engaged Northern Trust as administrator, custodian and depositary from 2 January 2018.
Refer to note 1e for the accounting policy on investments and details of the investments
are disclosed in note 9. The ownership of investment risk is included within the Audit
Committee report on page 41.
How the scope of our audit responded to We performed the following procedures to address this risk:
the key audit matter
Key observations
Revenue recognition
Key audit matter description
● We reviewed the Northern Trust service organisation controls report to understand and
document the design and implementation of controls over ownership of investments. In
addition, we also assessed whether the service auditors were professionally competent
and that the scope of the controls were appropriate to give us assurance over the risk
identified; and
● We confirmed the ownership of all investments at the year-end date by obtaining
independent third party confirmations directly from the custodian.
No issues were identified from our review of the Northern Trust service organisation report
and assessment of the related service auditor.
We did not identify differences in the investment holdings when agreeing the Company’s
investment portfolio to the confirmation received directly from the custodian.
Dividend income of £7 million for the year ended 31 December 2018 (2017: £6 million)
from equity investments is accounted for on an ex-dividend basis. Overseas dividends are
included gross of any withholding tax. We identified the risk of fraud in revenue recognition
as a key audit risk since dividend income may not be fully captured.
1. There is a risk that dividend income from the various overseas equity investments will
not be accurately calculated;
2. There is a risk that dividend income will not be recognised in the correct accounting
period in the financial statements; and
3. In addition there is a risk that dividend income for the year is not complete. Dividends
declared for the investments held may not all be recorded on the general-ledger.
Refer to note 1c for the revenue accounting policy and details of revenue are disclosed in
note 2. The revenue recognition risk is included within the Audit Committee report on
page 41.
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Independent Auditor’s Report
Financial Statements
How the scope of our audit responded
We have performed the following procedures to address this risk:
to the key audit matter
Key observations
● We critically assessed the design and implementation of controls over revenue
recognition for monitoring of completeness, accuracy and cut-off of revenue transactions
within the Northern Trust service organisation controls report. In addition we assessed
whether the service auditors were professionally competent and that the scope of the
controls tested are appropriate to provide assurance over the risk identified; and
● We obtained a listing of all investments held at any point during the year and obtained
the ex-dividend dates and rates for all dividends declared in the year from an independent
third party resource. A sample of these dividends were taken and the ex-dividend dates
and rates were compared to the ledger. We recalculated the expected income and
compared this to the ledger.
No misstatements in relation to revenue recognition, revenue accuracy, and revenue
completeness were identified which required reporting to those charged with governance.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
£3.2 million (2017: £3.1 million)
Basis for determining materiality
1% (2017: 1%) of net assets.
Rationale for the benchmark applied
Net assets has been chosen as it is considered the most relevant benchmark for investors
and is a key driver of shareholder value.
NAV £322m
Materiality £3m
NAV
Materiality
Audit Committee
reporting threshold
£0.06m
We agreed with the Audit Committee that we would report all audit differences in excess of £0.06 million (2017: £0.06 million), as well
as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall presentation of the financial statements.
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An overview of the scope of our audit
There were no changes to the scope of our audit from the prior year. Our audit was scoped by obtaining an understanding of the entity
and its environment, including internal control, and assessing the risks of material misstatement performed directly by the audit
engagement team.
We note that the accounting and administration for the Company changed from State Street to Northern Trust as a third-party service
organisation starting 2 January 2018. As part of our audit we assessed the design and implementation of relevant controls in place at
Northern Trust who prepare the financial statements.
Other information
The Directors are responsible for the other information. The other information comprises the
information included in the annual report other than the financial statements and our auditor’s report
thereon.
We have nothing to report in
respect of these matters.
Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit or otherwise appears to be materially
misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:
● Fair, balanced and understandable – the statement given by the Directors that they consider the
annual report and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company’s position and
performance, business model and strategy, is materially inconsistent with our knowledge obtained
in the audit; or
● Audit committee reporting – the section describing the work of the audit committee does not
appropriately address matters communicated by us to the audit committee; or
● Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the
Directors’ statement required under the Listing Rules relating to the Company’s compliance with
the UK Corporate Governance Code containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
Responsibilities of directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary
to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either
intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
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Independent Auditor’s Report
Financial Statements
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design
and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide
a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
● enquiring of management and the audit committee, including obtaining and reviewing supporting documentation, concerning the
Company’s policies and procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
● discussing among the engagement team regarding how and where fraud might occur in the financial statements and any potential
indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: completeness and accuracy of
investment income given the nature of revenue being a key performance indicator and an area of focus to users of the financial
statements; and
● obtaining an understanding of the legal and regulatory frameworks that the Company operates in, focusing on those laws and
regulations that had a direct effect on the financial statements or that had a fundamental effect on the operations of the Company.
The key laws and regulations we considered in this context included financial reporting including Companies Act 2006 and UK Listing
Rules, as well as the Company qualification as an Investment Trust under UK tax legislation.
Audit response to risks identified
As a result of performing the above, we identified revenue recognition as a key audit matter. The key audit matters section of our report
explains the matter in more detail and also describes the specific procedures we performed in response to that key audit matter.
In addition to the above, our procedures to respond to risks identified included the following:
● reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and
regulations discussed above;
● enquiring of management and the audit committee concerning actual and potential litigation and claims;
● performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement
due to fraud;
● reading minutes of meetings of those charged with governance and reviewing correspondence with HMRC and the FCA; and
● in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating
the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members, and remained
alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
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Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
● the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
● the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not
identified any material misstatements in the strategic report or the Directors’ report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
We have nothing to report in
respect of these matters.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
● we have not received all the information and explanations we require for our audit; or
● adequate accounting records have not been kept, or returns adequate for our audit have not been
received from branches not visited by us; or
● the financial statements are not in agreement with the accounting records and returns.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of
Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be
audited is not in agreement with the accounting records and returns.
We have nothing to report in
respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board of Directors on 11 November 2014 to audit the
financial statements for the year ending 31 December 2014 and subsequent financial periods. The period of total uninterrupted
engagements including previous renewals and reappoints of the firm is five years, covering the years ending 31 December 2014 to
31 December 2018.
Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).
Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Stuart McLaren (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, UK
21 March 2019
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Income Statement
Financial Statements
For the year ended
31 December 2018
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
For the year ended
31 December 2017
Dividend income 2 6,970 – 6,970 5,989 – 5,989
Gains/(losses) on investments
(Losses)/gains on investments held through
profit and loss 9 – (10,441) (10,441) – 53,350 53,350
Gains/(losses) on foreign exchange transactions 17 22 39 (34) (479) (513)
Management fees 4 (3,933) – (3,933) (3,409) – (3,409)
Other expenses including
dealing costs 5 (1,119) (570) (1,689) (1,183) (930) (2,113)
Profit/(loss) before tax 1,935 (10,989) (9,054) 1,363 51,941 53,304
Tax 6 (552) – (552) (368) – (368)
Profit/(loss) for the year 1,383 (10,989) (9,606) 995 51,941 52,936
Earnings per share
(basic and diluted) (p) 7 5.35 (42.47) (37.12) 4.12 215.37 219.49
The Company does not have any income or expenses which are not included in the profit for the year. Accordingly the “profit for the year”
is also the “total comprehensive income for the year” as defined in IAS 1 (revised).
All of the profit and total comprehensive income for the year is attributable to the owners of the Company.
The “Total” column of this statement represents the Company’s Income Statement, prepared in accordance with International Financial
Reporting Standards (IFRS). The “Revenue” and “Capital” columns are supplementary to this and are prepared under guidance published
by the Association of Investment Companies.
All items in the above statement derive from continuing operations.
The accompanying notes on pages 58 to 72 are an integral part of these financial statements.
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Statement of Financial Position
55
As at
31 December 2017
Notes £’000 £’000 £’000 £’000
As at
31 December 2018
Non-Current Assets
Investments held at fair value through profit and loss 9 321,493 306,646
321,493 306,646
Current Assets
Receivables 10 676 331
Cash and Cash Equivalents 2,709 5,318
3,385 5,649
324,878 312,295
Current Liabilities
Trade and other payables 11 (2,392) (1,622)
(2,392) (1,622)
322,486 310,673
Equity Attributable to Equity Shareholders
Ordinary share capital 12 264 246
Share Premium 13 78,560 57,159
Capital Reserves 242,391 253,380
Revenue Reserve 1,271 (112)
322,486 310,673
Net Asset Value per share (p) 14 1,222.0 1,259.7
The financial statements on pages 54 to 72 were approved by the Board on 21 March 2019 and were signed on its behalf by:
Martin Bralsford
Chairman
The accompanying notes on pages 58 to 72 are an integral part of these financial statements.
Fundsmith Emerging Equities Trust plc – Company Registration Number 08756681 (Registered in England and Wales)
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Statement of Changes in Equity
Financial Statements
For the year ended 31 December 2018
Share Share Capital Revenue
Capital Premium Reserves Reserve Total
Notes £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2018 246 57,159 253,380 (112) 310,673
(Loss)/profit for the year – – (10,989) 1,383 (9,606)
246 57,159 242,391 1,271 301,067
Issue of Share Capital 18 21,401 – – 21,419
Balance at 31 December 2018 12 264 78,560 242,391 1,271 322,486
For the year ended 31 December 2017
Share Share Capital Revenue
Capital Premium Reserves Reserve Total
£’000 £’000 £’000 £’000 £’000
Balance at 1 January 2017 229 38,022 201,439 (1,107) 238,583
Profit for the year – – 51,941 995 52,936
229 38,022 253,380 (112) 291,519
Issue of Share Capital 17 19,137 – – 19,154
Balance at 31 December 2017 12 246 57,159 253,380 (112) 310,673
The accompanying notes on pages 58 to 72 are an integral part of these financial statements.
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Statement of Cash Flows
57
For the year ended For the year ended
31 December 2018 31 December 2017
£’000 £’000
Cash Flows used in Operating Activities
(Loss)/profit for the year before taxation (9,054) 53,304
Adjustments for:
Loss/(gain) on investments 10,441 (53,350)
Gain/(loss) on foreign exchange (39) 513
Sale of investments [a] 28,294 44,854
Purchases of investments [a] (53,582) (67,312)
(Increase)/decrease in receivables (345) 1,770
Increase in payables 770 744
Overseas taxation paid (552) (368)
Net Cash Flow from Operating Activities (24,067) (19,845)
Cash Flows used in Financing Activities
Proceeds from issue of new shares 21,526 19,250
Issue costs relating to new shares (107) (96)
Net Cash Flow from Financing Activities 21,419 19,154
Net Decrease in Cash and Cash Equivalents (2,648) (691)
Effect of foreign exchange rates 39 (513)
Change in cash and cash equivalents (2,609) (1,204)
Cash and Cash Equivalents at start of the year 5,318 6,522
Cash and Cash Equivalents at end of the year 2,709 5,318
Cash Flow from Operating Activities includes
Interest paid (4) –
Dividends received 6,099 5,375
[a] Receipts from the sale of, and payments to acquire, investment securities have been classified as components of cash flows from
operating activities because they form part of the Company’s dealing operations.
The accompanying notes on pages 58 to 72 are an integral part of these financial statements.
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Notes to the Financial Statements
Financial Statements
1. Accounting Policies
The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
These comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”), together with
interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting
Standards Committee (“IASC”) that remain in effect, to the extent that IFRS have been adopted by the European Union.
(a) Accounting Convention
The financial statements have been prepared under the historical cost convention (modified to include investments at fair value
through profit or loss) on a going concern basis and in accordance with applicable International Financial Reporting Standards as
adopted by the EU (IFRS) and with the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies
and Venture Capital Trusts’ issued by the Association of Investment Companies in November 2014 (and updated in February
2018). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The
Directors believe that it is appropriate to continue to adopt the going concern basis for preparing the financial statements for the
reasons stated on page 36. The Company is a UK listed company with a predominantly UK shareholder base. The results and the
financial position of the Company are expressed in sterling, which is the functional and presentational currency of the Company.
The accounting policies have been disclosed consistently and in line with Companies Act 2006.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to
which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement
in its entirety, which are described as follows:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at
the measurement date;
• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either
directly or indirectly; and
• Level 3 inputs are unobservable inputs for the asset or liability.
Statement of estimation uncertainty
In the application of the Company’s accounting policies, management is required to make judgements, estimates and assumptions
about carrying values of assets and liabilities that are not always readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are considered to be relevant. Uncertainty about these
assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset
or liability affected in future periods. There have been no significant judgements, estimates or assumptions for the year.
(b) Presentation of the Income Statement
In order to better reflect the activities of an investment trust company, and in accordance with guidance issued by the AIC,
supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital
nature has been presented alongside the Statement of Comprehensive Income. In accordance with the Company’s Articles of
Association, net capital returns may not be distributed by way of dividend. Additionally, the net revenue is the measure the directors
believe appropriate in assessing the Company’s compliance with certain requirements set out in section 1158 of the Corporation
Tax Act 2010.
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1. Accounting Policies Continued
(c) Income
Income from investments (other than capital dividends), including taxes deducted at source, is included in revenue by reference
to the date on which the investment is quoted ex-dividend, or where no ex-dividend date is quoted, when the Company’s right to
receive payment is established. Special dividends are credited to capital or revenue, according to the circumstances. Income from
underwriting commission is recognised as earned.
Interest receivable and payable, management fees, and other expenses are treated on an accruals basis.
(d) Expenses
The management fee is recognised as a revenue item in the Income Statement. All other expenses are charged to revenue except
expenditure of a capital nature, in which case they are treated as capital. The Board will, however, keep this under review and an
appropriate amendment to this treatment will be made if required.
(e) Investments
Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-
recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame
established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are
valued at fair value. For listed investments, this is deemed to be bid market prices. Gains and losses arising from changes in fair
value are included in net profit or loss for the year as a capital item in the income statement and are ultimately recognised in the
capital reserve. For any unlisted investments, the fair value will be determined by using valuation techniques. These valuations
will maximise the use of observable market data where it is available and with minimal reliance on entity specific estimates. For
other investments which do not fit within this criteria the fair value will be determined by the Audit Committee with valuations
recommended to the Board of the Company. The Audit Committee will consider the appropriateness of the valuations, models and
inputs, using the various valuation methods in accordance with the Company’s valuations policy.
Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of
Comprehensive Income.
When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant market,
the investments concerned are recognised or derecognised on the trade date.
All the investments are defined by IFRS as investments held at fair value through profit and loss. All gains and losses are allocated
to the capital return within the Statement of Comprehensive Income as “Gains or losses on investments held at fair value through
profit and loss”.
All investments are designated upon initial recognition as held at fair value through profit and loss, and are measured at subsequent
reporting dates at fair value, which is either the bid price or the last traded price, depending on the convention of the exchange
on which the investment is quoted.
The Company derecognises a financial asset only when the contractual right to the cash flows from the asset expire, or when it
transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition
of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
and the cumulative gain or loss that had been accumulated in equity is recognised in capital on the Statement of Comprehensive
Income.
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Notes to the Financial Statements
Financial Statements
1. Accounting Policies Continued
(f) Foreign Currencies
Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange ruling at the date
of the balance sheet or at the related forward contract rate. Transactions in foreign currency are converted to sterling at the rate
ruling at the date of the transaction or, where forward foreign currency contracts have been taken out, at contractual rates and
included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is of a
capital or revenue nature.
(g) Cash and Cash Equivalents
Cash at bank and in hand comprises cash and demand deposits which are readily convertible to a known amount of cash and are
subject to insignificant risk of changes in value.
(h) Equity Dividends
Interim dividends are recognised in the period in which they are paid. Final dividends are not recognised until approved by
shareholders in the annual general meeting.
(i) Capital Reserves
Gains or losses on realisation of investments are transferred to the capital reserve. Any changes in fair values of investments that
are not readily convertible to cash are treated as unrealised gains or losses within the capital reserve.
(j) Taxation
The charge for taxation is based upon the revenue for the year and is allocated according to the marginal basis between revenue
and capital using the company’s effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date
where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the balance
sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being
recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying
temporary differences can be deducted. Timing differences are differences arising between the company’s taxable profits and its
results as stated in the financial statements which are capable of reversal in one or more subsequent periods. Due to the
Company’s status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval
in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation
or disposal of investments.
(k) Adoption of New and Revised Standards
At the date of authorisation of these financial statements the following Standard, which has not been applied in these financial
statements, was in issue but not yet effective:
IFRS 16 Leases (effective for accounting periods beginning on or after 1 January 2019)
The Company does not believe that there will be a material impact on the financial statements or the amounts reported from the
adoption of this standard.
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1. Accounting Policies Continued
(k) Adoption of New and Revised Standards (continued)
In the current financial year the company has applied a number of new standards, amendments to standards and interpretations
as follows:
IFRS 9 – Financial Instruments 2014 replaces IAS 39 and introduces new requirements for the classification and measurement
of financial assets and financial liabilities, impairment for financial liabilities, impairment for financial assets and general hedge
accounting. The Company measures all balance sheet items at fair value, there are no impaired assets and does not enter into
general hedge accounting. There is no material impact on the Company in relation to the adoption of this standard.
IFRS 15 – Revenue from Contracts with Customers specifies how and when an entity should recognise revenue and enhances the
nature of revenue disclosures. Due to the nature of the Company’s revenue streams from financial instruments there is no material
impact on the Company in relation to the adoption of this standard.
2. Dividend Income
2018 2017
£’000 £’000
Overseas dividends 6,970 5,989
Total 6,970 5,989
3. Segmental Reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being the investment business. The Company’s
objective is to be a core investment for investors seeking increasing capital growth and income over the long term. The accounting policies
of the operating segment, which operates in the UK, are the same as those described in the summary of significant accounting policies.
The Company evaluates performance based on total profit before tax, which is shown in the Income Statement on page 54. A geographical
split of the portfolio can be seen on page 11.
4. Investment Management Fee
2018 2017
£’000 £’000
Investment Management Fee 3,933 3,409
As at 31 December 2018, an amount of £965,012 (2017: £904,604) was payable to the Investment Manager.
Details of the terms of the Investment Management Agreement are provided on page 22.
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Notes to the Financial Statements
Financial Statements
5. Other Expenses
Transactions Costs on fair value
Revenue
£’000
2018 2017
Capital
£’000
Total Revenue Capital Total
£’000 £’000 £’000 £’000
through profit or loss assets – 137 137 – 281 281
Directors' Fees 99 – 99 65 – 65
Employers’ National Insurance Contributions – – – 11 – 11
Auditor's Remuneration 43 – 43 32 – 32
Registrar Fees 29 – 29 30 – 30
Broker Fee 35 – 35 35 – 35
Company Secretarial Fees 115 – 115 90 – 90
Custody Fees 308 – 308 655 – 655
Depositary Fees 50 – 50 61 – 61
Postage and Printing 25 – 25 21 – 21
Legal Fees 41 – 41 61 – 61
Administration Fees 2 – 2 105 – 105
Other Expenses 372 433 805 17 649 666
Total Expenses 1,119 570 1,689 1,183 930 2,113
Transaction costs on fair value through profit or loss assets represent such costs incurred on both purchase and sales of those assets.
Transaction costs on purchases amounted to £82,823 (2017: £106,000) and on sales amounted to £54,371 (2017: £175,000).
Auditor’s remuneration
The analysis of the Auditor’s remuneration is as follows:
2018 2017
Revenue £’000 £’000
Fees payable to the Company’s Auditor for the audit of the Company’s annual
financial statements 31 31
Total audit fees 31 31
Tax services
(a) tax compliance service 12 1
(b) other tax advisory services – –
Total non-audit fees 12 1
Total fees paid 43 32
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6. Taxation
(a) Analysis of tax charge in the year
Revenue
£’000
2018 2017
Capital
£’000
Total Revenue Capital Total
£’000 £’000 £’000 £’000
Taxation on ordinary activities
UK corporation tax at 19%
(2017: 19.2493%) – – – – – –
Irrecoverable overseas withholding tax 552 – 552 368 – 368
Total current tax for the year 552 – 552 368 – 368
The effective corporation tax rate of 19.2493% at 2017 is based on a marginal tax rate due to a change in rate during 2017 from 20% to 19%.
(b) The effective corporation tax rate was 19% (2017: 19.2493%). The tax charge for the year differs from the charge resulting from
applying the standard rate of corporation tax in the UK for an investment trust company. The differences are explained below:
Revenue
£’000
2018 2017
Capital
£’000
Total Revenue Capital Total
£’000 £’000 £’000 £’000
Profit before tax
1,935
(10,989)
(9,054) 1,363 51,941 53,304
Corporation tax at effective
rate of 19% (2017: 19.2493%) 368 (2,088) (1,720) 262 9,998 10,260
Effects of:
Expenses not allowable for tax purposes – 108 108 – 179 179
Non-taxable gains on investments – 1,980 1,980 – (10,177) (10,177)
Overseas dividends not taxable (1,328) – (1,328) (1,146) – (1,146)
Overseas tax suffered 552 – 552 368 – 368
Increase in excess management and
loan expenses 960 – 960 884 – 884
Total current year tax charge
for the year 552 – 552 368 – 368
As at 31 December 2018, the Company had unutilised management expenses of £18.0 million (2017: £12.9 million) carried forward. Due
to the Company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the
foreseeable future, the Company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of
investments.
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Notes to the Financial Statements
Financial Statements
7. Earnings per Share
Profit per Ordinary Share is as follows:
2018 2017
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Earnings per Ordinary Share 5.35 (42.47) (37.12) 4.12 215.37 219.49
Earnings per share is calculated based on returns for the year and the weighted average number of shares in issue during the year.
The total loss per share of (37.12)p (2017: gain of 219.49p) is based on a total loss attributable to equity shareholders of £(9,606,000)
(2017: gain of £52,936,000).
The revenue gain per share of 5.35p (2017: 4.12p) is based on a revenue gain attributable to equity shareholders of £1,383,000 (2017:
£995,000).
The capital loss per share of (42.47)p (2017: gain of 215.37p) is based on a capital loss attributable to equity shareholders of £(10,989,000)
(2017: gain of £51,941,000).
The total revenue gain and total capital loss per share are based on the weighted average number of shares in issue of 25,875,583 (2017:
24,117,407) during the year.
8. Dividends
Dividends relating to the year ended 31 December 2018 which is the basis on which the requirements of Section 1159 of the Corporation
Tax Act 2010 are considered below:
Dividends proposed:
2018 2018 2017 2017
pence £’000 pence £’000
Final dividend proposed* 2.00 532 – –
* Not included as a liability in the year ended 31 December 2018 accounts.
The final dividend proposed is based on shares in issue at the record date or, if the record date has not been reached, on shares in issue
on the date the Statement of Financial Position is signed.
The final dividend proposed will be paid on 29 May 2019 to Shareholders on the register on 26 April 2019. The associated ex-dividend
date is 25 April 2019.
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9. Investments Held at Fair Value Through Profit and Loss
All investments are designated as fair value through profit or loss on initial recognition, therefore all gains and losses arise on investments
designated as fair value through profit or loss.
2018 2017
£’000 £’000
Opening cost at 1 January 230,382 208,669
Opening unrealised gain/(loss) at 1 January 76,264 22,169
Valuation at 1 January 306,646 230,838
Purchases at cost 53,582 67,312
Sales – proceeds (28,294) (44,854)
Realised loss on sales (7,538) (745)
Investment holding unrealised (loss)/gain (2,903) 54,095
Closing Fair Value at 31 December 321,493 306,646
Closing cost at 31 December 248,132 230,382
Closing unrealised gain at 31 December 73,361 76,264
Valuation at 31 December 321,493 306,646
(Loss)/gain on investments
Loss on sales of investments (7,538) (745)
Unrealised (loss)/gain (2,903) 54,095
(Loss)/gain on investments (10,441) 53,350
All investments are listed.
Fair value of financial instruments
Under IFRS 13 ‘Fair Value Measurement’ an entity is required to classify investments using a fair value hierarchy that reflects the
significance of the inputs used in making the measurement decision.
The following shows the analysis of financial assets recognised at fair value based on:
• Level 1 – quoted prices in active markets for identical instruments. As at 31 December 2018, £282,795,000 (2017: £285,829,000)
of the investment portfolio was classified as level 1.
• Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk,
etc). As at 31 December 2018, £38,698,000 (2017: £20,817,000) of the investment portfolio was classified as level 2.
• Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
There are no level 3 investments.
During the year to 31 December 2018, British American Tobacco (£138,000), Fan Milk Ltd (£682,000) and Philippine Seven Corp
(£10,369,000) were transferred from level 1 to level 2. This was due to these securities having a lower volume of trade.
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Notes to the Financial Statements
Financial Statements
9. Investments Held at Fair Value Through Profit and Loss Continued
Fair value measurements recognised in the Statement of Financial Position
2018
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments held at fair value through profit and loss 282,795 38,698 – 321,493
Total 282,795 38,698 – 321,493
2017
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments held at fair value through profit and loss 285,829 20,817 – 306,646
Total 285,829 20,817 – 306,646
10. Receivables
2018 2017
£’000 £’000
Accrued income 632 278
Other receivables 44 53
676 331
The above receivables do not carry any interest and are short term in nature. The Directors consider that the carrying values of these
receivables approximate their fair value.
11. Payables
2018 2017
£’000 £’000
Management fee payable 965 905
Other fees payable 1,427 717
2,392 1,622
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12. Share capital
2018 2018 2017 2017
Number £’000 Number £’000
Issued, allotted and fully paid (ordinary) 26,390,056 264 24,662,556 246
During the year ended 31 December 2018, the Company issued 1,727,500 shares of £0.01 each (2017: 1,700,000) for a net consideration
of £21,419,000 (2017: £19,153,986). Details of the shareholder authorities granted to Directors to issue and buy back shares during the
year are provided on page 37.
13. Share Premium Account
2018 2017
£’000 £’000
Balance at 1 January 57,159 38,022
Premium arising on issue of new shares 21,508 19,233
Costs of issuing new shares (107) (96)
78,560 57,159
14. Net Asset Value per Share
2018 2017
pence pence
Net asset value per share 1,222.0 1,259.7
The net asset value per share is based on the net assets attributable to equity shareholders of £322,486,000 (2017: £310,673,000) and
on 26,390,056 (2017: 24,662,556) shares in issue at 31 December 2018.
15. Risk Management and Financial Instruments
The Company’s investing activities undertaken in pursuit of its investment objective, as set out on page 8, involve certain inherent risks.
The main risks arising from the Company’s financial instruments are market price risk, interest rate risk, liquidity risk, credit risk and
currency risk. The Board reviews and agrees policies for managing each of these risks as summarised below. These policies have remained
substantially unchanged during the current year.
Market price risk
Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents
the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets on four
scheduled occasions in each year and at each meeting it receives sufficient financial and statistical information to enable it to monitor
adequately the investment performance and status of the business. The Board has also established a series of investment parameters,
which are reviewed annually, designed to manage the risk inherent in managing a portfolio of investments.
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Notes to the Financial Statements
Financial Statements
15. Risk Management and Financial Instruments Continued
Interest rate risk
Interest rate risk is the risk of movements in the value of, or income from, cash balances that arise as a result of fluctuations in interest
rates. The Company finances its operations through retained profits including capital profits, with no additional financing.
Liquidity risk
The Company’s assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-
term flexibility is achieved through the use of cash balances and short-term bank deposits. All payables are due within under three months.
Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial
loss. This is mitigated by the Investment Manager reviewing the credit ratings of broker counterparties. The risk attached to dividend flows
is mitigated by the Investment Manager’s research of potential investee companies. The Company’s custodian bank is responsible for the
collection of income on behalf of the Company. Cash is held either with reputable banks with high quality external credit enhancements
or in liquidity/cash funds providing a spread of exposures to various underlying banks in order to diversify risk. The carrying amount of
financial instruments best represents the maximum exposure to credit risk.
Currency risk
The income and capital value of the Company’s investments and liabilities can be affected by exchange rate movements as some of the
Company’s assets and income are denominated in currencies other than sterling which is the Company’s reporting currency. The key areas
where foreign currency risk could have an impact on the Company are:
• movements in rates that would affect the value of investments and liabilities; and
• movements in rates that would affect the income received.
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15. Risk Management and Financial Instruments Continued
The Company had the following currency exposures, all of which are included in the Statement of Financial Position at fair value based on
the exchange rates ruling at the year end.
31 December 2018
Investments Cash Receivables Payables Total
£’000 £’000 £’000 £’000 £’000
Bangladeshi Taka 5,138 – – – 5,138
Brazilian Real 10,640 6 262 – 10,908
Chinese Yuan 13,117 – – – 13,117
Egyptian Pound 13,029 – 258 – 13,287
Ghanaian Cedi 1,682 – – – 1,682
Hong Kong Dollar 38,172 – – – 38,172
Indian Rupee 139,615 73 44 (1,153) 138,579
Indonesian Rupiah 12,716 – – – 12,716
Kenyan Shilling 3,700 – – – 3,700
Mexican Peso 6,947 – – – 6,947
Nigerian Naira 8,627 – – – 8,627
Pakistani Rupee 2,519 – – – 2,519
Philippino Peso 10,369 – – – 10,369
Pounds Sterling 5,512 2,630 36 (1,239) 6,939
South African Rand 15,118 – 8 – 15,126
Sri Lankan Rupee 6,590 – – – 6,590
Turkish Lira 5,950 – – – 5,950
US Dollar 13,890 – – – 13,890
Vietnam Dong 8,162 – 68 – 8,230
321,493 2,709 676 (2,392) 322,486
As at 31 December 2018, the investment portfolio included £8.627 million of Nigerian securities out of the total investment portfolio of
£321.5 million. These Nigerian securities are affected by the repatriation of the Nigerian Naira into sterling. This may take some time to
convert to sterling and may be subject to foreign exchange movements.
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Notes to the Financial Statements
Financial Statements
15. Risk Management and Financial Instruments Continued
31 December 2017
Investments Cash Receivables Payables Total
£’000 £’000 £’000 £’000 £’000
Bangladeshi Taka 8,576 – 52 – 8,628
Brazilian Real 17,910 – 13 – 17,923
Chinese Yuan 8,983 – – – 8,983
Egyptian Pound 12,292 – 85 – 12,377
Ghanaian Cedi 3,267 – – – 3,267
Hong Kong Dollar 25,091 – – – 25,091
Indian Rupee 121,266 – 29 – 121,295
Indonesian Rupiah 17,435 – – – 17,435
Kenyan Shilling 4,766 – – – 4,766
Mexican Peso 10,212 – – – 10,212
Nigerian Naira 10,242 – – – 10,242
Pakistani Rupee 3,332 – 18 – 3,350
Philippino Peso 10,004 – – – 10,004
Pounds Sterling 783 5,318 54 (1,654) 4,501
South African Rand 24,199 – – – 24,199
Sri Lankan Rupee 5,052 – – – 5,052
US Dollar 12,197 – 1 32 12,230
Vietnam Dong 11,039 – 79 – 11,118
306,646 5,318 331 (1,622) 310,673
The Company mitigates the risk of loss due to exposure to a single currency by way of diversification of the portfolio.
Foreign currency sensitivity
The following table illustrates the sensitivity of the profit after tax for the year and the net assets for the year in relation to foreign exchange
movements. The analysis below assumes that exchange rates may move +/-5% against sterling which is a reasonable approximation of
possible changes.
2018 2017 2018 2017
as at 31 December £’000 £’000 £’000 £’000
+5% +5% -5% -5%
Effect on net assets for the year 15,778 15,308 (15,778) (15,308)
Effect on capital return 15,800 15,293 (15,800) (15,293)
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15. Risk Management and Financial Instruments Continued
Interest rate risk
The majority of the Company’s financial assets are equity shares and other investments which neither pay interest nor have a maturity
date. The Company’s cash balance of £2,709,000 (2017: £5,318,000) earns interest, calculated on a tiered basis, depending on the
balance held, by reference to the base rate. The level of interest paid fluctuates in line with the base rate.
If the base rate increased by 0.5%, the impact on the profit or loss and net assets would be expected to be a positive £14,000
(2017: £30,000). If the bank base rate decreased by 0.5%, the impact on the profit or loss and net assets would be expected to be a
negative £14,000 (2017: £30,000). The calculations are based on the cash balances at the respective balance sheet date and are not
representative of the year as a whole.
All current liabilities have no interest rate and are repayable within one year.
Other price risk exposure
If the investment valuation fell by 10% at 31 December 2018, the impact on profit or loss and net assets would have been negative
£32.1 million (2017: £30.7 million). If the investment portfolio valuation rose by 10% at 31 December 2018, the impact on profit or loss
and net assets would have been positive £32.1 million (2017: £30.7 million). The calculations are based on the portfolio valuations as at
the respective year-end date and are not representative of the period as a whole, as well as the assumption that all other variables remained
constant.
The Company held the following categories of financial instruments, all of which are included in the Statement of Financial Position at fair
value.
as at 31 December
2018
£’000
2017
£’000
Assets at fair value through profit and loss 321,493 306,646
Cash 2,709 5,318
Investment income receivable 632 278
Other receivables 44 53
Other payables (2,392) (1,622)
322,486 310,673
Liquidity risk exposure
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. All payables are due
within under three months.
Capital management policies and procedures
The Company’s capital management objectives are to ensure that it will be able to continue as a going concern, and to provide long-term
growth in revenue and capital.
The Company’s capital is its equity share capital and reserves that are shown in the Statement of Financial Position at a total of
£322,486,000 (2017: £310,673,000).
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Notes to the Financial Statements
Financial Statements
15. Risk Management and Financial Instruments Continued
The Company is subject to the following externally imposed capital requirements:
• as a public company, the Company has a minimum share capital of £50,000; and
• in order to be able to pay dividends out of profits available for distribution, the Company has to be able to meet one of the two capital
restriction tests imposed on investment companies by company law.
The Company has complied with both of the above requirements.
The Board, with the assistance of the AIFM, monitors and reviews the broad structure of the Company’s capital on an ongoing basis. This
includes a review of the planned level of gearing, the need to repurchase or issue equity shares, and the extent to which any revenue in
excess of that which is required to be distributed be retained.
16. Contingent Liabilities
As at 31 December 2018, there were no contingent liabilities or capital commitments for the Company.
17. Related Party Transactions
IAS 24 ‘Related party disclosures’ requires the disclosure of the details of material transactions between the Company and any related
parties. Accordingly, the disclosures required are set out below:
Directors – The remuneration of the Directors is set out in the Directors’ Remuneration Report on page 43. There were no contracts
subsisting during or at the end of the year in which a Director of the Company is or was interested and which are or were significant in
relation to the Company’s business. There were no other material transactions during the year with the Directors of the Company.
AIFM and Investment Manager – Details of the contract including the remuneration due to the AIFM and Investment Manager are detailed
in Note 4 on page 61.
Terry Smith, the Managing Partner at Fundsmith LLP, the Company’s AIFM and Investment Manager holds 580,000 shares in the Company
(2017: 530,000) amounting to 2.2% (2017: 2.1%) of the Company’s issued share capital as at the date of this report.
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Shareholder Information
Further Information
Financial Calendar
31 December
Financial Year End
March
May
30 June
Final Results Announced
Annual General Meeting
Half Year End
July/August
Half Year End Results Announced
73
Annual General Meeting
The Annual General Meeting of Fundsmith Emerging Equities Trust plc will be held at Barber-Surgeons’ Hall, Monkwell Square,
Wood Street, London EC2Y 5BL on Wednesday, 22 May 2019 at 1.00 p.m.
Share Price
The Company’s Ordinary Shares are listed on the London Stock Exchange under ‘Investment Companies’. The price is given daily in the
Financial Times and other newspapers.
Change of Address
Communications with shareholders are mailed to the address held on the share register. In the event of a change of address or other
amendment this should be notified to the Company’s Registrar, Link Asset Services, under the signature of the registered holder.
Daily Net Asset Value
The daily net asset value of the Company’s shares can be obtained on the Company’s website at www.feetplc.co.uk and is published daily
via the London Stock Exchange.
Profile of the Company’s Ownership
% of Ordinary Shares held at
31 December 2018
31 December 2017
● Retail 80.3%
● Corporate 11.8%
● Banks 4.0%
● Pension Funds 1.5%
● Investment Companies 2.4%
● Retail 70.9%
● Corporate 19.4%
● Banks 6.9%
● Pension Funds 1.9%
● Investment Companies 0.9%
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Alternative Investment Fund Managers Directive Disclosures (Unaudited)
Further Information
Fundsmith LLP (“Fundsmith”) and the Company are required to make certain disclosures available to investors in accordance with the
Alternative Investment Fund Managers Directive (“AIFMD”). Those disclosures that are required to be made pre-investment are included
within an Investor Disclosure Document (“IDD”) which can be found on the Company’s website www.feetplc.co.uk.
The periodic disclosures to investors are made below:
• information on the investment strategy, geographic and sector investment focus and principal stock exposures are included in the
Strategic Report.
• None of the Company’s assets are subject to special arrangements arising from their illiquid nature.
• The Strategic Report and note 15 to the financial statements set out the risk profile and risk management systems in place. There
have been no changes to the risk management systems in place in the year under review and no breaches of any of the risk limits set,
with no breach expected.
• There are no new arrangements for managing the liquidity of the Company or any material changes to the liquidity management
systems and procedures employed by Fundsmith.
Leverage
For the purposes of the Alternative Investment Fund Managers (AIFM) Directive, leverage is any method which increases the Company’s
exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company’s exposure and its
net asset value and can be calculated on a Gross and a Commitment method. Under the Gross method, exposure represents the sum of
the Company’s positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements.
Under the Commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and
netting positions are offset against each other.
The table below sets out the current maximum permitted limit and actual level of leverages for the Company:
Maximum level of leverage
Actual level at 31 December 2018
As a percentage of assets
Gross
method
Commitment
method
115%
Nil
115%
Nil
There have been no breaches of the maximum level during the year and no changes to the maximum level of leverage employed by the
Company. There is no right of re-use of collateral or any guarantees granted under the leveraging arrangement.
Changes to the information contained either within this Annual Report or the IDD in relation to any special arrangements in place, the
maximum level of leverage which Fundsmith may employ on behalf of the Company, the right of use of collateral or any guarantee granted
under any leveraging arrangement, or any change to the position in relation to any discharge or liability by the Depositary will be notified
via a regulatory news service without undue delay in accordance with the AIFMD.
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Remuneration Disclosure
During the year ending 31 March 2018, Fundsmith LLP (‘Fundsmith’) had 22 members of personnel in total, including employees and
Partners. The total amount of remuneration paid to Fundsmith personnel during this period was £26,543,498. Out of this figure, the total
amount of remuneration paid to the Partners of Fundsmith LLP was £20,957,629 whilst the total amount of remuneration paid to the
employees of Fundsmith LLP was £5,585,869.
Of the £5,585,869 paid to Fundsmith employees, £3,860,000 was variable remuneration and £1,725,869 was fixed remuneration.
The partners of Fundsmith LLP are not paid a bonus. All of their remuneration is fixed as it is based on a fixed proportion of Fundsmith
LLP’s net profits.
Explanatory Note
Fundsmith LLP is required to make this remuneration disclosure to the Company’s investors in accordance with the Alternative Investment
Fund Managers Directive (AIFMD).
The financial year of the Company runs from 1 January to 31 December, whereas the financial year of Fundsmith LLP runs from 1 April to
31 March. The above figures are taken from the financial report and accounts of Fundsmith LLP for the period 1 April 2017 to 31 March
2018. These figures have been independently audited and filed with Companies House
The rules require Fundsmith to disclose both the amount of remuneration paid in total, and the amount paid to “Code Staff” (broadly,
senior management and/or risk takers). Fundsmith’s only Code Staff are the Partners.
The information above relates to Fundsmith LLP as a whole, and it has not been broken down by reference to the Company or the other
funds that Fundsmith manages. Nor has the proportion of remuneration which relates to the income Fundsmith earns from their
management of the Company been shown. Fundsmith has not provided such a breakdown because this does not reflect the way they work
or the way Fundsmith is organised. All of the Partners and most of the employees are involved in the management of the Company.
The Company represents approximately 1.8% of Fundsmith’s total funds under management.
Statement on the Alternative Investment Fund Managers Remuneration Code
The Company is classified as an Alternative Investment Fund (AIF) in accordance with the Alternative Investment Fund Managers Directive
(AIFMD). Fundsmith LLP is duly authorised as an Alternative Investment Fund Manager (AIFM) for the purpose of managing the Company.
As an authorised AIFM, Fundsmith LLP must adhere to the AIFM Remuneration Code.
The AIFM Remuneration Code contains a set of principles, which are designed to ensure that AIFMs reward their personnel in a way which
promotes sound and effective risk management, which does not encourage risk-taking, which supports the objectives and strategy of any
AIFs it manages, and which supports the alignment of interest between the AIFM, its personnel and any AIFs it manages (where this
alignment extends to the AIF’s investors).
Remuneration at Fundsmith LLP is deliberately straightforward. The employees are paid a competitive salary. At the end of each year, the
employees’ performance is reviewed by the Partners in order to determine whether or not a bonus should be paid. All bonus decisions are
agreed unanimously by the Partners.
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Alternative Investment Fund Managers Directive Disclosures (Unaudited)
Further Information
The Partners are each paid a fixed proportion of Fundsmith LLP’s net profits. They consider that this is the best way to ensure that the
Partners’ interests are completely aligned with their investors’ interests over the long-term. This alignment of interest is reinforced by the
fact that Fundsmith personnel have invested approximately £8,000,000 in the Company. They have a clear and direct interest in the long-
term success of the Company.
Any investor who would like more information on how Fundsmith adheres to the Principles of the Remuneration Code may request a
summary of our Remuneration Policy.
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Glossary of Terms
77
Alternative Investment Fund Managers Directive (“AIFMD”)
Agreed by the European Parliament and the Council of the European Union and transposed into UK legislation, the AIFMD classifies certain
investment vehicles, including investment companies, as Alternative Investment Funds (“AIFs”) and requires them to appoint an Alternative
Investment Fund Manager (“AIFMD”) and depositary to manage and oversee the operations of the investment vehicle. The Board of the
Company retains responsibility for strategy, operations and compliance and the Directors retain a fiduciary duty to shareholders.
Discount or Premium
A description of the difference between the share price and the net asset value per share. The size of the discount or premium is calculated
by subtracting the net asset value per share from the price per share and is usually expressed as a percentage (%) of the net asset value
per share. If the share price is higher than the net asset value per share the result is a premium. If the share price is lower than the net
asset value per share, the shares are trading at a discount.
Earnings Per Share (“EPS”)
The proportion of a Company’s profit allocated to each ordinary share.
Gearing
In simple terms gearing is borrowing. An investment trust can borrow money to invest in additional investments for its portfolio. The effect
of the borrowing on the shareholders’ assets is called ‘gearing’. If the Company’s assets grow shareholders’ assets grow proportionately
more because the debt remains the same. But if the value of the Company’s assets falls, the situation is reversed. Gearing can therefore
enhance performance in rising markets but can adversely impact performance in falling markets.
Gearing represents borrowings at par less cash and cash equivalents expressed as a percentage of shareholders’ funds.
Potential gearing is the company’s borrowings expressed as a percentage of shareholders’ funds.
Leverage
For the purposes of the Alternative Investment Fund Managers (AIFM) Directive, leverage is any method which increases the Company’s
exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company’s exposure and its
net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of
the Company’s positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements.
Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and
netting positions are offset against each other.
Net Asset Value (“NAV”) Per Share
The value of the Company’s assets, principally investments made in other companies and cash being held, minus any liabilities. The NAV
is also described as ‘shareholders’ funds’ per share. The NAV is often expressed in pence per share after being divided by the number of
shares which have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the Company’s
shares can be bought or sold by an investor. The share price is determined by the relationship between the demand and supply of the
shares.
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Glossary of Terms
Further Information
NAV Total Return
The theoretical total return on shareholders’ funds per share, including an assumed £100 original investment at the beginning of the
period specified, reflecting the change in NAV assuming that dividends paid to shareholders were reinvested at NAV at the time the shares
were quoted ex-dividend. A way of measuring investment management performance of investment trusts which is not affected by
movements in the share price discount/premium.
Neutral Free Cash Flow (“NFCF”)
An entity has neutral free cash flow if its expenses equal its income.
Ongoing Charges
Ongoing charges are calculated by taking the Company’s annualised operating expenses, and expressing them as a percentage of the
average daily net asset value of the Company over the year. The costs of buying and selling investments are excluded, as are interest costs,
taxation, costs of buying back or issuing shares and other non-recurring costs. These items are excluded because if included, they could
distort the understanding of the Company’s performance for the year and the comparability between periods.
Operating expenses
One off expense write offs
Average net assets during the year
Ongoing charges
31 Dec
2018
£’000
5,052
(291)
312,711
1.52%
31 Dec
2017
£’000
4,531
–
274,654
1.65%
Return on Capital Employed (“ROCE”)
A financial ratio that measures a company’s profitability and the efficiency with which its capital is employed. It is calculated as Earnings
Before Interest and Tax (EBIT)/Capital Employed.
Share Price Total Return
The return to the investor on mid-market prices assuming that all dividends paid were reinvested.
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How to Invest
79
Investment Platforms
The Company’s shares are traded openly on the London Stock Exchange and can be purchased through a stockbroker or other financial
intermediary. The shares are available through savings plans (including Investment Dealing Accounts, ISAs, Junior ISAs and SIPPs) which
facilitate both regular monthly investments and lump sum investments in the Company’s shares. There are a number of investment
platforms that offer these facilities. A list of some of them, that is not comprehensive nor constitutes any form of recommendation, can be
found below:
AJ Bell Youinvest http://www.youinvest.co.uk/
Alliance Trust Savings http://www.alliancetrustsavings.co.uk/
Barclays Stockbrokers https://www.barclays.co.uk/smart-investor/
Bestinvest http://www.bestinvest.co.uk/
Charles Stanley Direct https://www.charles-stanley-direct.co.uk/
Club Finance http://www.clubfinance.co.uk/
FundsDirect http://www.fundsdirect.co.uk
Halifax Share Dealing http://www.halifax.co.uk/Sharedealing/
Hargreaves Lansdown http://www.hl.co.uk/
HSBC https://hsbc.co.uk/investments/
iDealing http://www.idealing.com/
Interactive Investor http://www.ii.co.uk/
IWEB http://www.iweb-sharedealing.co.uk/share-dealing-home.asp
Saga Share Direct https://www.sagasharedirect.co.uk/
Selftrade http://www.selftrade.co.uk/
The Share Centre https://www.share.com/
Saxo Capital Markets https://www.home.saxo/
Link Asset Services – Share Dealing Service
A quick and easy share dealing service is available to existing shareholders through the Company’s Registrar, Link Asset Services, to either
buy or sell shares. An online and telephone dealing facility provides an easy to access and simple to use service.
There is no need to pre-register and there are no complicated forms to fill in. The online and telephone dealing service allows you to trade
‘real time’ at a known price which will be given to you at the time you give your instruction.
To deal online or by telephone all you need is your surname, investor code, full postcode and your date of birth. Your investor code can be
found on your share certificate. Please have the appropriate documents to hand when you log on or call, as this information will be needed
before you can buy or sell shares.
For further information on this service please contact: www.linksharedeal.com (online dealing) or 0371 664 0445† (telephone dealing).
† Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom are charged at the applicable
International rate. Lines are open from 8.00 a.m. to 4.30 p.m. Monday to Friday excluding public holidays in England and Wales.
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How to Invest
Further Information
Risk Warnings
• Past performance is no guarantee of future performance.
• The value of your investment and any income from it may go down as well as up and you may not get back the amount invested. This
is because the share price is determined, in part, by the changing conditions in the relevant stock markets in which the Company
invests and by the supply and demand for the Company’s shares.
• As the shares in an investment trust are traded on a stock market, the share price will fluctuate in accordance with supply and demand
and may not reflect the underlying net asset value of the shares; where the share price is less than the underlying value of the assets,
the difference is known as the ‘discount’. For these reasons, investors may not get back the original amount invested.
• Although the Company’s financial statements are denominated in sterling, most of the holdings in the portfolio are currently
denominated in currencies other than sterling and therefore they may be affected by movements in exchange rates. As a result, the
value of your investment may rise or fall with movements in exchange rates.
• Investors should note that tax rates and reliefs may change at any time in the future.
• The value of ISA and Junior ISA tax advantages will depend on personal circumstances. The favourable tax treatment of ISAs and
Junior ISAs may not be maintained.
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Notice of the Annual General Meeting
81
Notice is hereby given that the Annual General Meeting of Fundsmith Emerging Equities Trust plc will be held at Barber-Surgeons’ Hall,
Monkwell Square, Wood Street, London EC2Y 5BL on Wednesday, 22 May 2019 at 1.00 p.m. for the following purposes:
Ordinary Business
To consider and, if thought fit, pass the following as ordinary resolutions:
1. To receive and, if thought fit, to accept the Annual Report for the year ended 31 December 2018.
2. To approve the payment of a final dividend of 2 pence per ordinary share for the year ended 31 December 2018.
3. To re-elect Martin Bralsford as a Director of the Company.
4. To re-elect David Potter as a Director of the Company.
5. To re-elect John Spencer as a Director of the Company.
6. To elect Rachel de Gruchy as a Director of the Company.
7. To approve the Directors’ Remuneration Report for the year ended 31 December 2018.
8. To re-appoint Deloitte LLP as Auditor to the Company and to authorise the Audit Committee to determine their remuneration.
Special Business
To consider and, if thought fit, pass the following resolutions of which resolutions 10, 11, 12 and 13 will be proposed as special resolutions:
Authority to Issue Shares
9. THAT, in substitution for all existing authorities, the Directors be and are hereby generally and unconditionally authorised in accordance
with Section 551 of the Companies Act 2006 (the “Act”) to exercise all powers of the Company to allot relevant securities (within the
meaning of section 551 of the Act) up to a maximum aggregate nominal amount of £26,590.05 (being 10% of the issued share capital
of the Company at the date of the notice convening the meeting at which this resolution is proposed) and representing 2,659,005
shares of 1 penny each, provided that this authority shall (a) only be used to issue new shares for a price (after taking into account
the costs of issue) which represents a premium to the Company’s latest cum-income net asset value per share (as announced through
a regulatory information service) and (b) expire at the conclusion of the Annual General Meeting of the Company to be held in 2020
or 15 months from the date of passing this resolution, whichever is the earlier, unless previously revoked, varied or renewed, by the
Company in general meeting and provided that the Company shall be entitled to make, prior to the expiry of such authority, an offer
or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant
securities pursuant to such offer or agreement as if the authority conferred hereby had not expired.
Disapplication of Pre-emption Rights
10. THAT, in substitution of all existing powers, the Directors be and are hereby generally empowered pursuant to sections 570 and 573
of the Companies Act 2006 (the “Act”) to allot equity securities (within the meaning of section 560 of the Act) for cash pursuant to the
authority conferred on them by resolution 9 set out in the notice convening the Annual General Meeting at which this resolution is
proposed or otherwise as if section 561(1) of the Act did not apply to any such allotment and to sell relevant shares (within the meaning
of section 560 of the Act) for cash as if section 561(1) of the Act did not apply to any such sale, provided that this power shall be
limited to the allotment of equity securities pursuant to:
(a) an offer of equity securities open for acceptance for a period fixed by the Directors where the equity securities respectively
attributable to the interests of holders of shares of 1 penny each in the Company (“Shares”) are proportionate (as nearly as may
be) to the respective numbers of Shares held by them but subject to such exclusions or other arrangements in connection with
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Notice of the Annual General Meeting
Further Information
the issue as the Directors may consider necessary, appropriate, or expedient to deal with equity securities representing fractional
entitlements or to deal with legal or practical problems arising in any overseas territory, the requirements of any regulatory body
or stock exchange, or any other matter whatsoever; and
(b)
(otherwise than pursuant to sub-paragraph (a) above) an offer or offers of equity securities of up to an aggregate nominal value
of £26,590.05;
and expires at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution or 15 months
from the date of passing this resolution, whichever is the earlier, unless previously revoked, varied or renewed by the Company in
general meeting and provided that the Company shall be entitled to make, prior to the expiry of such authority, an offer or agreement
which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities pursuant
to such offer or agreement as if the power conferred hereby had not expired.
Treasury Shares
11. THAT in substitution of all existing powers (but in addition to any power conferred on them by resolution 10 set out in the Notice of
Annual General Meeting) the Directors be and are hereby generally empowered pursuant to Section 570 of the Companies Act 2006
(the “Act”) to sell relevant shares (within the meaning of Section 560 of the Act) if, immediately before the sale, such shares are held
by the Company as treasury shares (as defined in Section 724 of the Act (“Treasury Shares”)), for cash as if Section 561(1) of the Act
did not apply to any such sale provided that:
(a) where any Treasury Shares are sold pursuant to this power at a discount to the then prevailing net asset value of ordinary shares
of 1p each in the Company (“Shares”), such discount must be (i) lower than the discount to the net asset value per Share at
which the Company acquired the Shares which it then holds in treasury and (ii) not greater than 5% to the last published net
asset value per Share at the time of such sale (and for this purpose the Directors shall be entitled to determine in their reasonable
discretion the discount to the net asset value at which such Shares were acquired by the Company and the net asset value per
Share at the time such Shares are sold pursuant to this power); and
(b)
this power shall be limited to the sale of relevant shares having an aggregate nominal value of £26,590.05, being 10% of the
issued share capital of the Company as at the date of this Notice of Annual General Meeting and representing 2,659,005 Shares,
and provided further that the number of relevant shares to which power applies shall be reduced from time to time by the number
of Shares which are allotted for cash as if Section 561(1) of the Act did not apply pursuant to the power conferred on the Directors
by resolution 10 set out in the Notice of Annual General Meeting;
and such power shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution
or 15 months from the date of passing this resolution, whichever is earlier, unless previously revoked, varied or renewed by the Company
in general meeting and provided that the Company shall be entitled to make, prior to the expiry of such authority, an offer or agreement
which would or might otherwise require treasury shares to be sold after such expiry and the Directors may sell Treasury Shares pursuant
to such offer or agreement as if the power conferred hereby had not expired.
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Authority to Repurchase Ordinary Shares
12. THAT the Company be and is hereby generally and unconditionally authorised in accordance with section 701 of the Companies Act 2006
(the “Act”) to make one or more market purchases (within the meaning of section 693(4) of the Act) of ordinary shares of 1 penny
each in the capital of the Company (“Shares”) (either for retention as Treasury Shares for future reissue, resale, transfer or cancellation)
provided that:
(a)
the maximum aggregate number of Shares authorised to be purchased is 3,985,849 (representing approximately 14.99% of the
issued share capital of the Company at the date of the notice convening the meeting at which this resolution is proposed);
(b)
the minimum price (exclusive of expenses) which may be paid for a Share is 1 penny;
(c)
(d)
(e)
the maximum price (exclusive of expenses) which may be paid for a Share is an amount equal to the greater of (i) 105% of the
average of the middle market quotations for a Share as derived from the Daily Official List of the London Stock Exchange for the
five business days immediately preceding the day on which that Share is purchased and (ii) the higher of the price of the last
independent trade in shares and the highest then current independent bid for shares on the London Stock Exchange;
the authority hereby conferred shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2020
or, if earlier, on the expiry of 15 months from the date of the passing of this resolution unless such authority is renewed prior to
such time; and
the Company may make a contract to purchase Shares under this authority before the expiry of such authority which will or may
be executed wholly or partly after the expiration of such authority, and may make a purchase of Shares in pursuance of any such
contract.
General Meetings
13. THAT the Directors be authorised to call general meetings (other than annual general meetings) on not less than 14 clear days’ notice,
such authority to expire at the conclusion of the next Annual General Meeting of the Company or, if earlier, until expiry of 15 months
from the date of the passing of this resolution.
By order of the Board
Registered office:
33 Cavendish Square
London W1G 0PW
Frostrow Capital LLP
Company Secretary
21 March 2019
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Notice of the Annual General Meeting
Further Information
Notes
1. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting. A shareholder
may appoint more than one proxy in relation to the meeting provided that each proxy is appointed to exercise the rights attached to a different share
or shares held by that shareholder. A proxy need not be a shareholder of the Company.
2. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolutions. If no voting
indication is given, a proxy may vote or abstain from voting at his/her discretion. A proxy may vote (or abstain from voting) as he or she thinks fit in
relation to any other matter which is put before the meeting.
3. This year, hard copy forms of proxy have not been included with this notice. Members can vote by: logging onto www.myfeetshares.co.uk and following
instructions; requesting a hard copy form of proxy directly from the registrars, Link Asset Services at enquires@linkgroup.co.uk or in the case of CREST
members, utilising the CREST electronic proxy appointment service in accordance with the procedures set out below. To be valid any appointment of
a proxy must be completed, signed and received at Link Asset Services, PXS1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF no later than 1.00 p.m.
on 20 May 2019.
4. In the case of a member which is a company, the instrument appointing a proxy must be executed under its seal or signed on its behalf by a duly
authorised officer or attorney or other person authorised to sign. Any power of attorney or other authority under which the instrument is signed (or a
certified copy of it) must be included with the instrument.
5. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction (as described below) will not prevent a shareholder
attending the meeting and voting in person if he/she wishes to do so.
6. Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 to enjoy information rights (a
“Nominated Person”) may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed
(or have someone else appointed) as a proxy for the meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise
it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights.
7. The statement of the rights of shareholders in relation to the appointment of proxies in paragraphs 1 and 3 above does not apply to Nominated Persons.
The rights described in these paragraphs can only be exercised by shareholders of the Company.
8. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, only shareholders registered on the register of members of the Company
(the “Register of Members”) at close of business on 20 May 2019 (or, in the event of any adjournment, on the date which is two days before the time
of the adjourned meeting) will be entitled to attend and vote or be represented at the meeting in respect of shares registered in their name at that
time. Changes to the Register of Members after that time will be disregarded in determining the rights of any person to attend and vote at the meeting.
9. As at 20 March 2019 (being the last business day prior to the publication of this notice) the Company’s issued share capital consists of
26,590,056 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 20 March 2019 are 26,590,056.
10. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures
described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a
service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
11. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”)
must be properly authenticated in accordance with the specifications of Euroclear UK and Ireland Limited (“CRESTCo”), and must contain the information
required for such instruction, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is
an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s
agent (ID RA10) no later than 48 hours before the time appointed for holding the meeting. For this purpose, the time of receipt will be taken to be the
time (as determined by the timestamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the
message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should
be communicated to the appointee through other means.
12. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that CRESTCo does not make available special
procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored
member, or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be
necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and,
where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning
practical limitations of the CREST system and timings.
13. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities
Regulations 2001.
14. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior
holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Register of Members in respect of
the joint holding (the first named being the most senior).
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15. Members who wish to change their proxy instructions should submit a new proxy appointment using the methods set out above. Note that the cut-off
time for receipt of proxy appointments (see above) also applies in relation to amended instructions; any amended proxy appointment received after
the relevant cut-off time will be disregarded.
16. Members who have appointed a proxy using a hard-copy proxy form and who wish to change the instructions using another hard-copy form, should
contact Link Asset Services on 0871 664 0300 (calls cost 12p per minute plus your phone company’s access charge. Calls outside the United Kingdom
will be charged at the applicable international rate). Lines are open 9.00 a.m. to 5.30 p.m. Monday to Friday excluding public holidays in England and
Wales.
17. If a member submits more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take
precedence.
18. In order to revoke a proxy instruction, members will need to inform the Company. Members should send a signed hard copy notice clearly stating their
intention to revoke a proxy appointment to Link Asset Services, PXS1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF.
19. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of
the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified
copy of such power of attorney) must be included with the revocation notice. If a member attempts to revoke their proxy appointment but the revocation
is received after the time for receipt of proxy appointments (see above) then, subject to paragraph 4, the proxy appointment will remain valid.
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Notice of the Annual General Meeting
Further Information
LOCAT ION OF T HE AN NUAL G ENER A L ME ET IN G
Barber-Surgeons’ Hall, Monkwell Square, Wood Street, London EC2Y 5BL
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Explanatory Notes to the Resolutions
87
Resolution 1 – To receive the Annual Report and Financial Statements
The Annual Report for the year ended 31 December 2018 will be presented to the Annual General Meeting. The financial statements
accompanied this Notice of Meeting and shareholders will be given an opportunity at the meeting to ask questions.
Resolution 2 – To approve a Final Dividend
The rationale for the payment of a final dividend is set out in the Chairman’s Statement on page 6 and in the Report of the Directors on
page 35.
Resolutions 3 to 6 – Election and Re-Election of Directors
Resolutions 3 to 6 deal with the re-election or election of each Director. Biographies of each of the Directors can be found on page 28 of
this Annual Report.
The Chairman has confirmed, following a performance review, that all the Directors continue to perform effectively.
Resolution 7 – Remuneration Report
The Directors’ Remuneration Report is set out in full in this annual report on pages 43 to 44.
Resolution 8 – Re-Appointment of Auditor and the determination of their remuneration
Resolution 8 relates to the re-appointment of Deloitte LLP as the Company’s independent Auditor to hold office until the next Annual
General Meeting of the Company and also authorises the Audit Committee to set their remuneration.
Resolutions 9 and 10 – Issue of Shares
Ordinary Resolution 9 in the Notice of Annual General Meeting will renew the authority to allot unissued share capital up to an aggregate
nominal amount of £26,590.05 (equivalent to 2,659,005 shares, or 10% of the Company’s existing issued share capital on 20 March 2019,
being the nearest practicable date prior to the signing of this Annual Report). Such authority will expire on the date of the next Annual
General Meeting or after a period of 15 months from the date of the passing of the resolution, whichever is earlier. This means that the
authority will have to be renewed at the next Annual General Meeting unless previously renewed.
When shares are to be allotted for cash, Section 551 of the Companies Act 2006 (the “Act”) provides that existing shareholders have pre-
emption rights and that the new shares must be offered first to such shareholders in proportion to their existing holding of shares. However,
shareholders can, by special resolution, authorise the Directors to allot shares otherwise than by a pro rata issue to existing shareholders.
Special Resolution 10 will, if passed, give the Directors power to allot for cash equity securities up to 10% of the Company’s existing share
capital on 20 March 2019, as if Section 551 of the Act does not apply. This is the same nominal amount of share capital which the Directors
are seeking the authority to allot pursuant to Resolution 9. This authority will also expire on the date of the next Annual General Meeting
or after a period of 15 months, whichever is earlier. This authority will not be used in connection with a rights issue by the Company.
The Directors intend to use the authority given by Resolutions 9 and 10 to allot shares and disapply pre-emption rights only in circumstances
where this will be clearly beneficial to shareholders as a whole. The issue proceeds would be available for investment in line with the
Company’s investment policy. No issue of shares will be made which would effectively alter the control of the Company without the prior
approval of shareholders in general meeting.
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Explanatory Notes to the Resolutions
Further Information
Resolution 11 – Treasury Shares
Under Section 724 of the Companies Act 2006 (“s724”) the Company is permitted to buy back and hold shares in treasury and then sell
them at a later date for cash, rather than cancelling them. It is a requirement of s724 that such sale be on a pre-emptive, pro rata, basis
to existing shareholders unless shareholders agree by special resolution to disapply such pre-emption rights. Accordingly, in addition to
giving the Directors power to allot unissued share capital on a non pre-emptive basis pursuant to Resolution 10, Special Resolution 11,
if passed, will give the Directors authority to sell shares held in treasury on a non pre-emptive basis. The benefit of the ability to hold
treasury shares is that such shares may be resold. This should give the Company greater flexibility in managing its share capital, and
improve liquidity in its shares. Any re-sale of treasury shares would only take place at a narrower discount to the net asset value per share
than that at which they had been bought into treasury, and in any event at a discount no greater than 5% to the prevailing net asset value
per share, and this is reflected in the text of Resolution 11. It is also the intention of the Board that sales from treasury would only take
place when the Board believes that to do so would assist in the provision of liquidity to the market. The number of treasury shares which
may be sold pursuant to this authority is limited to 10% of the Company’s existing share capital as at the date of this report (reduced by
any equity securities allotted for cash on a non-pro rata basis pursuant to Resolution 10, as described above). This authority will also expire
on the date of the next Annual General Meeting or after a period of 15 months, whichever is earlier.
Resolution 12 – Share Repurchases
The principal aim of a share buy-back facility is to enhance shareholder value by acquiring shares at a discount to net asset value, as and
when the Directors consider this to be appropriate. The purchase of shares, when they are trading at a discount to net asset value per
share, should result in an increase in the net asset value per share for the remaining shareholders. This authority, if conferred, will only be
exercised if to do so would result in an increase in the net asset value per share for the remaining shareholders and if it is in the best
interests of shareholders generally. Any purchase of shares will be made within guidelines established from time to time by the Board.
Under the current Listing Rules, the maximum price that may be paid on the exercise of this authority must not exceed the higher of (i) 105%
of the average of the middle market quotations for the shares over the five business days immediately preceding the date of purchase and
(ii) the higher of the last independent trade and the highest current independent bid on the trading venue where the purchase is carried
out. The minimum price which may be paid is 1 penny per share.
Special Resolution 12 in the Notice of Annual General Meeting will renew the authority to purchase in the market a maximum of 14.99%
of shares in issue on 20 March 2019, being the nearest practicable date prior to the signing of this Annual Report, (amounting to
3,985,849 shares). Such authority will expire on the date of the next Annual General Meeting or after a period of 15 months from the date
of passing of the resolution, whichever is earlier. This means in effect that the authority will have to be renewed at the next Annual General
Meeting or earlier if the authority has been exhausted.
Resolution 13 – General Meetings
Special Resolution 13 seeks shareholder approval for the Company to hold General Meetings (other than the Annual General Meeting) at
14 clear days’ notice. The Company will only use this shorter notice period where it is merited by the purpose of the meeting and will
endeavour to give at least 14 working days’ notice if possible, in line with the recommendations of the UK Corporate Governance Code.
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Recommendation
The Board considers that the resolutions relating to the above items of special business are in the best interests of shareholders as a
whole. Accordingly, the Board unanimously recommends to shareholders that they vote in favour of the above resolutions to be proposed
at the forthcoming Annual General Meeting, as the Directors intend to do in respect of their own beneficial holdings totalling 121,511
shares.
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Further Information
Directors
Martin Bralsford, (Chairman)
Rachel de Gruchy
David Potter (Chairman of the Management Engagement
Committee and Senior Independent Director)
John Spencer (Chairman of the Audit Committee)
Registered Office
33 Cavendish Square
London W1G 0PW
Website
www.feetplc.co.uk
Company Registration Number
08756681 (Registered in England and Wales)
The Company is an investment company as defined under
Section 833 of the Companies Act 2006.
The Company was incorporated in the United Kingdom on
31 October 2013 as FEEIT plc
Investment Manager and AIFM
Fundsmith LLP
33 Cavendish Square
London W1G 0PW
Website: www.fundsmith.co.uk
Authorised and regulated by the Financial Conduct Authority.
Company Secretary
Frostrow Capital LLP
25 Southampton Buildings
London WC2A 1AL
Telephone: 0203 008 4910
E-Mail: info@frostrow.com
Website: www.frostrow.com
Authorised and regulated by the Financial Conduct Authority.
If you have an enquiry about the Company, please contact
Frostrow Capital using the stated e-mail address.
Administrator
Northern Trust Global Services Limited
50 Bank Street
Canary Wharf
London E14 5NT
Depositary
Northern Trust Global Services SE
50 Bank Street
Canary Wharf
London E14 5NT
Authorised by the Prudential Regulation Authority and regulated
by the Financial Conduct Authority and the Prudential Regulation
Authority.
Custodian and Banker
The Northern Trust Company
50 Bank Street
Canary Wharf
London E14 5NT
Independent Auditor
Deloitte LLP
Statutory Auditor
2 New Street Square
London EC4A 3B2
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Telephone (in UK): 0871 664 0300†
Telephone (from overseas): +44 (0)371 664 0300
E-Mail: enquiries@linkgroup.co.uk
Website: www.linkassetservices.com
Please contact the Registrars if you have a query about a
certificated holding in the Company’s shares.
†calls cost 12p per minute plus your phone company’s access charge and
may be recorded for training purposes. Calls outside the UK will be charged
at the applicable International rate. Lines are open from 9.00 a.m. to 5.30
p.m. Monday to Friday excluding public holidays in England and Wales.
Broker
Investec Bank plc
2 Gresham Street
London EC2V 7QP
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Solicitors
Travers Smith LLP
10 Snow Hill
London EC1A 2AL
Identification Codes
Shares:
SEDOL:
ISIN:
BLOOMBERG:
EPIC:
BLSNND1
GB00BLSNND18
FEET LN
FEET
Foreign Account Tax Companies Act
(“FATCA”)
32RSE8.99999.SL.826
Legal Entity Identifier
2138003EL6XV8JYU8V55
91
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2018
252772 Frostrow FEET Cover 6mm spine.qxp 25/03/2019 08:24 Page 2
Disability Act
Copies of this annual report and other documents issued by the Company are available from the Company Secretary. If needed, copies can be
made available in a variety of formats, including braille, audio tape or larger type as appropriate. You can contact the Registrar to the Company,
Link Registrars, which has installed telephones to allow speech and hearing impaired people who have their own telephone to contact them
directly, without the need for an intermediate operator, for this service please call 0800 731 1888. Specially trained operators are available during
normal business hours to answer queries via this service. Alternatively, if you prefer to go through a ‘typetalk’ operator (provided by RNID) you
should dial 18001 from your textphone followed by the number you wish to dial.
This report is printed on Revive 100% White Silk a totally recycled paper produced using 100% recycled waste at a mill that has been awarded the
ISO 14001 certificate for environmental management.
The pulp is bleached using a totally chlorine free (TCF) process.
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Annual Report
for the year ended 31 December 2018
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A member of the Association of Investment Companies
Fundsmith Emerging Equities Trust plc
33 Cavendish Square, London W1G 0PW
www.feetplc.co.uk
Perivan Financial Print 252772