Annual Report
for the year ended 31 December 2020
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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 260382
Contents
1
1
Strategic Report
2
3
5
9
10
12
27
30
Company Summary
Financial Highlights
Chairman’s Statement
Investment Objective and Policy
Investment Portfolio
Investment Manager’s Review
Investment Philosophy
Business Review
3
Financial Statements
59
67
68
69
70
71
Independent Auditor’s Report
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
2
Governance
36
38
47
51
Board of Directors
Corporate Governance Report
Report of the Directors
Statement of Directors’
Responsibilities
Audit Committee Report
Directors’ Remuneration Report
Directors’ Remuneration
Policy Report
52
56
58
4
Further Information
88
89
Shareholder Information
Alternative Investment Fund
Managers Directive Disclosures
Glossary of Terms
How to Invest
Notice of Annual General Meeting
92
95
97
103 Explanatory Notes
to the Resolutions
106 Company Information
108 Appendix
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
2
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.
*See Fundsmith’s Investment Philosophy beginning on page 27 for further information
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 2020 were
£388.5 million (2019: £323.1 million) and the market capitalisation
was £376.5 million (2019: £293.0 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 30.
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 13 to the financial statements on
page 82.
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.
Further details of the Company’s investment policy are set out in the Strategic Report on page 9.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Financial Highlights
3
Performance Summary
Net asset value per share - basic
Net asset value per share - diluted
Share price
Discount 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)*
Index† (total return)
As at
31 December 2020
As at
31 December 2019
1,460.2p
1,460.1p
1,415.0p
3.1%
1.3%
1,213.0p
1,213.0p
1,100.0p
9.3%
1.4%
For the year ended
31 December 2020
For the year ended
31 December 2019
+20.7%
+29.1%
+14.4%
-0.5%
-7.4%
+13.9%
*Alternative Performance Measure (see Glossary beginning on page 92)
1MSCI Emerging and Frontier Markets Index (measured on a net sterling adjusted basis)
Please refer to the Glossary on pages 92 to 94 for definitions of these terms and the basis of their calculation.
Performance over one year
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Share Price
NAV
MSCI Emerging + Frontier Markets Index
Source: MSCI/Bloomberg
Figures rebased to 1,000 as at 31 December 2019
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
4
Financial Highlights
Strategic Report
Performance since launch
)
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(
1600
1500
1400
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1200
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1000
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Share Price
NAV
Source: MSCI/Bloomberg
Five Year Record
Premium/
(discount)
of the
Net asset share price
Shareholders’ value to the net
funds per share – Share asset value
31 December £’000 basic price per share
2015 179,344 927.4p 955.0p 3.0%
2016 238,583 1039.0p 1055.5p 1.6%
2017 310,673 1259.7p 1314.0p 4.3%
2018 322,486 1222.0p 1190.0p (2.6)%
2019 323,143 1213.0p 1100.0p (9.3)%
2020 388,468 1460.2p 1415.0p (3.1)%
Dividend
per share
Ongoing
charges
N/A
N/A
N/A
2.0p
3.2p
2.0p
1.7%
1.7%
1.7%
1.5%
1.4%
1.3%
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Chairman’s Statement
5
“Demand for the Company’s shares led to the issue of a total of 1,727,500
Introduction
This is our seventh Annual Report which covers the year ended 31 December
new shares during the year, raising £21.5 million”
2020 and also the Company’s sixth full year.
analysis of the performance of the Company’s portfolio during the
year, in their report which begins on page 12.
Capital Structure
I mentioned in my statement last year, the Board’s desire that the
Company’s shares would not trade at a price which, on average,
represented a discount that was out of line with the Company’s peer
group (the AIC Global Emerging Markets Sector). The Board
monitored the position very closely and took note of the varying
views of the Company’s long-term shareholders during the year. As
part of the Board’s discount management strategy, the Company
repurchased a total of 35,684 shares to be held in treasury at a
total cost of £455,000. The Board and its advisers continue to
monitor the discount closely and the Company will make further
purchases of shares if the Board deems it to be appropriate. No new
shares were issued during the year.
As at 31 December 2020, the Company had 26,604,372 shares of
1p each in issue excluding the shares held in treasury (2019:
26,640,056 – no shares held in treasury).
At the last Annual General Meeting in May 2020, shareholders
granted the Board authority to repurchase up to 14.99% of the
Company’s issued share capital. The Board will ask for the same
authority again at the forthcoming Annual General Meeting.
Performance
I am pleased to report both strong absolute and relative
performance for the Year. The Company’s net asset value (NAV) per
share total return* for the Year was +20.7% (2019: -0.5%) and the
share price total return* was +29.1% (2019: -7.4%), both
significantly outperforming the Emerging and Frontier Markets
Index, measured on a total return, net sterling adjusted basis, which
rose by 14.4% over the same period (2019: +13.9%). I am also
pleased that partly as a result of the strong share price
performance, the discount* of the Company’s share price to the
NAV per share narrowed to end the Year at 3.1% (2019: 9.3%)
* Alternative Performance Measure
Dividend
In addition,
The investee company portfolio benefitted from its holdings in
businesses that demonstrated a high level of resilience in the
the portfolio’s greater
COVID-19 pandemic.
concentration, a reduced weighting
listed multinational
in
subsidiaries, its underweight exposure to frontier markets and its
higher weighting to healthcare and technology sectors were all key
drivers of performance. Nevertheless the compound annual return
of 6.1% since inception remains below our aspiration. Fundsmith LLP
(‘Fundsmith’), our Investment Manager, provides a comprehensive
The Company made a small revenue profit during the year and, as
a result, the Board recommends to shareholders the payment of a
dividend which both allows the Company to comply with the
investment trust rules regarding distributable income and is also of
a meaningful size for shareholders.
Subject to shareholder approval at the forthcoming Annual General
Meeting, a final dividend of 2.0p per share (2019: 3.2p) will be paid
on 3 June 2021 to shareholders on the register on 16 April 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
6
Chairman’s Statement
Strategic Report
“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.”
(2019: 3.2p per share). The associated ex-dividend date will be
15 April 2021.
The Company’s principal objective remains to provide shareholder
returns through capital growth in its investments rather than income
and the Board is maintaining its current policy to pay only those
dividends required to maintain UK investment trust status. Subject
to the investment trust rules, any dividends and distributions will
continue to be at the discretion of the Board from time to time.
Board Renewal
launch,
the Company’s
The Board continues to be conscious of the need to refresh its own
membership over the medium term. I am delighted that Professor
Heather McGregor, CBE, will be joining the Board at the conclusion
of this year’s Annual General Meeting. Professor McGregor, a
shareholder since
financial
communications specialist, and has been Executive Dean of
Edinburgh Business School, Heriot Watt University since 2016. The
Board believes that her experience in journalism will offer a different
and unique perspective to the Board and will provide an important
contribution to the challenge needed to support good decision
making. Professor McGregor’s appointment will be proposed to
shareholders for election at the Annual General Meeting of the
Company to be held in May 2022.
is a
In accordance with the Board’s policy and the AIC Code of Corporate
Governance, all current Directors will be standing for re-election at
the forthcoming Annual General Meeting. You will find the
appropriate resolutions in the Notice of the Annual General Meeting
and a summary of the contribution each Director makes to the
Board and the Company in the explanatory notes.
Continuation Vote
Shareholders may be aware of the requirement that the Directors
may, but are not required by the Company’s constitutional
documents to, call a continuation vote in the event that, after the
end of the fourth financial year of the Company’s existence (being
31 December 2018), the Company’s shares have traded at an
average discount in excess of 10% of the Net Asset Value per share
in a relevant year. The Board has considered this matter at length
and, while the Company’s shares traded at an average discount of
12.3% during the Year, it believes that such a vote should not be
put before shareholders this year. This is due to the recent narrower
level of discount of 6.5% (as at 30 March 2021), recent strong NAV
performance together with the positive outlook for the sector. The
Board will continue to keep this under close review on an
annual basis.
Proposed Amendments to the Company’s
Investment Objective and Policy
The economies of the countries in which the Company can invest
have shown significant development over the period of almost
seven years since the Company was launched. This has created new
investment opportunities in sectors which lie near the boundaries
of our current investment remit. The Company’s investment
management team has identified a modest, albeit increasing,
number of businesses which have the superior financial
characteristics shared by our current portfolio holdings but in which
our existing Investment Objective and Policy do not formally allow
us to invest.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
7
We are therefore proposing to shareholders a change in the
Company’s Investment Objective, for the first time since launch, to
allow our Investment Manager to act on these opportunities. We
propose that the Company’s current Investment Objective:
“To invest in 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” is broadened by adding
at the end “or to the broader social and/or economic development
of those countries”.
Our Investment Manager believes that adopting this change will
result in the short term in an increase in the Company’s investable
universe by only around half a dozen stocks given the additional
rigorous qualitative criteria which it applies as part of its investment
process; but importantly the amendment will provide our Investment
Manager with a broader range of potential investments over time
as countries and their economic infrastructures develop.
Alongside this we are proposing a change to the Company’s
Investment Policy to reduce the expected number of investments in
the portfolio to a range of 25 to 40 stocks, from the current 35 to
55 stocks. This move towards a slightly more concentrated portfolio,
with the Company holding the stocks in which it has the highest level
of conviction, will still allow for the investment and management of
assets in a way which is consistent with the objective of spreading
investment risk.
The amended Investment Objective and Policy will apply, subject to
shareholder approval (which is required by the Listing Rules as these
changes are considered material), with effect from the Company’s
Annual General Meeting to be held on Wednesday, 26 May 2021;
the FCA has already approved these proposed changes. Full details
of the proposed amendments are set out in the appendix on page
108 of this Annual Report. The Board unanimously recommends that
shareholders vote in favour of this resolution.
Outlook
The outlook for Emerging Markets looks to be positive albeit with
considerable uncertainty; there has been a strong recovery since
the lows in March and the roll-out of an effective vaccine against
Covid-19 should help restore the sector’s positive consumer and
export characteristics. Whilst the pace of the recovery will vary
across the markets, our Investment Manager believes that sectors
such as technology and healthcare will continue to be beneficiaries
of the changed consumer behaviour in the wake of the pandemic.
We continue to remain optimistic on the longer-term outlook for
Emerging Markets and believe that the Company continues to offer
investors exposure to some of the best companies available in the
sector. The Board further believes that the long-term investor will
be well rewarded.
Annual General Meeting (AGM)
The Company’s AGM will be held at noon on Wednesday, 26 May 2021
at 33 Cavendish Square, London W1G 0PW. In view of the continuing
Covid-19 related restrictions attendance will be kept to the minimum
permitted by the Company’s Articles of Association and shareholders
will not be able to attend. I would remind shareholders that they are
able to submit proxy voting forms before the applicable deadline and
also to direct any questions or comments for the Board in advance of
the meeting through our Company Secretary, Frostrow Capital at
info@frostrow.com. Shareholders who hold their shares directly can
vote online by visiting www.myfeetshares.co.uk and following
instructions. Any shareholders who require a hard copy form of proxy
may request one from the Registrar, Link Group. Shareholders who
hold their shares through an investment platform or a nominee will
need to contact them to enquire about voting arrangements. Given
shareholders and third parties will be unable to attend the AGM in
person, I strongly encourage shareholders to appoint the Chairman of
the AGM as their proxy to vote on their behalf.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
8
Chairman’s Statement
Strategic Report
“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.”
The votes on the resolutions to be proposed at the AGM will be
conducted on a poll. The results of the proxy votes will be published
immediately following the conclusion of the AGM by way of a stock
exchange announcement and on the Company’s website at
www.feetplc.co.uk.
Whilst there will be no live presentation from our Investment
Manager on the day of the AGM, they will record a presentation
the Company’s website
which will be available on
(www.feetplc.co.uk) shortly after the event.
The Board is committed to holding in person meetings in future
when restrictions are not in place and they can be held safely. The
Company is also proposing a resolution to shareholders at the
Company’s AGM to amend the Company’s Articles of Association to
enable a combination of virtual and in person shareholder meetings
to be held. The proposed changes will provide the Board with the
flexibility to hold virtual shareholder meetings in the future should
the need arise.
Martin Bralsford
Chairman
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Investment Objective and Policy
9
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.
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
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;
(ii) not more than 40% of the Company’s gross assets can be
invested in shares issued by companies domiciled in any single
jurisdiction. Where, as a result of investment performance, the
total value of the companies in a particular jurisdiction exceeds
40% 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
(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.
Proposed Amendments to the Company’s
Investment Objective and Policy
As noted in the Chairman’s Statement, a proposal is being put
forward at the Company’s Annual General Meeting to seek approval
from shareholders to make amendments to the Investment
Objective and Policy of the Company. The proposed amendments,
if approved, shall come into effect from 26 May 2021. The proposed
amendments are also described in the appendix on page 108.
*See Fundsmith’s Investment Philosophy beginning on page 27 for further information
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
10
Investment Portfolio
Strategic Report
Investments held as at 31 December 2020
Security Country of incorporation Fair value £’000
MercadoLibre Inc USA1 34,860
Foshan Haitian Flavouring China 31,002
Asian Paints Ltd India 19,164
Info Edge (India) Ltd India 18,325
Vitasoy International Holdings Ltd Hong Kong 17,090
Havells India Ltd India 14,714
Nestlé India Ltd India 14,292
Avenue Supermarts India 12,788
Hindustan Unilever Ltd India 12,660
Metropolis Healthcare Ltd India 12,251
% of investments
9.1
8.1
5.0
4.8
4.5
3.8
3.7
3.3
3.3
3.2
Top 10 Investments 187,146
48.8
Marico Ltd India 11,982
Dr Lal Pathlabs Ltd India 10,534
Vietnam Dairy Products JSC Vietnam 10,153
Philippine Seven Corp Philippines 9,484
Godrej Consumer Products Ltd India 9,435
Taiwan Semiconductor Manufacturing Taiwan 9,410
Tencent Holdings Cayman Islands2 8,807
Eris Lifesciences Ltd India 8,570
Integrated Diagnostics Holdings Plc Jersey3 8,563
Hypera SA Brazil 8,412
Top 20 Investments 282,496
Eastern Company S.A.E Egypt 7,829
Thyrocare Technologies Ltd India 7,669
XP Inc Brazil 7,344
Walmart De Mexico SAB de CV Mexico 7,153
BIM Birlesik Magazalar AS Turkey 6,939
Procter + Gamble Hygiene India 6,788
Dabur India Ltd India 6,780
Britannia Industries Ltd India 6,721
Clicks Group Ltd South Africa 6,642
Dali Foods Group Co Ltd Cayman Islands4 6,120
Top 30 Investments 352,481
Nestlé Nigeria Plc Nigeria 5,318
British American Tobacco Bangladesh 4,740
Ceylon Tobacco Co Plc Sri Lanka 4,388
East African Breweries Ltd Kenya 4,037
PT Prodia Widyahusada Tbk Indonesia 3,762
Lojas Renner Brazil 3,010
DP Eurasia NV Netherlands5 2,732
Edita Food Industries SAE Egypt 2,067
3.1
2.8
2.7
2.5
2.5
2.5
2.3
2.2
2.2
2.2
73.8
2.0
2.0
1.9
1.9
1.8
1.8
1.8
1.8
1.7
1.6
92.1
1.4
1.2
1.1
1.1
1.0
0.8
0.7
0.6
Total Investments (38) 382,535
100.0
1 Principal place of business Brazil 2 Principal place of business China 3 Principal place of business Egypt 4 Principal place of business China 5 Principal place of business Turkey
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
11
Portfolio Distribution
as at 31 December 2020
By Sector (based on net asset value)
4% 2%
4%
By Geography (by Country of Incorporation)
13.2%
4%
5%
7%
12%
16%
as at 31 December 2019
28%
18%
● Food & Beverage
● IT
● Fast Moving Consumer
Goods
● Healthcare
● Retail
● Decorative Paint
● Cash
● Tobacco
● Household Electronics
● Financials
21.1%
39.4%
● India
● Asia (ex India)
● Eastern Europe, Middle
East and Africa
● Latin America
By Sector (based on net asset value)
1%
3%
4%
28%
4%
7%
11%
11%
16%
15%
Top Purchases and Sales in 2020
● Food & Beverage
● Healthcare
● Fast Moving Consumer
Goods
● IT
● Retail
● Tobacco
● Cash
● Decorative Paint
● Household Electronics
● Fast food
● Industrials
● Auto
Taiwan Semiconductor Manufacturing
Tencent Holdings
XP Inc
Top Purchases
Security
1
2
3
4 Avenue Supermarts
5
Lojas Renner
6 Clicks Group Ltd
7 Metropolis Healthcare Ltd
8 Havells India Ltd
Country of incorporation
Taiwan
Cayman Islands1
Brazil
India
Brazil
South Africa
India
India
26.3%
By Geography (by Country of Incorporation)
10.9%
18.4%
43.4%
● India
● Asia (ex India)
● Eastern Europe, Middle
East and Africa
● Latin America
Country of incorporation
China
Egypt
USA2
India
South Africa
China
India
Philippines
India
India
27.3%
Travelsky Technology Ltd
Eastern Company S.A.E
Top Sales
Security
1
2
3 MercadoLibre Inc
4
5
6
7
8
9
10 Eris Lifesciences Ltd
Britannia Industries Ltd
Tiger Brands Ltd
Foshan Haitian Flavouring & Food
Godrej Consumer Products Ltd
Philippine Seven Corp
Thyrocare Technologies Ltd
1 Principal place of business China
2 Principal place of business Brazil
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
12
Investment Manager’s Review
Strategic Report
2020 was a year when global markets were impacted by a global
pandemic, the impact of which I will touch on later, both in terms of
overall market performance and the performance of the Company.
Whereas in 2019 performance was poor in a year where the index
rose and the Company’s NAV fell marginally, 2020 was a strong year
for emerging markets and we take great heart that the Company,
which had previously lagged in strong periods of emerging market
performance, comfortably outperformed on a relative basis.
Performance in more detail can be seen below:
Since
incep- Annual-
2020 2019 2018 2017 2016 2015 2014 tion ised
%
FEET NAV +20.7 -0.5 -3.0 +21.2 +12.0 -7.0 +0.1 +47.3 +6.1
FEET Share
Price +29.1 -7.4 -9.4 +24.5 +10.5 -10.9 +7.2 +42.2 +5.5
Emerging
Markets +14.4 +13.9 -9.3 +25.3 +32.4 -10.0 +0.5 +77.3 +9.2
UK bonds +4.6 +3.8 +1.2 +1.4 +6.5 +1.0 +7.4 +28.7 +3.9
UK cash +0.3 +0.8 +0.7 +0.4 +0.5 +0.6 +0.3 +3.6 +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)
5 3m £ LIBOR Interest Rate (source: Bloomberg)
* From 25 June 2014
As we have previously stated, the composition of the Index is very
different to our portfolio and we have regularly opined on the impact
of flows into emerging market index funds. In 2019, net inflows into
ETF funds into emerging markets were almost US$14 billion.
In 2020, emerging markets experienced net outflows of $1.9 billion,
with US$11.5 billion of outflows from ETFs and US$9.6 billion of
inflows in active funds.
Fundsmith Emerging Equities Trust “FEET” or the “Company” had a
strong 2020, both in terms of absolute and relative performance.
Total return
1 January – 31 December 2020 %
FEET Net Asset Value Per Share +20.7
FEET Share Price +29.1
MSCI Emerging and Frontier Markets Index +14.4
Table 1: Source: MSCI/Bloomberg
The net asset value (‘NAV’) increase of 20.7% compared to an
increase in the MSCI Emerging & Frontier Markets Index (‘the Index’)
of 14.4%. The share price increase was greater than the increase
in the NAV as a result of the discount narrowing substantially in the
year. Since launch to the end of 2020, the Company has (after fees)
produced a cumulative NAV return of 47.3%, or a return of 6.1% on
an annualised basis.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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 constituents of the index are shown below:
Top 10 MSCI E+FM Index constituents
Weight % ROCE %
Taiwan Semiconductor
Manufacturing Corporation
Alibaba
Tencent
Samsung Electronics
Meituan Dianping
Naspers
Reliance
JD.com
China Construction Bank
Ping An Insurance
Total Average
Table 3: Source: MSCI
1 See Glossary beginning on page 92.
5.8
5.5
5.3
4.5
1.7
1.1
1.0
1.0
0.9
0.9
28
27
9
18
11
8
-2
10
8
5
3
10
At the end of 2020 the top ten constituents of the Index accounted
for 28% of the index, and thus are ongoing beneficiaries of any
sustained ETF fund flows, yet the average return on capital
employed (‘ROCE’) of those 10 holdings is just 10%. In the FEET
portfolio, the top ten holdings accounted for 48% of the portfolio
and had an average ROCE of 43%. The Company currently has
investments in two of the top 10 Index constituents. Our active
share (the proportion of our holdings which do not overlap with the
index) at the end of December 2020 was 93.7%.
The two top-ten index constituents we own are Tencent and Taiwan
Semiconductor, both of which were new investments made during
the course of 2020, and we comment later on why we own both. As
at the end of 2020, these two investments accounted for 4.7% of
the Company’s NAV.
We have previously commented on the high level of concentration
at the top end of the Index (to put this into context, the top five
constituents of the Index accounted for almost 23%, whilst for the
MSCI World Index, which covers global developed markets, the
respective percentage was 12.6%). Performance is also seemingly
more concentrated. The top 5 constituents in the MSCI Emerging
and Frontier Market Index accounted for 61% of its performance,
whilst the top 5 holdings in the MSCI World Index accounted for 43%
of that Index’s performance.
In 2020, two stocks, Tencent and Taiwan Semiconductor, accounted
for a third of the increase in the Index. At present these are the only
two stocks in the top ten index constituents which are currently of
the appropriate quality for our portfolio. We do of course continue
to analyse some of the stocks which dominate the Index to see if
they are developing into businesses we would be comfortable
investing in but, as yet, we have not found this to be case.
Our Company remains underweight in China. Before we go on to
explain why we are under-represented against China, I would like to
remind readers that (as we said last year) ‘the China element of the
index is not predominantly, as you might think, made up of Chinese
companies listed on Chinese markets. Instead it comprises, Chinese
companies listed in the US, Chinese companies listed in Hong Kong,
and Hong Kong companies. The smallest element of the index
categorised as ‘China’ is Chinese companies listed in mainland
China’.
There has been an inordinate percentage of ‘Chinese’ companies
we have analysed that have had issues around corporate
governance, accounting standards, shareholder structures and
voting rights, legal ownership and regulation. The latter point is
interesting as recent months have shown, particularly in relation to
‘fintech’ businesses a marked increase in regulation by the
authorities, with little option for businesses subject to this regulation
to do anything other than comply. This was most marked by the Ant
Financial IPO getting pulled from the market at the last minute. The
regulatory risk inherent in some Chinese companies also increased
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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Investment Manager’s Review
Strategic Report
“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”
due to the Trump administration imposing investment sanctions on
a number of these businesses.
We will not invest in a Chinese company just because it is a ‘good
business by Chinese standards’, as those standards are not
replicable across the range of emerging markets in which the
Company has the ability to invest. Given their weight in the index,
‘Chinese’ companies continue (to us at least) to be skewed by the
tendency of investors to hug the index and, increasingly, capital
flows into Hong Kong listed companies from Chinese mainland
investors, where quality and risk are not a primary concern. Instead
our focus continues to be buying good companies and this will
continue to be our one and only priority.
As a result of this focus, FEET owns stakes in companies which, as
a whole, have superior financial characteristics to the Index. The
Company offers emerging market investors the ability to invest in
companies with higher returns and margins, stronger cash
conversion and, typically, faster rates of cash flow growth than found
in the Index. Our investments will typically have no debt, and if not,
a conservative level of financial leverage. We believe that these
characteristics will be reflected in the share prices of the companies
that the Company owns. The characteristics of the FEET portfolio as
of the 31 December 2020 compared with the index were:
MSCI E+FM
Index
(ex-financials)
%
FEET
%
LTM ROCE
LTM Gross margin
LTM Operating Margin
LTM NFCF conversion
LFY NFCFE growth
Table 4: Source: Fundsmith, MSCI, Bloomberg
Abbreviations: LTM: last twelve months, LFY: last full year,
ROCE: return on capital employed, NFCF: neutral free cash flow.
See Glossary beginning on page 92.
40
52
18
93
21
11
33
11
82
8
Unsurprisingly, our stocks are significantly more highly rated than
the index based upon either the measures of PE ratio or Neutral
Free Cash Flow Yield (Neutral being is when capital expenditure is
above the level of depreciation and is expansionary and can
therefore be disregarded in this calculation).
LTM NFCF yield
LTM portfolio dividend yield
FEET
2.5
1.4
MSCI EM&FM
(ex-financials)
3.6
1.8
Table 5: Source: Fundsmith, MSCI, Bloomberg
Valuation is, we believe, unlikely to be the main determinant of the
performance of our strategy in the long term. Instead, we believe
quality, with continued reinvestment of earnings at high rates of
return, will be the main determinant in the long term.
Portfolio turnover in the year was 21%, compared to 27% in 2019.
The ongoing charges fee (‘OCF’) was 1.3% of net asset value, whilst
dealing charges were 3 basis points. Taking into account the
estimated spread on dealing prices, dealing costs were 14 basis points.
During the year we acquired four new holdings and exited two,
taking us up from 36 holdings at the start of 2020 to 38 at the
year end.
We made four new investments in the year; Lojas Renner, XP Inc,
Taiwan Semiconductor Manufacturing Corporation and Tencent. The
former two are businesses based in Brazil, whilst the latter two are
based in Asia. With the exception of XP which only IPO-ed in late
2019, the other businesses are ones we have been following for a
considerable period of time.
Lojas Renner is the largest fashion retailer in Brazil, with over
600 stores. The group is at the end of a seven-year investment
programme that began in 2012 and saw the remodelling of the
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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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”
store network, a new logistics platform put in place and the
development of the supply chain to reduce lead times. The group is
now implementing an omni-channel strategy encompassing both
online and offline retail, in order to increase revenues and improve
efficiency. The online business is performing strongly in the COVID-19
environment, and given Renner’s brand recognition in the local market
could become a meaningful part of the business over time, helped by
local sourcing to reduce the time it takes to get new lines to market.
Barriers to entry are provided by a combination of consistent
execution and investment in physical and digital infrastructure, all
of which discourage international entrants into a country with
substantial logistical challenges. Efficiency, particularly speed to
market is helped by having most of its supply chain within Brazil.
The average customer spend per transaction is c £20.
XP Inc is the largest online investment platform for retail investors
in Brazil and has a 5% share of the $2.1 trillion investment market
in the country. The business listed in late 2019 and we took
advantage of major share price weakness in the early part of 2020
to initiate a new holding in the business.
XP is 10 times larger than its nearest independent competitor in a
market that is controlled by banks and has significant market share
growth opportunities. Only 10% of retail investment assets in Brazil
are in equities, giving the group scope for growth, and the
penetration level of brokerage accounts (c 1.0%) is well below that
of the developed world.
XP has more than 1.5 million retail clients on its platform who, by
using XP, can invest in equity, fixed income and mutual funds. Only
10% of retail investment assets in Brazil are in equities (the vast
majority are in fixed income products), giving the group scope for
growth. XP also has a strong culture of employee share ownership
which allows the business to attract and retain talent, whilst it also
provides financial education to retail clients which helps grow its
client base.
We also built a shareholding in Tencent, which is China’s largest
social networking, gaming and music streaming company. Its social
media platform (WeChat) has over 1.2 billion users, while its
QQ messaging service has over 600 million users. Around the
WeChat infrastructure are a number of other services such as
payments, utilities, gaming, information and news. Above all, we
believe advertising is a major opportunity for the Group. Some 98%
of Chinese internet users access the internet through smartphones,
supporting Tencent’s business model, which has focused on
building a large user base with relatively low transaction values and
a high proportion of revenues derived from subscriptions. Foreign
entrants into the market are highly restricted by Chinese law.
Tencent also has a significant technology investment portfolio which
we believe will produce meaningful value creation for investors over
coming years, particularly when they allow the group to enter new
geographies or new activities. It is increasingly clear to us that some
of the technological innovation coming out of China is world-class.
A business such as Tencent with a sizable commercial ventures arm
and access to capital is well placed to capitalise on this, especially
as it typically acts in collaboration with other partners which reduces
regulatory risk (something we believe is increasing in China) and
allows businesses in which Tencent is invested to strengthen their
competitive position through being able to call on the expertise of
several strategic investors.
We also acquired a stake in Taiwan Semiconductor Manufacturing
Corporation (TSMC), our first investment in Taiwan and to us, one
of the best businesses we have seen.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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Investment Manager’s Review
Strategic Report
“Weakness in emerging market currencies adversely affected our performance”
TSMC is the world’s largest semiconductor contract manufacturer
with a market share of over 50% (and growing). It is a business that
we believe has built an unsurmountable lead in its industry which
is now an effective duopoly with Samsung.
TSMC does not design or market any semiconductor products under
its own name, ensuring that it does not compete with any of its
customers. It has focused on developing its own technologies in
both products and manufacturing processes and aims to be the
foundry of choice. American and Japanese rivals have ceased
developing the smaller chip sizes TSMC is bringing to market as they
lack the capital and technological skills to do so, whilst China is
several years behind TSMC in technology terms. As well as the
physical cost of catching up with TSMC, it has considerable
engineering and R&D strengths which money itself can’t replicate.
In addition, if its customers leave they risk product launch delays of
months, and more likely years.
combination of China’s central government and state-controlled
airlines having majority control. Although as investors we could
tolerate TravelSky’s working capital cycle with its airline customers,
we became increasingly concerned about how the group allocated
capital outside of the business, most notably setting up joint
ventures in the insurance and telecom sectors.
Tiger Brands is an investment where we exhibited patience, but in
hindsight, probably too much. We owned the business due to its
strong market positions in a number of South African food
segments, alongside its exposure to a number of other fast-growing
African markets. Unfortunately, the business did not show the level
of resilience we would have liked in a weak South African consumer
market with high levels of competition and price deflation and, as
witnessed by the Listeria incident we have previously talked about,
we increasingly took the view that management had lost control of
the business and any recovery would be long and difficult.
TSMC also has a strong balance sheet and publicly describes its
financial position as being its ‘fortress’ allowing it to develop market
positions in the more technically advanced 7nm, 5nm and 3nm
segments, backed by continuing research and development
expertise to back it up. TSMC tries to ensure that return on
investment in each size of chip development is above that achieved
in the previous one.
We made outright sales of two holdings, Tiger Brands and TravelSky.
We initially bought TravelSky because of its exposure to the growth
of air passenger traffic in China because of its government-enforced
monopoly position. As the Chinese middle class grows, incomes rise
and consumption increases, there is an increasing propensity to
travel, both domestically and internationally. We knew that TravelSky
at the time of investment was a state-controlled enterprise, with a
By sector, the breakdown of FEET as at 31 December is as below:
FEET GICS Sector Split
Consumer Staples
Healthcare
Consumer Discretionary
Communication Services
Materials
Industrials
Cash
Technology
Financials
Table 6: Source: Fundsmith, Bloomberg
%
52.0
15.1
10.5
6.8
4.7
3.7
3.1
2.4
1.9
100
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
17
“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”
Compared with the Index:
MSCI GICS Sector Split
Information Technology
Consumer Discretionary
Information Technology Financials
Communication Services
Materials
Consumer Staples
Energy
Health Care
Industrials
Real Estate
Utilities
%
20.3
18.2
18.1
11.7
7.8
5.9
5.0
4.7
4.3
2.2
2.0
100
Table 7: Source: Fundsmith, Bloomberg
By sector, the breakdown of FEET at 31 December 2020 as we
would describe the sectors rather than those used by the index
(which are rather generic) was:
Sector (%)
2020
2019
Food & Beverage
Information Technology
Healthcare
Retail
Fast Moving Consumer Goods
Decorative Paint
Tobacco
Household Electricals
Fast Food
Auto
Industrials
Cash
Table 8: Source: Fundsmith
24
20
15
12
12
5
4
4
1
0
0
3
28
11
16
11
15
4
7
3
1
0
0
4
As well as the constituent companies of the Index being distinctly
different to those we would be willing to invest in, the geographical
weightings of the Index remain very different to where the
Company’s portfolio is invested. The best performing emerging
markets in 2020 were South Korea and Taiwan, markets where the
Company has not historically invested due to high GDP levels and
unattractive demographics limiting the opportunities available to
the Company.
Our geographical weightings and those of the index are shown
below:
FEET Country Breakdown
Weight (%)
India
China (incl. Hong Kong)
Argentina
Brazil
Egypt
Other Emerging Markets
Frontier Markets
Cash
TOTAL
Table 9: Source: Fundsmith
42.9
16.2
9.0
4.8
4.7
11.9
7.4
3.1
100
MSCI EM+FM Index Country Breakdown
Weight (%)
China (incl. Hong Kong)
South Korea
Taiwan
India
Brazil
Other Frontier & Emerging Markets
38.7
13.3
12.6
9.2
5.1
21.1
100
100
100
Table 10: Source: MSCI, Bloomberg
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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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”
In terms of contributors to performance, the tables below show the
top five contributors and detractors from the Company’s
performance:
core payments and e-commerce platforms but to develop a broader,
market leading offer to customers. We are already seeing signs of
a significant increase in the penetration of digital payments.
Top 5 Contributors
MercadoLibre
Foshan Haitian
Info Edge
Asian Paints
Dr Lal Pathlabs
Table 11: Source: Fundsmith
Country
Argentina
China
India
India
India
%
7.9
6.3
2.4
1.7
1.0
In 2020, the top two performers, MercadoLibre and Foshan Haitian,
were also in the top five in 2019. Both MercadoLibre and Foshan
Haitian continue to execute well on their strategies. Although we
touch on the Covid-19 situation later and its implications for the
stocks in the portfolio, both MercadoLibre and Foshan Haitian are
well placed to benefit from the three main trends we believe the
pandemic will dramatically accelerate – digitalisation, formalisation
and consolidation. MercadoLibre is an obvious beneficiary of the
first of these whilst Foshan Haitian is likely to benefit from shifts
towards formalisation and consolidation.
MercadoLibre’s management believe that the pandemic has
accelerated growth by ‘maybe three to five years’. The Covid-19
outbreak led to a sharp increase in demand for home shopping, and
Latin America remains an embryonic market for digital retailing.
Even if the most optimistic estimates bear fruit and e-commerce
doubles its penetration over the course of 2020, it would only
account for around a tenth of retail sales, a significantly smaller
percentage than either developed markets or China. MercadoLibre
is well funded following both the recent PayPal investment and
private placement issuance, and this will allow it not just to build its
Foshan Haitian continued the progress it has made since its IPO.
The company has a simple business model, to take market share
in the fragmented condiments market in China. Its advantages
come from production efficiencies, increasing brand recognition,
distribution and a fragmented competition, quite often operating on
only a local or regional basis. In a country where food scandals are
common. Foshan Haitian is benefiting from increasing awareness
of the importance of food provenance. The business continues to
introduce both new products with a premium focus but also new
categories.
The next three largest positive contributors to performance were all
Indian stocks.
Info Edge owns leading internet portals for jobs and property
classified ads in India. The company’s operating performance
struggled in the light of the impact of Covid-19 on its recruitment
market and this was compounded by a slowdown in the real estate
market. In spite of this, the group’s share price performed strongly
in the latter stages of the year in anticipation of a strong recovery
from the pandemic and the potential IPOs of Zomato (India’s leading
food delivery platform) and PolicyBazaar.com (India’s largest
marketplace for health and life insurance); Info Edge owns
meaningful stakes in both the businesses.
Asian Paints has seen a very strong rebound in decorative paint
consumption, with volume growth back to double digits, since the
pandemic, and has also seen market share gains from informal
players. The company is expanding its business beyond decorative
paints into other areas of home improvement, including furniture
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
19
and furnishings. The business retains a strong relationship with its
distributors and contractor base helped by its industry leading
supply chain.
Dr Lal Pathlabs performed strongly in the year. Branded players in
India account for just 10-15% of the overall diagnostics market in
the country. The ability of major labs to offer Covid-19 tests has led
to a significant increase in brand awareness. Dr Lal (as with its
larger peers) now have the opportunity to consolidate a fragmented
market at a faster pace and benefit from economies of scale.
The top 5 detractors to performance are shown below:
Bottom 5 Contributors
Country
Hypera
Philippine Seven
Dali Foods
East African Breweries Ltd
Edita
Table 12: Source: Fundsmith
Brazil
Philippines
China (HK-listed)
Kenya
Egypt
%
-1.1%
-0.6%
-0.6%
-0.5%
-0.5%
Hypera was the worst performer, although the majority of the
contribution of its underperformance to the portfolio came from
currency rather than its stock price. The ongoing regulatory
investigation made only limited progress during the year and
overshadowed what to us appear to be two good acquisitions of
products from major multinational pharmaceutical brands during
2020. Later on in the year the group, through its ventures arm,
acquired a range of natural organic and vegan cosmetics. In spite
of a sale of some smaller brands in the year, the acquisitions have
driven debt up and we look forward to the group deleveraging.
Dali Foods was again a disappointing performer in the year and its
share price failed to benefit from the rally a number of its listed
peers enjoyed as China emerged from Covid. Dali’s drinks
businesses, in particularly its Hi-Tiger energy drink, suffered from
reduced ‘on the go’ consumption, whilst lock-down measures in
China slowed the growth of its soy milk category. The execution of
the roll-out of the bread business continues and the business
continues to develop the all-important e-commerce category in the
PRC. The Group’s balance sheet remains strong and our forecasts
indicate that by the middle of the decade, the group will have over
half of its current market capitalisation in cash.
The Philippines has been one of the hardest hit countries globally
in economic terms from the Covid-19 pandemic. A combination of
an elongated lockdown, lack of government stimulus and delays to
vaccine procurement have all contributed to a decline in GDP of
around 9% in 2020, with a more limited rebound in 2021. Our only
holding in the Philippines, Philippine Seven will be a net beneficiary
of Covid-19. Already limited store roll-out programmes from its less-
well capitalised rivals have been severely disrupted in lockdown and
there is strong evidence that there has been a marked increase in
market share during the pandemic which we do not fully expect to
reverse once the impact of the pandemic ends.
EABL has been another business impacted by Covid-19, with hotels,
bars and restaurants in its main markets of Uganda, Tanzania and,
in particular Kenya all subject to closure. As well as volume
reductions, the business also had to deal with a mix change away
from kegs and crates into bottles, cans and 6-packs as home
consumption became a greater proportion of its sales.
The table overleaf shows the impact on of currencies on the
Company in 2020. The overall impact of currencies in the year was
to detract from performance by 5.7%.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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Investment Manager’s Review
Strategic Report
Top Five
China
Philippines
Egypt
Indonesia
Bangladesh
%
0.2
0.2
0.1
0.0
0.0
Bottom Five
India
United States
Brazil
Turkey
South Africa
%
-2.5
-1.1
-1.1
-0.6
-0.3
Table 13: Source: Fundsmith
The positive contribution of currencies to the portfolio was limited.
The Chinese Yuan performed strongly against other countries
helped by a continued trade surplus and also a rapid return to
economic growth after the Covid-19 outbreak was controlled. The
Egyptian Pound continued to benefit from the IMF restructuring
programme implemented previously, whilst the Philippine Peso
benefited from a sharp fall in imports to the country.
In 2019 the Indian Rupee was the biggest single detractor from
performance, both in terms of the currency impact and the total
impact on portfolio performance (over 40% of the portfolio is in
companies listed in India with their earnings overwhelmingly derived
in Rupees). In 2020, this repeated itself and the Rupee was one of
Asia’s weakest currencies, primarily due to weakening economic
data in India and aggressive rate cuts by the Reserve Bank during
the year.
Elsewhere, Latin American currencies were weak (particularly the
Brazilian Real) but also the US dollar (both MercadoLibre and XP
are listed in the US in US dollars). The Turkish Lira was also weak
on concerns about political interference in the country’s economic
institutions amidst continued high inflation. The South African Rand,
like the Brazilian Real, suffered from both concerns over
macroeconomic policies and lower resource prices.
We continue not to hedge currencies, primarily due to cost and
complexity.
The regional Geographic breakdown of the portfolio as at the end
of December 2020 is shown below:
Region
India
Asia (ex-India)
Latin America
Eastern Europe, Middle East and Africa
Cash
Table 14: Source: Fundsmith
%
42.9
27.0
15.7
11.3
3.1
100.0
India experienced a severe disruption and slowdown in economic
activity in the first half of 2020 because of strict and extended
lockdown introduced by the government in light of the pandemic.
Since September, the number of Covid-19 cases in the country has
come down exponentially and economic activity has rebounded
sharply. Prime Minister Narendra Modi also took the opportunity to
make further reform to spur domestic manufacturing. Our portfolio
in India has been a net beneficiary of the pandemic with those
stronger consumer brands gaining market share and increased
awareness around health and digitalisation. India returned to growth
in the final quarter of calendar 2020. India is the largest
manufacturer of vaccines in the world and has started its
inoculation programme, which we hope will help to sustain the
rebound in economic activity in 2021.
As always, the portfolio’s weighting in India is not a deliberate
judgment on the Indian economy, but more on the quality of
company we have found and the opportunities open to them. India
retains a large number of investment opportunities, whether it be
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
21
listed multinational subsidiary, listed businesses operating across
the country (and in some cases with international operations
outside of India) and also regional businesses. As well as having a
young and increasingly educated population, there remains
significant scope for urbanisation (which in itself will bring a shift
from informal markets and drive premiumisation) and, of course,
India’s institutions have proved to be resilient in the decades since
independence.
Almost all of our consumer holdings in India saw an acceleration in
market share gains from regional brands and informal players
because of better execution, consumers gravitating towards trusted
brands, more resilient supply chains, faster adoption of technology
to interact with distributors and consumers and strong growth in
digital channels.
Our healthcare portfolio in the country, mostly invested in diagnostic
testing businesses like Dr Lal Pathlabs, Metropolis and Thyrocare,
initially saw a significant impact on test volumes due to reduced
prescription rates, delays in elective surgeries and patients reluctant
to visit local labs. However, all three businesses rebounded strongly
in the second half of the year with several structural changes taking
place in the sector. These included an acceleration in market share
gains from independent ‘mom-n-pop’ labs that control 85-90% of
the overall market, significant growth in home collection of test
samples, increased digital engagement with consumers from
booking tests to collecting and analysing test results and consumers
becoming more conscious about their health and choosing to do
preventive or wellness tests. In fact, the founder of one of our
portfolio companies said, “Covid-19 has been a big PR exercise for
diagnostics.” We believe Covid will drive faster consolidation of the
fragmented diagnostics sector in India.
Our second largest exposure is China. We have four China exposed
companies, three of which are listed in Hong Kong, which to us
typically provides greater transparency when compared to mainland
listed comparators. Two of the portfolio’s three largest holdings at
the end of 2020 were companies which derived the bulk of their
revenues from the PRC.
China continues to have specific issues which reduce the number
of investment opportunities available to the Company and if
anything the investment environment in China has deteriorated.
China lacks an independent legal system, ownership structures can
be murky and biased against institutions, corporate governance can
be poor, government guidance and regulation in the economy can
be unhelpful and often enterprises do not naturally operate or
allocate financial capital in a logical economic manner beneficial to
all shareholders.
The last point can be brought to bear by a quick analysis of
Kweichow Moutai, one of China’s largest domestically listed
businesses and widely held by a number of emerging market funds.
In spite of the businesses’ excellent returns and high margins, we
have shied away from investing and the reasons why show some of
the issues foreign investors in Chinese companies have to assess.
2020 saw the group carry out a substantial bond issue, not to
develop its own business, but to refinance an indebted toll-road
operator in its home province of Guizhou. Both businesses had the
same controlling shareholder- the provincial government. And not
stopping there, the provincial government has twice recently
transferred 4% share stakes from the holding company to itself and
subsequently sold them in the market. Of greater alarm to any
shareholder in the group would be why at least 14 senior officials
of the company and its CEO have been arrested or placed under
investigation for corruption since Spring 2019 and persistent rumours
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Investment Manager’s Review
Strategic Report
of the provincial government looking at stripping the sales and
marketing (and thus the main source of profitability) out of the listed
entity. To us, even though these issues may not be unique in a
Chinese context, they are certainly risks which rule out investing.
We are unwilling to invest in companies which are below the quality
threshold of the fund just because they may be good companies in
a Chinese context. Setting aside the 2020 impact of the Trump
administration placing investment sanctions on a number of
Chinese companies which it deemed to be military controlled, the
year also saw a marked increase in regulatory intervention by the
mainland authorities in the largest private companies, and most
notably the major private internet businesses such as Tencent and
Alibaba. Zhigang Tao, a professor of economics at the University of
Hong Kong sums up the regulatory environment in China neatly, with
state owned companies being ‘the favourite kids of the socialist
government of China’, while private firms are ‘adopted kids facing
systematic discriminations and substantial constraints in business
entries and subsequent operations’.
Alibaba (a business we do not own) to us proves an interesting
example of what may be acceptable behaviour elsewhere but is not
always acceptable to regulators in the PRC. Although we have always
had concerns about Alibaba’s governance and accounting policies,
regulators in the PRC took intervention to a new level when they
forced the spin-out of the group’s Fintech business, Ant Financial,
to be abandoned at the 11th hour. Setting aside the reputational
impact on Alibaba and its founder Jack Ma, to us the whole
intervention by the Peoples’ Bank of China and other regulatory
issues brings to bear two points.
First, and going back to the Kweichow Moutai example, we continue
to be surprised at how little some emerging market investors (and
of course almost all ETFs) look at what they are investing in.
The extensive work we carried out on Ant Financial clearly suggested
to us that it increasingly looked like a bank, smelt like a bank and
therefore probably was a bank, and thus opening it up to regulatory
risk, which ultimately came to pass. Second, regulatory processes
in China are brutal. They are typically quick, lack the scope for any
businesses to prove a case, have very limited consultation and
implemented instantly. To us, if we see such risks, we won’t invest.
The crackdown on Ant Financial highlights the issues in China’s
financial system of debt and the overall lack of transparency in the
financial system. We see little change from our commentary of last
year when we noted that ‘China appears to have a triple bubble in
investment, real estate and credit’.
To us, there are three areas of particular concern in China’s debt
structure- the scale of local government debt, debt held by property
developers which needs refinancing (much of which is offshore in
HK$ or US$) and the debt lent to overseas governments and
projects as part of the ‘Belt and Road’ initiative which may not have
the cash flow to cover the borrowings taken out. Our concerns
remain amplified on the basis that Chinese businesses (and state
entities) are often not the best allocators of capital. To us, one of
the reasons behind the Ant Financial crackdown was a worry by the
Chinese authorities that the more lending which went through a
platform like Ant, the less clear debt risks in China became,
increasing the risk to the financial system as a whole.
China has, however, managed one of the earliest and more
sustained recoveries from the Covid-19 pandemic, in spite of and
because of early quarantine measures taken in Q1 and Q2 last year.
China recorded 2020 economic growth of 2.3% and forecasts for
2021 seem to suggest that GDP growth will come in at around 8%.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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2020 was a difficult year for Vitasoy. One of its Chinese plants in
Wuhan had to deal with the enforced closure of this for several
months in the year. Consumption was impacted both in mainland
China and Hong Kong, where the ‘on the go’ consumption which
drives product sales was limited by quarantining and reduced
overall footfall. In addition, the closure of Hong Kong’s schools for
a large part of 2020 also hit the group’s sales. The recent results
presentation indicated strong recovery in the Chinese market, and
the group’s recently opened new plant in Dongguan in the PRC will
help support future sales volumes.
Vietnam, like China helped by a combination of centralised control
and a local party organisation (both of which support quarantining
and tracking), has been relatively immune from Covid-19 cases. This
has helped the economy perform better than almost all other
economies, with 2020 GDP growth of 2.9%. Our one holding in the
country remains Vietnam Dairy, and the business has been helped
by the trends which have driven it over recent years- market share
gains, new product launches and premiumisation. In 2019 the
group took a controlling stake in rival dairy firm GTN, which not only
gave it a stronger position in northern Vietnam but also allowed a
number of cost savings and procurement synergies to be exploited.
The performance of our one remaining holding in Indonesia, Prodia,
has been disappointing. The medical diagnostics business struggled
due to the disruption caused by repeated lockdowns in the country
whilst, it also suffered from a decline in day to day medical testing
activity as customers shied away from visiting doctors or health
centres during the pandemic. The development of higher cost
diagnostic services and preventative screening procedures have
failed to lift profitability in spite of opportunities offered by Covid testing.
Our remaining three tobacco investments are all seeing different
trends impact their market. Ceylon Tobacco retains its monopoly
position in Sri Lanka, and we see the election of a potentially more
pro-business government as potentially helpful for the business. The
cigarette market in Bangladesh, where we continue to hold BAT
Bangladesh retains a number of growth drivers, in particularly
premiumisation. BAT Bangladesh is, however seeing intensified
competition from Japan Tobacco in its market. We retain a position
in Egypt’s Eastern Company S.A.E, which is a business where we
believe restructuring and better capital allocation can turn healthy
returns into very attractive ones, although execution is dependent
on the Egyptian government’s privatisation programme.
In terms of our other holdings in Egypt, EDITA saw a strong
performance in bakery and cakes, but biscuits, candy and rusk
sales suffered as consumers, particularly children, stayed at home.
Integrated Diagnostic Holdings is looking at carrying out a joint
listing on the Egypt exchange in a move to encourage local interest
in the shares.
A similar move is also being considered by DP Eurasia which is
evaluating a joint listing in its main market of business activity,
Turkey. DP Eurasia was a frustrating performer for the fund in 2020,
with Covid-19 hampering both trading and the group’s turnaround
strategy in Russia. Although we invest in businesses rather than
share prices taking a view that if a business performs strongly and
consistently it will be reflected in its share price, the share-price
performance of DP Eurasia is, to us, exacerbated by a listing in
London where it is hard to garner new investor interest. Our other
investment in Turkey, BIM, performed strongly in a tough consumer
market and high inflation environment. To us, BIM has a very
attractive counter-cyclical business model, operating in high-density
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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Investment Manager’s Review
Strategic Report
residential areas with a limited range of value-orientated goods.
Think Co-op store locations with an Aldi style product offer.
no net debt, and where we do own businesses with debt we ensure
that they are lightly geared.
After the sale of Tiger Brands, we have only one holding in South
Africa, Clicks. Clicks retains a strong market position and although
sales of beauty products have suffered during South Africa’s
lockdown, the business is well placed for future growth.
Both Nestlé Nigeria and EABL are, in our view, the best investments
for two attractive themes our fund can benefit from- the rise of the
Nigerian consumer and African beer consumption- within a western
corporate governance structure. Nigeria’s population is forecast by
the UN to double from c.200 million now to c.400 million by 2050
and then almost double again between 2050 and 2100, making it
the third most populous country on earth by the mid-2040s.
In terms of our investments in Latin America, we have already
touched on Hypera, MercadoLibre, XP and Lojas Renner. Walmart
de Mexico performed strongly at the operational level, no doubt
helped by the pandemic, but the shares weakened in the latter part
of the year as it announced it was under investigation by Mexico’s
competition authorities for anticompetitive behaviour, something
which the group denies.
Covid-19 impact
At the time of writing, the ‘known’ global death toll from Covid-19
has reached over 2 million. Although with a mortality rate somewhat
lower than past-pandemics, the economic disruption caused by the
pandemic has been both severe and unprecedented in modern
times. Our portfolio went into the pandemic with a high allocation
to defensive businesses in areas such as consumer staples, grocery
retail and healthcare. The majority of the businesses we own have
We were also well placed to avoid businesses with characteristics
which have struggled in the downturn, most notably financial
leverage, an exposure to complicated cross-border supply chains, a
dependency on discretionary consumer expenditure and
operationally geared business models in sectors such as travel,
leisure and hospitality (to put this into perspective we had just two
stocks in these sectors at the outbreak of the pandemic).
Accompanying the severity of the disruption has been an
acceleration of three structural changes which are going to become
increasingly dominant over coming years:
• Formalisation
• Consolidation
• Digitalisation
We believe the FEET portfolio is well positioned to be a net
beneficiary of these trends, no doubt accelerated by the pandemic.
Although the rate of acceleration of these trends is uncertain, times
of economic upheaval tend to magnify and accelerate social,
economic and political change.
We believe that most of our companies will be beneficiaries of the
three trends. First, formalisation will drive increasing post-pandemic
awareness of food provenance, a desire to know that food and drink
being consumed is safe and bought from a shopping environment
which is clean and efficient. Our investments in branded food
businesses and modern trade retail are well placed to benefit from
this, whilst we would also include greater healthcare awareness as
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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a beneficiary of post-pandemic formalisation. Again, we are well
placed to benefit from this trend.
The pandemic has placed a huge number of businesses under both
operational and financial strain. Those businesses with weaker
business models or financially leveraged balance sheets are not
going to be well placed relative to their competitors. Simply put,
stronger businesses will get stronger, weaker ones will risk falling
by the wayside. Given the strong market positions and high barriers
to entry exhibited almost unanimously by the Company’s holdings,
we would expect that our portfolio companies will be able to benefit
from opportunities to increase market share, either through
acquisition, or far more likely organic growth.
The third trend accelerated by the pandemic is that of digitalisation.
Digitalisation to us takes two main forms of investment opportunity-
businesses which are outright digital businesses in the IT space, or
non-digital businesses which can benefit from the rise of
digitalisation, particularly in areas such as customer engagement
and retail distribution. A large number of companies we own, many
of which were bought at inception, are well placed to benefit from
the latter trend. In terms of digital businesses, as such investment
opportunities have become available over time, we have made
selective investments in businesses such as MercadoLibre, Tencent,
XP and Info Edge, all of which are digital businesses well placed to
benefit from market leadership, innovation, disruption and the
migration of previously off-line activities into the digital domain.
Summary
Obviously the Company had a strong 2020, both in absolute and
relative terms, and also saw an appreciable narrowing of the
discount to stand at 3.1% at the end of 2020.
The portfolio clearly benefited from being invested in businesses
with a high degree of resilience in the pandemic- whether it be the
sectors they serve, their generally sound financing or the ability of
them to take advantage of the trends of formalisation, consolidation
and, in particular, digitalisation the pandemic brought upon.
We also take the view that the Company benefitted in 2020 from
having a lower exposure to frontier markets, a greater exposure to
healthcare and technology (both sectors which performed strongly
over the year), greater concentration and less reliance on listed
multinational subsidiaries (we increasingly differentiate between
those with high-calibre local management and those with ‘revolving
door’ expat management where we typically have concerns over
incentivisation and the ability of those businesses to innovate). In
contrast to a reduced portfolio weighting in listed multinational
subsidiaries, there had been an increase in businesses where those
running them have considerable economic interests in those
businesses, where we believe innovation has a higher priority and
decisions can be taken in the long-term interest of the business
without being swayed by the short-term.
To put how the portfolio has evolved over recent times into
perspective, over the course of 2019 and 2020, the proportion of
the portfolio invested in frontier markets fell from 12% to 7%, whilst
the proportion of the portfolio invested in technology and healthcare
rose from 19% to 36%, with the proportion of FEET invested in
consumer sectors falling from 81% to 64%. Over the same time
period, the proportion of businesses the fund is invested in outside
of government or multinational control has increased from 53% to
76%. Over the number of stocks held by the fund decreased from
45 to 36, reflecting an increased focus on those stocks in which the
managers have the greatest conviction.
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Investment Manager’s Review
Strategic Report
Environmental, Social and Governance (ESG)
Fundsmith considers sustainability risks and the net impacts a
portfolio company has on both the environment and society as
much as is possible with the availability and consistency of reporting
of non-financial data pertaining to ESG in emerging markets. As long
term investors, we consider this a fundamental part of how we
assess the long term sustainability of a company’s returns in our
investment process. As part of this, we engage with companies on
a regular basis on areas that it can add value and vote all available
proxies to promote the sustainability of long term returns.
Further information can be found in the Strategic Report on
page 35.
Outlook
As managers we will continue to seek to invest in resilient
companies, with high returns on capital, the ability to reinvest that
capital at high rates of return in order to sustain those returns. On a
relative basis, performance will always be influenced by ETF and
Index fund flows, the bulk of which ends up in businesses we would
never have any intention of owning.
As emerging markets have developed, increasing opportunities have
presented themselves to invest in businesses that meet our
exacting criteria in higher growth segments such as healthcare and
technology. Although not exclusive to these sectors, we saw towards
the end of 2020 increasing signs of valuations across emerging
markets becoming more stretched, particularly in China-focused
businesses where domestic and international institutional fund
flows have had an impact, quite often on illiquid shareholder
structures where there is scope for share price movements to be
magnified. A sell-off in February 2021 seemed to suggest that our
view held some credence, even though it did impact some of our
holdings.
In spite of this, we believe that the Company continues to offer
investors exposure to some of the best companies available to own
in emerging markets and we look forward to reporting on how these
businesses develop over time.
Michael O’Brien
Fundsmith LLP
Investment Manager
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Investment Philosophy
27
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
28
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.”
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
29
(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 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.
Fundsmith LLP
Investment Manager
31 March 2021
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
30
Business Review
Strategic Report
Business Review
The Strategic Report on pages 2 to 35 has been prepared to provide
information to shareholders to assess how the Directors have
performed their duty to promote the success of the Company. Further
information on how the Directors have discharged their duty under
s172 of the Companies Act 2006 in promoting the success of the
Company for the benefit of the investors as a whole and how they
have taken wider stakeholders’ needs into account can be found on
pages 39 to 42.
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 .
Business Model
The Company is an externally managed 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 purpose of the Company is to provide a vehicle for investors to
gain exposure to a portfolio of companies in Developing Economies,
through a single investment.
its
The Company’s strategy is to create value for shareholders by
addressing
is to provide
investment objective, which
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. See page 9 for further information.
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 buybacks, 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 36.
Investment Manager and 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 1.00% 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
• monitoring the Company’s compliance with
investment
restrictions and leverage limits set in its offering documents.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
31
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 +20.7%, outperforming the benchmark by
6.3% (2019: -0.5%, underperforming the benchmark by 14.4%).
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.
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. Share price performance is
monitored closely by the Board.
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.
During the year under review the Company’s share price total return
was 29.1%, outperforming the benchmark by 14.7% (2019 -7.4%,
underperforming the benchmark by 21.3%).
Key Performance Indicators
The Board of Directors reviews performance against the following
Key Performance Indicators (KPIs). They comprise specific financial
and shareholder-related measures and are also considered to be
the Company’s alternative performance measures (APMs). The KPIs
have not changed from the prior year:
• Net asset value total 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*.
* Alternative Performance Measure (see Glossary beginning on page 92).
Please refer to the Glossary beginning on page 92 for definitions of
these terms and an explanation of how they are calculated.
Net asset value return against the Index
The Company’s net asset value per share is shown on the
Statement of Financial Position on page 68. The Directors regard
the Company’s net asset value return as being the overall measure
of value delivered to shareholders over the long-term. The Board
considers the most important comparator to be the MSCI Emerging
and Frontier Markets Index measured on a total return, net sterling
adjusted basis. Fundsmith’s investment style is such that
performance is likely to deviate from that of the Index.
Premium/discount of share price to net asset value per share
The Board monitors the level of premium/discount as a key
indicator of shareholder sentiment and demand for the Company’s
shares. The Board aims to achieve a sustainable low discount or
premium to the NAV per share, taking account of market conditions.
The Board therefore considers ways in which share price
performance may be enhanced, including the effectiveness of
marketing, share issuance and buybacks, where appropriate. The
making or timing of any share issuance and/or buyback is at the
discretion of the Board.
As at 31 December 2020, the discount of the Company’s share
price to the NAV per share was 3.1% (2019: 9.3%). The Chairman’s
Statement, beginning on page 6, describes the actions the Board
took to address share price performance during the year.
Ongoing charges ratio
Ongoing charges represent the costs that shareholders can
reasonably expect to pay from one year to the next, under normal
circumstances. The Board continues to be conscious of expenses
and works hard to maintain a sensible balance between good
quality service and costs. The Board therefore considers the
ongoing charges ratio to be a KPI and reviews the figure both in
absolute terms and in comparison to the Company’s peers.
As at 31 December 2020, the ongoing charges ratio was 1.3%
(2019: 1.4%).
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
32
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 emerging and 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.
Principal Risks and Uncertainties
Mitigation
The Board has categorised the risks faced by the Company under
five headings as follows:
• Corporate strategy;
• Investment strategy & activity;
• Operational (service providers);
• Financial; and
• Legal & regulatory.
The following sections detail the risks the Board considers to be the
most significant to the Company under these headings:
Corporate Strategy
The share price return may differ materially from
the NAV per share i.e. the shares may trade at a
material discount to the NAV per share.
In consultation with its advisers, the Board regularly reviews the level of share
price premium or discount to the net asset value per share and consideration
is given to ways in which share price performance may be enhanced, including
the effectiveness of share issuance, marketing and share buybacks, where
appropriate.
Investment Strategy and Activity
be
unsuccessful
The investment strategy adopted by Fundsmith
result
may
in
the Company’s
underperformance against
principal performance comparator and peer
companies.
and
The portfolio may be affected by volatile market
movements (in both equity and foreign exchange
markets) in the sectors and regions in which it
invests.
The Board receives regular reports on shareholder activity and is kept
informed of shareholder sentiment. Regular contact is maintained with major
shareholders.
The Board regularly reviews the Company’s investment mandate and
Fundsmith’s 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 discuss current and potential investment
holdings with the Board on a regular basis. The Board sets appropriate
investment restrictions and guidelines.
The Board has appointed Fundsmith to manage the portfolio within the remit
of the investment objective and policy. The investment policy limits ensure
that the portfolio is diversified, reducing the risks associated with individual
stocks and markets. Compliance with the investment restrictions is monitored
by Fundsmith on a daily basis. The Board monitors exposure to investments,
performance, and compliance with the investment objective and policy. The
Board sets the policy on hedging, which is detailed on page 9.
The departure of a key member of Fundsmith’s
investment team may affect the Company’s
performance.
The Investment Manager reports to the Board on developments at Fundsmith
at each Board meeting. In 2019 portfolio management arrangements were
put in place which reduce reliance on any single individual.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
33
Principal Risks and Uncertainties
Mitigation
Operational (Service Providers)
for dealing,
As an externally-managed investment trust, the
Company is reliant on the systems of its service
trade processing,
providers
administrative services, financial and other
functions. If such systems were to fail or be
disrupted (including as a result of cyber-crime) this
could lead to a failure to comply with applicable
laws, regulations and governance requirements
and/or to a financial loss.
The Audit Committee reviews the internal controls reports and key policies
(including disaster recovery procedures) put in place by its principal service
providers. These reviews include consideration of the associated cyber security
risks facing the Company. Fundsmith provides a quarterly compliance report
to the Audit Committee, which details their compliance with applicable laws
and regulations. The Audit Committee maintains the Company’s risk matrix
which details the risks to which the Company is exposed, the approach to
managing those risks, the key controls relied upon and the frequency of the
controls operation. Further details are set out in the Audit Committee Report
beginning on page 52.
The spread of an infectious disease may force
governments to introduce rules to restrict meetings
and movements of people and take other
measures to prevent its spread, which may cause
The operational and regulatory risks arising from the COVID-19 pandemic, and
measures introduced to combat its spread, were discussed by the Board, with
updates on operational resilience received from the Investment Manager and
AIFM and other key services providers.
Financial
The Company is exposed to liquidity risk and credit
risk arising from the use of counterparties. If a
counterparty were to fail, it could adversely affect
the Company through either delay in settlement or
loss of assets. 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 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 16 to the financial statements
beginning on page 82.
The Board reviews the services provided by the Depositary and the internal
controls report of the Custodian to ensure that the security of the Company’s
custodial assets is maintained. Fundsmith 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.
Legal and Regulatory
The regulatory or political environment in which the
Company operates could change to the extent that
it affects the Company’s viability.
The Board monitors regulatory developments but relies on the services of its
external advisers to ensure compliance with applicable law and regulations.
The Board has appointed a specialist investment trust company secretary who
provides industry and regulatory updates at each Board meeting.
The Board believes that the UK’s exit from the European Union (‘Brexit’) 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.
Emerging Risks
The Company has carried out a robust assessment of the Company’s
emerging and principal risks and the procedures in place to identify
emerging risks are described below. The International Risk Governance
Council definition of an ‘emerging’ risk is one that is new, or is a
familiar risk in a new or unfamiliar context or under new context
conditions (re-emerging). Failure to identify emerging risks may
cause reactive actions rather than being proactive and, in the worst
case, could cause the Company to become unviable or otherwise
fail or force the Company to change its structure, objective or strategy.
The Audit Committee reviews a risk map at its half-yearly meetings.
Emerging risks are discussed in detail as part of this process and
also throughout the year to try to ensure that emerging (as well as
known) risks are identified and, so far as practicable, mitigated.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
34
Business Review
Strategic Report
Brexit
Longer Term Viability Statement
The Board has considered whether the UK’s exit from the European
Union (“Brexit”) poses a discrete risk to the Company. At the date of
this report, the UK has left the EU and has emerged from the
transition period with a trade and security deal finalised with the EU
on 24 December 2020. The impact and implications of this remain
to be seen.
As the Company is priced in sterling and its portfolio companies are
priced in foreign currencies, sharp movements in exchange rates can
affect the net asset value (see page 85 for the foreign currency
sensitivity analysis). This is not a reflection of 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
currency movements.
Furthermore, 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 share price discount widening. 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.
Impact of COVID-19
The Board recognises that the emergence and spread of the new
coronavirus (Covid-19) represents a new area of risk, both to the
Company’s investment performance and to its operations. In recent
months the Investment Manager successfully continued their dialogue
with investee companies and the Board has stayed in close contact
with the Investment Manager and has been continuously monitoring
portfolio and share price developments. The Board has also received
assurances from all of the Company’s service providers in respect of:
• their business continuity plans and the steps being taken to
guarantee the ongoing efficiency of their operations while
ensuring the safety and well-being of their employees;
• their cyber security measures including improved user-access
controls, safe remote working and evading malicious attacks; and
• any increased risks of fraud as a result of decreased operations
and possible employee terminations and weakness in user-
access controls resulting in the potential for management
overrides.
With the emergence of several vaccines, the outlook is cautiously
positive, but the Board will continue to monitor developments as
they occur.
In accordance with the UK Corporate Governance Code, the Directors
have carefully assessed the Company’s position and prospects as well
as the principal risks and have formed a reasonable expectation that
the Company will be able to continue in operation and meet its
liabilities as they fall due over the next four financial years. The Board
has chosen a four year horizon in view of the long term nature and
outlook adopted by the Investment Manager when making investment
decisions.
To make this assessment and in reaching this conclusion, the Audit
Committee has considered the Company’s financial position and its
ability to liquidate its portfolio and meet its liabilities as they fall due:
• The portfolio is principally comprised of investments traded on
major international stock exchanges. Based on historic analysis
69.4% of the current portfolio could be liquidated within
30 trading days with 47.7% in seven days and there is no
expectation that the nature of the investments held within the
portfolio will be materially different in future;
• The expenses of the Company are predictable and modest in
comparison with the assets and there are no capital
commitments foreseen which would alter that position; and
• The Company has no employees, only its non-executive Directors.
Consequently it does not have redundancy or other employment
related liabilities or responsibilities.
The Audit Committee, as well as considering the potential impact of
its principal risks and various severe but plausible downside scenarios,
has also considered the following assumptions in considering the
Company’s longer-term viability:
• There will continue to be demand for investment trusts;
• The Board and the Investment Manager will continue to adopt a
long-term view when making investments, and anticipated
holding periods will be at least four years;
• The Company invests principally in the securities of listed
companies traded on major international stock exchanges to
which investors will wish to continue to have exposure;
• The closed ended nature of the Company means that, unlike open
ended funds, it does not need to realise investments when
shareholders wish to sell their shares;
• Regulation will not increase to a level that makes running the
Company uneconomical; and
• The performance of the Company will continue to be satisfactory.
COVID-19 was also factored into the key assumptions made by
assessing its impact on the Company’s key risks and whether the key
risks had increased in their potential to affect the normal, favourable
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
and stressed market conditions. As part of this review the Board
considered the impact of a significant and prolonged decline in the
Company’s performance and prospects. This included a range of
plausible downside scenarios such as reviewing the effects of
substantial falls in investment values and the impact of the Company’s
ongoing charges ratio, which were the subject of stress testing.
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.
A copy of the Company’s Anti Bribery and Corruption Policy can be
found on the website at www.feetplc.co.uk. The policy is reviewed
annually by the Audit Committee.
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.
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 any particular
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 27.
The Investment Manager’s investment process includes an evaluation
of potential investee companies’ social and environmental impact and
corporate governance. They maintain a sustainability database of
company comments on a range of issues including environmental,
governance, social and innovation matters. Further information can
35
be found in the Investment Manager’s stewardship policy, which is
published on their website: www.fundsmith.co.uk.
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.
Integrity and Business Ethics
The Company is committed to carrying out business in an honest and
fair manner with a zero-tolerance approach to bribery, tax evasion and
corruption. In carrying out its activities, the Company aims to conduct
itself responsibly, ethically and fairly, including in relation to social and
human rights issues.
As an investment trust with limited internal resources, the Company
has little impact on the environment. The Company believes that high
standards of ESG make good business sense and have the potential
to protect and enhance investment returns. Consequently, the
Investment Manager’s investment criteria take account of ESG and
ethical issues and best practice is encouraged. The Board’s
expectations are that its principal service providers have appropriate
governance policies in place.
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.
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.
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 35 has been signed for and
on behalf of the Board.
Martin Bralsford
Chairman
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
36
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
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
20 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, Illustrated London News Limited, Coeus
Software and Chairman of the Bryanston Foundation.
John Spencer
Chairman of the Audit Committee
John 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.
John is an Independent Member for Value Assessment at Fundsmith LLP.
All Directors are members of the Audit and Management Engagement Committees.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
37
Meeting Attendance
The number of Board and Committee meetings held during the year ended 31 December 2020, and each Director’s attendance, is
shown below:
Type and number of meetings
held during the year ended 31 December 2020
Martin Bralsford
Rachel de Gruchy
David Potter
John Spencer
Directors’ Interests
Board
(8)
8
8
8
8
Audit Committee
(2)
2
2
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
Ordinary Shares of 1p each
31 December 2020
100,000
2,000
19,996
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, the CEO of Fundsmith LLP, the Investment Manager, held interests in 847,000 (2019: 847,000)
shares in the Company. Michael O’Brien, the Company’s Portfolio Manager at Fundsmith LLP, held interests in 27,425 shares in the
Company.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
38
Corporate Governance Report
Governance
The Board and Committees
Responsibility for effective governance lies with the Board whose role is to promote the long-term success of the Company. The governance
framework of the Company reflects the business model as an externally managed investment company; it has no employees and outsources
investment management, risk management, company management, company secretarial, administrative and marketing services to third
parties. The Board generates value for shareholders through its oversight of the service providers and management of costs associated
with running the Company.
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 and will not chair any discussions relating to the appointment of his successor.
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.
– to make recommendations to the Board regarding the
continuing appointment of the AIFM.
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.
The work of the Management Engagement Committee and the Audit Committee during the year is set out on pages 48 and 52 to 55
respectively.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
39
Corporate Governance
The Board has considered the principles and provisions of the AIC
Code of Corporate Governance (the “AIC Code”) published in
February 2019. The AIC Code addresses the principles and
provisions set out in the UK Corporate Governance Code (the “UK
Code”), as well as setting out additional provisions on issues that
are of specific relevance to the Company.
The Board considers that reporting against the principles and
provisions of the AIC Code (which has been endorsed by the
Financial Reporting Council) will provide better information
to shareholders. By reporting against the AIC Code, the Company
meets its obligations under the UK Code (and associated disclosure
requirements under paragraph 9.8.6 of the Listing Rules) and as
such does not need to report further on issues contained in the UK
Code which are irrelevant to the Company.
The AIC Code is available 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). The AIC Code includes an explanation of
how the AIC Code adapts the principles and provisions set out in
the UK Code to make them relevant for investment companies.
The Company has complied with the principles and provisions of the
AIC Code.
Board Leadership and Purpose
Purpose and Strategy
The purpose and strategy of the Company are described in the
Strategic Report on page 30.
Board Culture
The Board aims to fully enlist differences of opinion, unique vantage
points and areas of expertise. The Chairman encourages open
debate to foster a supportive and co-operative approach for all
participants. Strategic decisions are discussed openly and
constructively. The Board aims to be open and transparent with
shareholders and other stakeholders.
The Board has gained assurance on whistleblowing procedures at
the Company’s principal service providers to ensure employees at
those companies are supported in speaking up and raising
concerns. No concerns relating to the Company were raised during
the year.
Shareholder Relations
During the year, representatives of Fundsmith and Investec Bank
plc (the Company’s corporate stockbroker) regularly met with
institutional shareholders and private client asset managers to
understand their views on governance and the Company’s
performance. Reports on investor sentiment and the feedback from
investor meetings were discussed with the Directors at the following
Board meeting. The Chairman and the Senior Independent Director
met with investors on request. They discussed topics including
investment performance and the Board’s approach to addressing
the share price discount (see Chairman’s Statement on page 6 for
further information).
importance on communications with
Shareholder Communications
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. The Chairman and the SID are also now contactable by
email (see page 106 for details).
Significant Holdings and Voting Rights
Details of the shareholders with 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 47 to 50.
Stakeholder Interests and Board Decision-making
Under the new AIC Code, the Directors must now explain more fully
how they have discharged their duty under s172 of the Companies
Act 2006 in promoting the success of the Company for the benefit
of the members as a whole. This includes the likely consequences
of the Directors’ decisions in the long-term and how they have taken
wider stakeholders’ needs into account.
The Directors aim to act as fairly as possible between the
Company’s shareholders. The Board’s approach to shareholder
relations, and the actions taken as a result of the Board’s
engagement with shareholders, are summarised earlier in this
Corporate Governance Report. The Chairman’s Statement beginning
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
40
Corporate Governance Report
Governance
on page 6 also provides an explanation of the actions taken by the
Directors during the year to achieve the Board’s long-term aim of
ensuring that the Company’s shares trade at a price close to the
NAV per share, as well as steps that the Board has taken to reduce
the Company’s impact on the environment.
As an externally managed investment trust, the Company has no
employees, customers (in the traditional sense), operations or
premises. Therefore, the Company’s key stakeholders (other than
its shareholders) are considered to be its service providers.
The need to foster business relationships with the service providers
and maintain a reputation for high standards of business conduct
are central to the Directors’ decision-making as the Board of an
externally managed investment trust. The Directors believe that
fostering constructive and collaborative relationships with the
Company’s service providers will assist in their promotion of the
success of the Company for the benefit of all shareholders.
The Board engages with representatives from its service providers
throughout the year. Representatives from Fundsmith and Frostrow
Capital, as Company Secretary, are in attendance at each Board
meeting. As the Investment Manager and AIFM and the Company
Secretary respectively, the services they provide are essential to the
long-term success of the Company.
Further details are set out below:
Who?
Stakeholder Group
Why?
The Benefits of Engaging with
the Company’s Stakeholders
Investors
Clear communication of the Company’s
strategy and the performance against the
Company's objective can help the share
price trade at a narrower discount or a
wider premium to its net asset value per
share which benefits shareholders.
New shares can be issued to meet demand
without net asset value per share dilution
to existing shareholders. Increasing the size
of the Company can benefit liquidity as well
as spread costs.
In an effort to control the discount at which
shares trade to their net asset value per
share, the Company can buy back shares if
the Board considers this to be in the best
interest of the Company and shareholders
as a whole. Shares can either be held in
“treasury” or cancelled. Any shares held in
treasury can later be sold back to the
market if conditions permit. The Company
currently holds 35,684 shares in treasury.
How?
How the Board, the Investment Manager
and Administrator have Engaged with the
Company’s Stakeholders
The Investment Manager, Frostrow and the Company’s
broker, on behalf of the Board, complete a programme of
investor relations throughout the year.
An analysis of the Company’s shareholder register is
provided to the Directors at each Board meeting along with
marketing reports from Fundsmith. The Board reviews and
considers the marketing plans on a regular basis. Reports
from the Company’s broker are submitted to the Board on
investor sentiment and industry issues.
Key mechanisms of engagement include:
• the Annual General Meeting;
• the Company’s website which hosts reports, video
interviews with the investment manager and monthly
factsheets;
• one-on-one investor meetings and online webinars;
• should any significant votes be cast against a
resolution, proposed at the Annual General Meeting,
the Board will engage with shareholders in order to
understand the reasons behind the votes against; and
• following the consultation, an update will be published
no later than six months after the AGM and the Annual
Report will detail the impact the shareholder feedback
has had on any decisions the Board has taken and any
actions or resolutions proposed.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
41
How?
How the Board, the Investment Manager
and Administrator have Engaged with the
Company’s Stakeholders
The Board meets regularly with the Company’s Investment
Manager throughout the year both formally at the
scheduled Board meetings and informally as needed.
The Investment Manager’s attendance at each Board
meeting provides the opportunity for the Investment
Manager and Board to further reinforce their mutual
understanding of what is expected from both parties.
The Board and Fundsmith engage regularly with other
service providers both in one-to-one meetings and via
regular written reporting. Representatives from service
providers are asked to attend Board and Audit Committee
meetings when deemed appropriate. This regular
interaction provides an environment where topics, issues
and business development needs can be dealt with
efficiently and collegiately.
The Board together with Fundsmith have maintained
regular contact with the Company’s key service providers
during the pandemic, as well as carrying out a review of the
service providers' business continuity plans and additional
cyber security provisions.
Engagement on ESG issues with the aim of improving
operations. Fundsmith places emphasis on understanding
a company’s corporate culture. The Board strongly supports
the team in this undertaking.
Who?
Stakeholder Group
Why?
The Benefits of Engaging with
the Company’s Stakeholders
Investment Manager
Service Providers
Portfolio Companies
Company’s
the
Engagement with
Investment Manager
is necessary to
evaluate their performance against the
Company’s stated strategy and
to
understand any risks or opportunities this
may present. The Board ensures that the
Investment Manager’s environmental,
social and governance (“ESG”) approach is
in line with standards elsewhere and is in
line with the Board's expectations.
Engagement also helps ensure
that
Investment Management costs are closely
monitored and remain competitive.
The Company contracts with third parties
for other services including: depositary,
investment accounting & administration as
well as company secretarial and registrars.
The Company ensures that the third parties
to whom
the services have been
outsourced complete their roles in line with
their service level agreements, thereby
supporting the Company in its success and
ensuring compliance with its obligations.
The COVID-19 pandemic has meant that it
was vital to make certain there were
adequate procedures in place at the
Company’s key service providers to ensure
the safety and wellbeing of their employees
and the continued high quality of service to
the Company.
Gaining a deeper understanding of the
portfolio companies and their strategies as
well as incorporating consideration of ESG
factors into the investment process assists
in understanding and mitigating risks of an
investment as well as identifying future
potential opportunities.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
42
Corporate Governance Report
Governance
What?
What were the Key Topics of Engagement?
Outcomes and Actions
What Actions were Taken, Including Principal
Decisions?
Key topics of engagement with investors
• Ongoing dialogue with shareholders concerning the strategy of
the Company, performance, the portfolio and ESG issues.
• The Investment Manager and the broker meet regularly with
shareholders and potential investors to discuss the Company’s
strategy, performance and the portfolio.
Key topics of engagement with the Investment Manager on
an ongoing basis
• Portfolio composition, performance, outlook and business
• Updates are received by the Board at every Board meeting and
updates.
on an ad hoc basis where appropriate.
• The impact of Brexit on their business and the portfolio.
• No specific action on Brexit was required.
• The impact of Covid-19 on their business and the portfolio.
• Regular updates were received by the Board throughout the
year in respect of the impact of the pandemic on investment
decision making and working practices.
Other Service Providers
• The Directors have frequent engagement with the Company’s
other service providers through the annual cycle of reporting
and due diligence meetings. This engagement is completed
with the aim of maintaining an effective working relationship
and oversight of the services provided.
• No specific action required as the reviews of the Company’s
service providers have been positive and the Directors believe
their continued appointment is in the best interests of the
Company.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
43
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.
There were no other direct or indirect interests of a Director that
conflicted, or potentially conflicted, with the interests of the
Company during the year. Appropriate authorisation will be sought
prior to the appointment of any new director or if any new conflicts
or potential conflicts arise.
• leading the annual assessment of the performance of the
Chairman
• holding meetings with the other non-executive Directors without
the Chairman being present, on such occasions as necessary
• carrying out succession planning for the Chairman’s role
• working with the Chairman, other Directors and shareholders
to resolve major issues
• being available to shareholders and other Directors to address
any concerns or issues they feel have not been adequately
dealt with through the usual channels of communication (i.e.
through the Chairman or the Investment Manager)
Division of Responsibilities
Responsibilities of the Chairman and the SID
The Chairman’s primary role is to provide leadership to the Board,
assuming responsibility for its overall effectiveness in directing the
Company. The Chairman is responsible for:
• taking the chair at general meetings and Board meetings,
conducting meetings effectively and ensuring all Directors are
involved in discussions and decision-making
• setting the agenda for Board meetings and ensuring the
Directors receive accurate, timely and clear information for
decision-making
• taking a leading role in determining the Board’s composition
and structure
• overseeing the induction of new directors and the development
of the Board as a whole
• leading the annual board evaluation process and assessing the
contribution of individual Directors
• supporting and also challenging the Investment Manager (and
other suppliers where necessary)
• ensuring effective communications with shareholders and,
where appropriate, stakeholders
• engaging with shareholders to ensure that the Board has a
clear understanding of shareholder views
The Senior Independent Director (SID) serves as a sounding board
for the Chairman and acts as an intermediary for other Directors
and shareholders. The SID is responsible for:
• working closely with the Chairman and providing support
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
regulatory and statutory
information on
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.
Director Independence
The Board consists of four non-executive Directors, each of whom
the Board considers to be independent of Fundsmith and the Board
believes that there are no relationships or circumstances which are
likely to impair or could appear to impair their judgement.
Directors’ Other Commitments
During the year, none of the Directors took on any significant new
commitments or appointments. All of the Directors consider that they
have sufficient time to discharge their duties.
Board Meetings
The primary focus at regular Board meetings is the review of
investment performance and associated matters, including asset
allocation, marketing/investor relations, gearing, 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’s approach to
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
44
Corporate Governance Report
Governance
addressing share price performance during the year is described in
the Chairman’s Statement beginning on page 6.
the Board and the Investment Manager, and the two parties worked
closely together throughout the year.
The Board is responsible for setting the Company’s corporate
strategy and reviews the continued appropriateness of the
Company’s
investment strategy and
investment restrictions at each meeting.
investment objective,
The Management Engagement Committee evaluates Fundsmith’s
performance and reviews the terms of the Investment Management
Agreement at least annually. The outcome of this year’s review is
described on page 45.
The number of meetings and the individual attendance by Directors
is set out on page 37.
Matters Reserved for Decision by the Board
The Board has adopted a schedule of matters reserved for its
decision. This includes, inter alia, the following:
• Requirements under the Companies Act 2006, including
approval of the half year and annual financial statements,
recommendation of the final dividend (if any), the appointment
or removal of the Company Secretary, and determining the
policy on share issuance and buybacks.
• Matters relating to certain Stock Exchange requirements and
announcements, the Company’s internal controls, and the
policy
Company’s
and procedures.
governance
structure,
corporate
• Decisions relating to the strategic objectives and overall
management of the Company, including appointment or
removal of the AIFM and other service providers, and review of
the Investment Policy.
• Matters relating to the Board and Board committees, including
the terms of reference and membership of the committees, the
appointment of directors (including the Chairman and the SID)
and the determination of Directors’ remuneration.
Day-to-day operational and investment management is delegated
to Fundsmith as AIFM.
The Board takes responsibility for the content of communications
regarding major corporate issues, even if Fundsmith acts as
spokesman. The Board is kept informed of relevant promotional
material that is issued by Fundsmith.
Relationship with the Investment Manager
Representatives from Fundsmith are in attendance at each Board
meeting to address questions on specific matters and seek approval
for specific transactions which Fundsmith is required to refer to the
Board. There is a respectful and constructive partnership between
Relationship with Other Service Providers
The Management Engagement Committee monitors and evaluates
all of the Company’s other service providers, including the Company
Secretary, Depositary, Registrar and Broker. At the most recent
review in November 2020, the Committee concluded that all the
service providers were performing well and should be retained for
a further year on their existing terms and conditions.
Stewardship and the Exercise of Voting Powers
The Board has delegated authority to Fundsmith (as AIFM and
Investment Manager) to engage with companies held in the portfolio
and to vote the shares owned by the Company. The Board has
instructed that Fundsmith submit votes for such shares wherever
possible. Fundsmith may refer to the Board on any matters of a
contentious nature.
Fundsmith’s approach to stewardship, including their consideration
of environmental, social and governance issues, is set out in their
stewardship policy which can be found on their website
www.fundsmith.co.uk. During the year, the Board reviewed
Fundsmith’s updated stewardship policy and a summary of their
voting and engagement record.
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. No such advice was
sought during the year.
Company Secretary
The Directors have access to the advice and services of an
investment trust specialist Company Secretary through
its
appointed representative, which is responsible for advising the
Board on all governance matters. The Company Secretary ensures
governance procedures are followed and that the Company
complies with applicable statutory and regulatory requirements.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
45
Composition, Succession and Evaluation
Board Evaluation
During the course of 2020, the performance of the Board, its
committees and the individual Directors (including each Directors’
independence) was evaluated through a formal assessment process
led by the Chairman.
The Chairman and the Board as a whole are satisfied that the
structure and operation of the Board continues to be effective and
there is a satisfactory mix of skills, experience and knowledge. This
year, board succession was identified as an area requiring further
consideration and this is discussed in the following section.
During the year, Mr Potter led the appraisal of the Chairman’s
performance, in line with the AIC Code.
All Directors submit themselves for annual re-election by
shareholders. Further information on the contribution of each
individual Director can be found in the explanatory notes to the
notice of the AGM beginning on page 103. Following the evaluation
process, the Board recommends that shareholders vote in favour
of the Directors’ re-election at the forthcoming AGM.
Succession Planning
The Board regularly considers its structure and recognises the need
for progressive refreshment.
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; 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 policy is reviewed annually and
at such other times as circumstances may require.
During the year, the Board reviewed the policy on Directors’ tenure
and considered the overall length of service of the Board as a whole.
As three of the four Directors have been appointed since the launch
of the Company, a review process, initiated by the Chairman, has
been put in place to ensure that there is an orderly succession when
the time comes for those Directors to retire from the Board. (See
the Chairman’s Statement on page 7 for further information).
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 AGM. The minimum number of
directors is two and the maximum is 10. When considering new
appointments, the Board endeavours to ensure that it has the
capabilities required to be effective and oversee the Company’s
strategic priorities. This will include an appropriate range, balance
and diversity of skills, experience and knowledge. The Company is
committed to ensuring that any vacancies arising are filled by the
most qualified candidates.
While no new appointments were made during the year, subsequent
to the year-end it was agreed that Professor Heather McGregor, CBE,
should join the Board at the conclusion of the 2021 AGM. Professor
McGregor’s appointment was made following a review by the Board
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, the Board drew up a list of
desirable skills and industry experience for a new director. Professor
McGregor’s appointment was made following an extensive interview
process where it was determined that she was the best candidate
for the role. No external search agency was used in this process.
Policy on the Director Tenure
The tenure of each independent, non-executive director, including
the Chairman, is not expected to exceed nine years. However, in the
case of the Chairman, a limited extension may be granted provided
it is conducive to the Board’s overall orderly succession. The Board
believes that this more flexible approach to the tenure of the
Chairman is appropriate in the context of the regulatory rules that
apply to investment companies, which ensure that the chair remains
independent after appointment, while being consistent with the
need for regular refreshment and diversity.
Notwithstanding this expectation, the Board considers that a
director’s tenure does not necessarily reduce his or her ability to act
independently and will continue to assess each Director’s
independence annually, through a formal performance evaluation.
Diversity Policy
The Board supports the principle of Boardroom diversity, of which
gender is one important aspect. The Company’s policy is that the
Board should be comprised of directors who collectively display the
necessary balance of professional skills, experience, length of
service and industry knowledge and that appointments to the Board
should be made on merit, against objective criteria, including
diversity in its broadest sense.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
46
Corporate Governance Report
Governance
The objective of the policy is to have a broad range of approaches,
backgrounds, skills, knowledge and experience represented on the
Board. The Board believes that this will make the Board more
effective at promoting the long-term sustainable success of the
company and generating value for all shareholders by providing a
range of perspectives and the challenge needed to support good
decision making. To this end, achieving a diversity of perspectives
and backgrounds on the Board will be a key consideration in any
Director search process.
The gender balance of three men and one woman meets the
original recommendation of Lord Davies’ report on Women on
Boards. The Board is aware that new gender representation
objectives have been set for FTSE 350 companies and that targets
concerning ethnic diversity have been recommended for FTSE 250
companies. While the Company is not a FTSE 350 constituent and
the Board is small in size, the Board will continue to monitor
developments in this area and will consider diversity during any
director search process.
Audit, Risk and Internal Control
The Statement of Directors’ Responsibilities on page 51 describes
the Directors’ responsibility for preparing this report.
The Audit Committee Report, beginning on page 52, explains the
work undertaken to allow the Directors to make this statement and
to apply the going concern basis of accounting. It also sets out the
main roles and responsibilities and the work of the Audit Committee
and describes the Directors’ review of the Company’s risk
management and internal control systems.
A description of the principal risks facing the Company and an
explanation of how they are being managed is provided in the
Strategic Report on pages 2 and 35.
The Board’s assessment of the Company’s longer-term viability is
set out in the Strategic Report on page 34.
Remuneration
The Directors’ Remuneration Report beginning on page 56 and the
Directors’ Remuneration Policy Report on page 58 set out the levels
of remuneration for each Director and explain how Directors’
remuneration is determined.
Annual General Meeting
THE FOLLOWING INFORMATION TO BE DISCUSSED AT THE
FORTHCOMING ANNUAL GENERAL MEETING IS IMPORTANT
AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in any doubt about the action you should take,
you should seek advice from your stockbroker, bank
manager, solicitor, accountant or other financial adviser
authorised under the Financial Services and Markets Act
2000 (as amended). If you have sold or transferred all of
your ordinary shares in the Company, you should pass this
document, together with any other accompanying
documents, including the form of proxy, at once to the
purchaser or transferee, or to the stockbroker, bank or other
agent through whom the sale or transfer was effected, for
onward transmission to the purchaser or transferee.
Resolutions relating to the following items of special business will
be proposed at the forthcoming Annual General Meeting.
Resolution 10 Authority to allot shares
Resolution 11 Authority to disapply pre-emption rights
Resolution 12 Authority to sell shares held in Treasury on a non
pre-emptive basis
Resolution 13 Authority to buy back shares
Resolution 14 Authority to hold General Meetings (other than the
Annual General Meeting) on at least 14 clear days’
notice
Resolution 15 To approve an amended Investment Objective and
Investment Policy
Resolution 16 To approve the proposed amendment to the
Company’s Articles of Association
The full text of the resolutions can be found in the Notice of Annual
General Meeting on pages 97 to 102.
By order of the Board
Frostrow Capital LLP
Company Secretary
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Report of the Directors
Governance
47
The Directors present their annual report on the affairs of the
Company together with the audited financial statements and the
Independent
ended
31 December 2020.
Auditor’s Report
year
the
for
report. Disclosures
The Corporate Governance Report on pages 38 to 46 forms part of
this
future
relating
developments and risk management can be found in the Strategic
Report on pages 2 to 35.
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 9 and the
Investment Philosophy beginning on page 27.
Results and Dividend
The results attributable to shareholders for the year are shown on
page 67.
In 2020, the Company made a revenue profit. Under investment trust
rules regarding distributable income, a final dividend will 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 trust 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 2.0p per ordinary share will be paid on 3 June 2021 to
shareholders on the register on 16 April 2021. The associated
ex-dividend date is 15 April 2021.
Information on the Company’s dividend policy is also detailed in the
Chairman’s Statement on pages 6 and 7.
Alternative Performance Measures
the Company’s
The Financial Statements (on pages 67 to 87) set out the required
statutory reporting measures of
financial
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 4 and explained in greater detail in the Strategic Report,
under the heading ‘Key Performance Indicators’ on page 31. 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 92 to 94.
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.
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 (see Glossary beginning on page 92 for further details). 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 89.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
48
Report of the Directors
Governance
Continuing Appointment of the Investment
Manager and AIFM
and those in the Longer-Term Viability Statement, the stress testing
conducted also featured consideration of the effects of COVID-19.
The performance of Fundsmith LLP, the Company’s Investment
Manager and AIFM, is reviewed continuously by the Board and its
Management Engagement Committee (the “MEC”) with a formal
evaluation process undertaken each year.
The MEC reviewed Fundsmith’s performance and the continuing
appropriateness of Fundsmith’s appointment in November 2020,
with a recommendation being made to the Board.
The Board believes the continuing appointment of Fundsmith, under
the terms summarised on page 30, is in the interests of
shareholders as a whole. In coming to this decision, the MEC and
the Board took into consideration, inter alia, the following:
• the terms of the Investment Management Agreement, in
particular the level and method of remuneration and the notice
period, and the comparable arrangements of a group of the
Company’s peers;
• the quality of service provided by the portfolio management
team and the Company’s investment performance in absolute
terms and in comparison to the MSCI Emerging and Frontier
Markets Index; and
• the quality of service provided by the company management,
administrative and marketing teams that Fundsmith allocates
to the management of the Company.
Going Concern
The Company’s portfolio, investment 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 Board has considered a detailed
assessment of the Company’s ability to meet its liabilities as they
fall due, including stress tests which modelled the effects of
substantial falls in portfolio valuations and liquidity constraints, on
the Company’s NAV, cash flows and expenses. Based on the
information available to the Directors at the date of this report,
including the results of these stress tests, the conclusions drawn in
the Viability Statement in the Strategic Report on pages 34 and 35
and the Company’s cash balances, the Directors are satisfied that
the Company has adequate financial resources to continue in
operation for at least the next 12 months and that, accordingly, it is
appropriate to continue to adopt the going concern basis in
preparing the financial statements. In reaching these conclusions
Continuation of the Company
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% of the 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. Despite the Company’s
shares having traded at an average discount of 12.3% during the
year ended 31 December 2020, the Board believes that such a vote
should not be put before shareholders at this year’s Annual General
Meeting. (Please see the Chairman’s Statement beginning on
page 6 for further information).
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 36.
Martin Bralsford (Chairman)
Rachel de Gruchy
David Potter
John Spencer
All Directors seek re-election by shareholders at each Annual
General Meeting.
Directors’ & Officers’ Liability Insurance
Directors’ & officers’ liability insurance cover was maintained during
the year ended 31 December 2020. It is intended that this cover
will continue for the year ending 31 December 2021 and
subsequent years.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
49
Substantial Share Interests
The Company was aware of the following substantial interests in the voting rights of the Company:
Shareholder
Hargreaves Lansdown
1607 Capital LCC
Wells Fargo & Co
Interactive Investor
City of London Investment Group
AJ Bell Securities
Mr Simon Justin Nixon
Mr Terry Smith
Compagnie Odier SCA
2 March 2021
31 December 2020
Number of
shares
2,856,299
1,640,567
1,511,750
1,712,950
1,335,999
1,248,149
1,000,000
847,000
834,979
% of issued
share capital
10.7
6.2
5.7
6.4
5.0
4.7
3.8
3.2
3.1
Number of
shares
2,547,811
1,934,029
1,758,569
1,590,065
1,516,160
1,160,061
1,000,000
847,000
846,749
% of issued
share capital
9.2
7.3
6.6
6.0
5.7
4.4
3.8
3.2
3.2
As at 31 December 2020 and the date of this report, the Company had 26,604,372 shares in issue.
Directors’ Indemnities
Share Capital
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.
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 13 on
page 82.
At the start of the year under review, the Directors had shareholder
authority to issue up to 1,983,755 ordinary shares of 1 penny each
on a non-pre-emptive basis. At the Company’s annual general
meeting held on Wednesday, 27 May 2020, this authority expired
and a new authority to allot up to 2,664,005 ordinary shares
(representing 10% of the Company’s issued share capital) on a
non-pre-emptive basis was granted. Authority to repurchase up to
3,993,344 ordinary shares was also granted.
35,684 shares were repurchased during the year, these shares are
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
repurchase shares are set out in the Notice of Annual General
Meeting beginning on page 97.
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 100.
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
50
Report of the Directors
Governance
Political Donations
The Company has not made, and does not intend to make, any
political donations.
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 this Annual Report.
Global Greenhouse Gas Emissions
The Company is an investment trust, with neither employees nor
premises, nor has it any financial or operational control of the assets
which it owns. It 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 or the
Companies (Directors’ Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018, including those
investment portfolio.
within
Consequently, the Company consumed less than 40,000 kWh of
energy during the year in respect of which the Directors’ Report is
prepared and therefore is exempt from the disclosures required
under the Streamlined Energy and Carbon Reporting criteria.
the Company’s underlying
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
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
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.
Annual General Meeting
The Company’s Annual General Meeting (“AGM”) will be held on
Wednesday, 26 May 2021 at 12 noon.
The Notice of the AGM and the explanatory notes to the proposed
resolutions can be found on pages 97 to 105.
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 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.
Events after the Reporting Period
Since the year end and up to the date of this report, there have been
no events that would require adjustment of or disclosure in the
financial statements.
By order of the Board
Frostrow Capital LLP
Company Secretary
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Statement of Directors’ Responsibilities
51
Governance
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
Accounting Standards in conformity with the requirements of the
Companies Act 2006 and IFRSs issued by the Accounting Standards
Board (IASB). 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 the 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.
• 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 Auditor
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 2020;
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
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:
Martin Bralsford
Chairman
31 March 2021
• 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
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
52
Audit Committee Report
Governance
Statement from the Chairman
I am pleased to present the Audit Committee report for the year
ended 31 December 2020. The Committee met twice during the
year. Attendance by each Director is shown in the table on page 37.
The Committee also met on 3 March 2021 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.
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.
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. Deloitte did not provide any
non-audit services to the Company during the year. An analysis
of the Auditor’s remuneration can be found on page 77.
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.
Composition
The Audit Committee comprises all of the Directors whose
biographies are set out on page 36. The Committee as a whole has
experience relevant to the investment trust industry with Committee
members having a range of commercial, financial and investment
experience. Both Mr Spencer and Mr Bralsford are chartered
accountants. In light of Mr Bralsford’s relevant experience, his
continued independence and his valued contributions in Committee
meetings, the Audit Committee considers it appropriate that he
continues to be a member.
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, and provided the information necessary for
shareholders to 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.
Meetings and Business
The following matters were dealt with at the Committee’s meetings:
February 2020
– Review of the Company’s annual results;
– Approval of the 2019 annual report and financial statements;
– Review of risk management, internal controls and compliance;
– Review of cyber security controls in place at the Company’s
Registrars; and
– Review of the outcome of the audit.
July 2020
– Review of the Committee’s terms of reference and non-audit
services policy;
– Review of the Auditor’s plan and terms of engagement for the
2020 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 of the Company’s half-year results; and
– Approval of the half-year report.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
53
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
• the comprehensive control framework around the production
of the Annual Report, including the verification process in place
to ensure 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:
COVID-19
The COVID-19 pandemic commenced in early 2020 and the
Committee gave in-depth consideration to its potential effects on
the Company. Despite initial volatility in line with markets world-
wide, the Company’s performance has remained robust. The
long-term effect of the pandemic on the global economy and, in
particular, emerging markets will become clearer in time and the
Committee will continue to monitor the impact of COVID-19, which
is also captured in the Company’s risk register.
In order to mitigate the business risks caused by the pandemic, the
Committee continues to review the operational resilience of its
various service providers, who have continued to demonstrate their
ability to provide services to the expected level, whilst doing so
remotely.
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.
Internal Controls and Risk Management
The Directors have identified main areas of risk as described in the
Strategic Report on pages 2 to 35. They 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
mitigating actions if necessary.
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 Company Secretary, the Investment Manager and the
Depositary. Each maintains its own systems and the Committee
receives regular reports from them. The Committee is satisfied that,
appropriate systems have been in place for the year under review.
Other Reporting Matters
Accounting Policies
The current accounting policies, as set out on pages 71 to 74, have
been applied consistently throughout the year and the prior period
where applicable.
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 financial statements on the going concern basis. Further detail
is provided on page 48.
Viability Statement
The Audit Committee reviewed the Company’s financial position and
principal risks in connection with the Board’s statement on the
longer term viability of the Company, which is set out on pages 34
and 35 of the Strategic Report.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
54
Audit Committee Report
Governance
Risk Management and Internal Controls
External Auditor
The Board has overall responsibility for risk management and for
the review of the internal controls of the Company, undertaken in
the context of the Company’s investment objective.
The review covers the key business, operational, compliance and
financial risks facing the Company. In arriving at its judgement of
the risks, the Board has considered the Company’s operations in
light of the following factors:
• the nature of the Company, with all management functions
outsourced to third party service providers;
• the nature and extent of risks which it regards as acceptable
for the Company to bear within its overall investment objective;
Meetings:
This year the nature and scope of the audit together with Deloitte
LLP’s audit plan were considered by the Committee on
30 July 2020.
The Committee met Deloitte LLP (the “Auditor”) on 3 March 2021 to
review the outcome of the audit and the draft 2020 Annual Report
and financial statements.
Independence and Effectiveness:
In order to fulfil the Committee’s responsibility regarding the
independence of the Auditor, the Committee reviewed:
• the threat of such risks becoming a reality; and
– the senior audit personnel in the audit plan for the year;
• the Company’s ability to reduce the incidence and impact of
– the Auditor’s arrangements concerning any potential conflicts
risk on its performance.
of interest;
A summary of the principal risks facing the Company is provided in
the Strategic Report on pages 32 and 33.
– the extent of any non-audit services;
Against this background, a risk matrix has been developed which
covers all key risks that the Company faces, the likelihood of their
occurrence and their potential impact, how these risks are
monitored and the mitigating controls in place.
The Board has delegated to the Audit Committee responsibility for
the review and maintenance of the risk matrix. The Committee
reviews the risk matrix each time it meets, bearing in mind any
changes to the Company, its environment or service providers since
the last review. The Board considers whether any new risks are
emerging as a result of any such changes and any significant
changes to the risk matrix are discussed with the Board. 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 Committee reviews the internal controls reports from its
principal service providers on an annual basis. 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.
– 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
55
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 next Annual
General Meeting.
Performance Evaluation
The Committee reviewed the results of the annual evaluation of its
performance in November 2020. As part of the evaluation, the
Committee reviewed the following:
• the composition of the Committee;
• the leadership of the Committee Chairman;
• the Committee’s monitoring of compliance with corporate
governance regulations;
• the Committee’s review of the quality and appropriateness of
financial accounting and reporting;
• the Committee’s review of significant risks and internal
controls; and
• the Committee’s assessment of
independence,
competence and effectiveness of the Company’s external
auditor.
the
It was concluded that the Committee was performing satisfactorily
and there were no formal recommendations made to the Board.
John Spencer
Chairman of the Audit Committee
31 March 2021
Non-Audit Services
The Company operates on the basis whereby the provision of all
non-audit services by the Auditors has to be preapproved by the
Audit Committee. Such services are only permissible where no
conflicts of interest arise, the service is not expressly prohibited by
audit legislation, where the independence of the Auditors 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 Auditors if they are inconsequential or would have no direct
effect 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 services must not exceed
70% of the average audit fees paid in the last three years.
During the year under review, Deloitte LLP have carried out no
non-audit work.
Audit Tendering
Deloitte LLP has been the appointed Auditor since the Company’s
launch in 2014. Deloitte carried out the audit for the years ended
31 December 2014-2020 and was considered independent by the
Board. Chris Hunter is the designated 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, remuneration or independence reasons. Unless any
such grounds for change arise in the interim, it is expected that the
next audit tender will take place in 2023.
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
56
Directors’ Remuneration Report
Governance
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 59 to 66.
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 unchanged from the previous
year: £30,000 per annum for the Chairman and £25,000 per
annum for Directors, with Directors who chair a board committee
receiving an additional £2,000 per annum. At a review meeting held
on 19 November 2020, it was decided that Directors fees would
remain unchanged for the year ending 31 December 2021. The
projected fees for 2021 are set out on page 58. No remuneration
consultants were appointed during the year (2019: none).
All levels of remuneration reflect both the time commitment and
responsibility of the role. The simple fee structure reflects the non-
executive nature of the Board, which itself reflects the Company’s
business model as an externally-managed investment trust (please
refer to the Business Review beginning on page 30 for more
information). Accordingly, statutory requirements relating to
executive directors’ and employees’ pay do not apply.
Directors’ Fees
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 (2019: nil).
Percentage
Date of
Appointment
Fees change
to the Board 2020 (£)2019 (£) (%)
Fees
Director
Martin Bralsford 23 May 2014
Rachel de Gruchy 1 June 2018
23 May 2014
David Potter
John Spencer
23 May 2014
Total
30,000 30,000 –
25,000 25,000 –
27,000 27,000 –
27,000 27,000 –
109,000 109,000
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
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. There were no
claims for taxable benefits during the year.
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
The Directors’ letters of appointment specifically exclude any
entitlement to compensation upon leaving office for whatever
reason. Appointment as Director may, at the discretion of either
party, be terminated upon three months’ notice. No payments were
made to past directors for loss of office.
Share Price Total Return
A performance comparison is required to be presented in this
report. As the Company commenced trading on 25 June 2014, the
performance comparison is shown for the period from 25 June
2014 to 31 December 2020 using the MSCI Emerging and Frontier
Markets Index (measured on a total return, net sterling adjusted
basis) which the Board has adopted as the principal comparator for
both the Company’s performance and that of the Investment
Manager for the period.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
57
Total Shareholder Return for the period 25 June 2014 to
31 December 2020
2,215 votes were withheld; the percentage of votes excludes votes
withheld.
100%
75%
50%
25%
0%
-25%
Launch
Directors’ Interests in the Company’s Shares as at
31 December 2020 (audited)
Martin Bralsford (Chairman)
Rachel de Gruchy
David Potter
John Spencer
Total
Ordinary shares
of 1p each
2020
2019
100,000
2,000
19,996
5,000
126,996
100,000
2,000
19,996
5,000
126,996
D ec-1 4
D ec-1 5
D ec-1 6
D ec-1 7
D ec-1 8
D ec-1 9
D ec-2 0
Directors are not required to hold shares in the Company.
FEET Share Price
MSCI EM + FM
No changes have been notified to the date of this report.
Source: MSCI/Bloomberg
Approved by the Board and signed on its behalf by:
Relative Cost of Directors’ Remuneration
The bar chart below shows the comparative cost of Directors’ fees
compared with the proposed level of dividend distribution and
Company expenses for the years ended 31 December 2019 and
2020.
Martin Bralsford
Chairman
31 March 2021
£’000
5000
4000
3000
2000
1000
0
4,757
4,334
2020
2019
852
532
109
109
Directors’
Fees
Company
Expenses
Dividends
Statement of Voting at the Annual General Meeting
At the AGM held on 27 May 2020, 6,723,678 votes (99.88%) were
received in favour of the resolution seeking approval of the
Directors’ Remuneration Report, 8,401 (0.12%) were against, and
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
58
Directors’ Remuneration Policy Report
During the year, no communications were 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, it is expected that an Ordinary Resolution for
the approval of this policy will next be considered by shareholders
at the forthcoming Annual General Meeting.
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. There were no such
events in 2020 (2019: none) and so no additional fees were paid
to any of the Directors. The projected Directors’ fees for 2021 are
shown in the table below. The Company does not have any
employees.
Directors’ Fees Projected and Current
Martin Bralsford
Rachel de Gruchy
David Potter
John Spencer
Total
Fees
2021 (£)
30,000
25,000
27,000
27,000
109,000
Fees
2020 (£)
30,000
25,000
27,000
27,000
109,000
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Independent Auditor’s Report
59
Financial Statements
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Fundsmith Emerging Equities Trust plc (the
‘company’):
l give a true and fair view of the state of the company’s affairs as at 31 December 2020
and of its profit for the year then ended;
l have been properly prepared in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006 and IFRSs as issued
by the International Accounting Standards Board (IASB); and
l have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
l the Statement of Comprehensive Income;
l the Statement of Financial Position;
l the Statement of Changes in Equity;
l the Statement of Cash Flows; and
l the related notes 1 to 19.
The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in
conformity with the requirements of the Companies Act 2006 and as issued by the IASB.
2. 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.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
l Valuation of Investments; and
l Ownership of Investments.
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
(cid:11)
(cid:11)
(cid:11)
(cid:11)
Materiality
Scoping
The materiality that we used in the current year was £3.9 million which was determined on
the basis of 1% of net assets as of 31 December 2020.
Audit work to respond the risk of material misstatement was performed directly by the
audit engagement team.
Significant changes in our approach
There were no significant changes in our approach in the current year.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
60
Independent Auditor’s Report
Financial Statements
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation
of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the company’s ability to continue to adopt the going concern basis of accounting included:
l Obtaining an understanding of relevant controls in place in preparing the revenue projections;
l Assessing liquidity and the ability of the Managers to trade in the investment portfolio (within the normal spreads) in order to cover
operational expenditure as it falls due;
l Assessing management’s revenue account projections for the subsequent 12 month period (from March 2021) for reasonableness;
l Assessing any other market altering factors such as Covid-19 by looking at the operational impact and business continuity plans;
l Confirming that the latest continuation vote has taken place and that it has been favourable for the continuation of the company; and
l Assessing the going concern disclosures included within the financial statements
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the company’s ability to continue as a going concern for a period of at least twelve months
from when the financial statements are authorised for issue.
In relation to the reporting on how the company has applied the UK Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this
report.
5. 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.
5.1 Valuation of Investments
Key audit matter description
(cid:11)
As an investment entity, the company holds investments of £383m as at 31 December 2020
(2019: £312m) which has increased by 23% from the prior year-end. These represent the
most quantitatively significant financial statement line on the statement of financial position,
hence alteration of investment prices is deemed more susceptible to manipulation by fraud.
In addition, the investments held at fair value through profit or loss 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 profit or loss and
also the fair value hierarchy for investments disclosures.
Investments are valued by a fund administrator on behalf of the company.
Refer to note 1e to the financial statements for the accounting policy on investments and
details of the investments are disclosed in note 10 to the financial statements. The valuation
of investment risk is included within the Audit Committee report beginning on page 52.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
61
How the scope of our audit responded
to the key audit matter
We performed the following procedures to address the valuation of investments key
audit matter:
l We obtained an understanding over the controls at fund administrator relating to
valuation of investments by reviewing an assurance report over the fund administrator’s
controls, and receiving reconfirmation from fund administrator that these controls were
in effect during the year. We assessed the professional competence and independence
of the auditor who provided the assurance report; and
l 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:
l We identified investments that were not actively traded and considered indicators of
impairment;
l 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
l We reviewed the completeness and appropriateness of disclosures in relation to fair value
measurements and liquidity risk.
Based on the work performed we concluded that the valuation of investments and their
classification in the fair value hierarchy is appropriate.
The company holds investments of £383m as at 31 December 2020 (2019: £312m) which
has increased by 23% from the prior year-end. These represent the most quantitatively
significant financial statement line on the statement of financial position. There is a risk
that investments recorded may not be owned by the company at year end and as such we
deem this more susceptible to manipulation by fraud.
Refer to note 1e for the accounting policy on investments and details of the investments
are disclosed in note 10. The ownership of investment risk is included within the Audit
Committee report beginning on page 52.
Key observations
5.2 Ownership of Investments
Key audit matter description
(cid:11)
How the scope of our audit responded
to the key audit matter
We performed the following procedures to address this key audit matter:
l We obtained an understanding over the controls at the fund administrator relating to
ownership of investments by reviewing an assurance report over the fund
administrator’s controls and obtaining confirmation from the fund administrator that
these controls were in effect during the year. We also assessed the professional
competence and independence of the auditor who provided the assurance report;
l We confirmed the ownership of 100% of investments at the year-end date by obtaining
independent third party confirmations directly from the custodian; and
l We agreed the schedule of investments holding as at the year-end to the independently
obtained custodian confirmation and investigated any differences in the holdings.
Based on the work performed we did not identify differences in the investment holdings
when agreeing the company’s investment portfolio to the confirmation received directly from
the custodian.
Key observations
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
4(cid:22)(cid:23)(cid:22) ’(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:2)(cid:7)(cid:6)(cid:3)(cid:8)(cid:11)
62
Independent Auditor’s Report
Financial Statements
6. Our application of materiality
6.1. 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
£3.9 million (2019: £3.2 million)
Basis for determining materiality
1% (2019: 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.
(cid:16)(cid:17)(cid:18)(cid:19)(cid:20)(cid:2)(cid:3)(cid:4)(cid:2)(cid:5)(cid:6)(cid:7)(cid:8)(cid:8)(cid:9)
(cid:10)(cid:11)(cid:4)(cid:3)(cid:12)(cid:13)(cid:11)(cid:14)(cid:13)(cid:4)(cid:15)(cid:5)(cid:6)(cid:7)(cid:16)(cid:17)(cid:9)
(cid:29)(cid:3)(cid:4)(cid:5)(cid:19)(cid:2)(cid:3)(cid:4)(cid:2)
(cid:10)(cid:11)(cid:4)(cid:3)(cid:12)(cid:13)(cid:11)(cid:14)(cid:13)(cid:4)(cid:15)
(cid:19)9(cid:20)(cid:13)(cid:4)(cid:5)(cid:21)(cid:22)(cid:9)(cid:9)(cid:13)(cid:4)(cid:4)(cid:3)(cid:3)(cid:5)
(cid:12)(cid:3)(cid:23)(cid:22)(cid:12)(cid:4)(cid:13)(cid:24)(cid:25)(cid:5)(cid:4)(cid:26)(cid:12)(cid:3)(cid:2)(cid:26)(cid:22)(cid:14)(cid:20)(cid:5)
(cid:6)(cid:27)(cid:16)(cid:28)(cid:17)(cid:9)
6.2. Performance materiality
4(cid:11)*(cid:11) 5(cid:4)(cid:5)(cid:13)(cid:12)(cid:5)(cid:17)(cid:2)(cid:4)(cid:10)(cid:4)(cid:11)(cid:17)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:2)(cid:7)(cid:6)(cid:3)(cid:8)(cid:11)
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as a whole. Performance materiality was set at 60% of materiality for
the 2020 audit (2019: 70%). In determining performance materiality, we considered the following factors:
a. no significant changes in business structure and operations;
b. our experience from previous audits, has indicated a low number of corrected and uncorrected misstatements identified in prior
periods; and
c. the inherent increase in risk in the company’s operating environment caused by the uncertainty and volatility brought about by the
Covid-19 pandemic. The latter of these factors has led to a reduction in our performance materiality from 70% of materiality in the
prior year to 60% in the current year.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.19m (2019: £0.16m),
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
(cid:18)
63
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the company and its environment, including internal control and assessing the
risks of material misstatement. Audit work to respond to the risks of material misstatement was performed directly by the audit
engagement team.
7.2. Our consideration of the control environment
As part of our risk assessment, we assessed the control environment in place at the fund administrator, to the extent relevant to our
audit.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor’s
report thereon. The directors are responsible for the other information contained within the annual report.
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.
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 course of 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 this gives rise to
a material misstatement in the financial statements themselves. 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.
We have nothing to report in this regard.
9. 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.
10. 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.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is detailed below.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
64
Independent Auditor’s Report
Financial Statements
11.1. 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, we considered the following:
l the nature of the industry and sector, control environment and business performance including the design of the company’s
remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;
l results of our enquiries of management and the audit committee about their own identification and assessment of the risks of
irregularities;
l any matters we identified having obtained and reviewed the company’s documentation of their policies and procedures relating to:
m identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
m detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
m the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
l the matters discussed among the audit engagement team regarding how and where fraud might occur in the financial statements and
any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas: valuation of investments and ownership of investments. In common with
all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory framework that the company operates in, focusing on provisions of those
laws and regulations that:
l had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations
we considered in this context included the UK Companies Act, Listing Rules, tax legislation; and
l do not have a direct effect on the financial statements but compliance with which may be fundamental to the company’s ability to
operate or to avoid a material penalty. These included the company’s qualification as an Investment Trust under UK tax legislation.
11.2. Audit response to risks identified
As a result of performing the above, we identified valuation of investments and ownership of investments as key audit matters related to
the potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes the specific
procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
l reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant
laws and regulations described as having a direct effect on the financial statements;
l enquiring of management and the audit committee concerning actual and potential litigation and claims;
l performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement
due to fraud;
l reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with
HMRC and the FCA; and
l 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
65
Report on other legal and regulatory requirements
12. 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:
l 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
l 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.
13. Corporate Governance Statement
The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified
for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance
Statement is materially consistent with the financial statements and our knowledge obtained during the audit:
l the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material
uncertainties identified set out on page 48;
l the directors’ explanation as to its assessment of the company’s prospects, the period this assessment covers and why the period is
appropriate set out on pages 34 and 35;
l the directors' statement on fair, balanced and understandable set out on page 51;
l the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on pages 32 and 33;
l the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
pages 32 and 33; and
l the section describing the work of the audit committee set out on page 52.
14. Matters on which we are required to report by exception
14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
l we have not received all the information and explanations we require for our audit; or
l adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited
by us; or
l the financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2. 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
66
Independent Auditor’s Report
Financial Statements
15. Other matters which we are required to address
15.1. 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
engagement including previous renewals and reappointments of the firm is 7 years, covering the years ending 31 December 2014 to
31 December 2020.
15.2. 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).
16. 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.
Chris Hunter CA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Statement of Comprehensive Income
67
Financial Statements
For the year ended
31 December 2020
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
For the year ended
31 December 2019
Income from investments held at
fair value through profit or loss 2 5,987 – 5,987 6,833 – 6,833
Gains/(losses) on investments held
at fair value through profit or loss:
Gains/(losses) on investments held
at fair value through profit or loss 10 – 70,010 70,010 – (2,738) (2,738)
Foreign exchange losses – (135) (135) – (215) (215)
Investment management fee 4 (3,374) – (3,374) (3,650) – (3,650)
Other expenses including transaction costs 5 (857) (103) (960) (901) (206) (1,107)
Profit/(loss) before finance costs
and taxation 1,756 69,772 71,528 2,282 (3,159) (877)
Finance costs 6 – – – (2) – (2)
Profit/(loss) before taxation 1,756 69,772 71,528 2,280 (3,159) (879)
Taxation 7 (568) (4,328) (4,896) (468) (500) (968)
Profit/(loss) for the year 1,188 65,444 66,632 1,812 (3,659) (1,847)
Return/(loss) per share (basic) (p) 8 4.46 245.69 250.15 6.81 (13.75) (6.94)
Return/(loss) per share (diluted) (p) 8 4.46 245.66 250.12 6.81 (13.75) (6.94)
The Company does not have any income or expenses which are not included in the profit for the year.
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 Statement of Comprehensive Income, 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 71 to 87 are an integral part of these financial statements.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
68
Statement of Financial Position
Financial Statements
As at As at
31 December 31 December
2020 2019
Notes £’000 £’000
Non-Current Assets
Investments held at fair value through profit or loss 10 382,535 312,267
382,535 312,267
Current Assets
Receivables 11 738 792
Cash and cash equivalents 13,410 12,798
14,148 13,590
Total assets 396,683 325,857
Current Liabilities
Trade and other payables 12 (8,215) (2,714)
(8,215) (2,714)
Total assets less current liabilities 388,468 323,143
Equity Attributable to Equity Shareholders
Ordinary Share capital 13 266 266
Share premium 14 81,595 81,595
Capital reserves 303,721 238,732
Revenue reserve 2,886 2,550
388,468 323,143
Net asset value per share (p) - basic 15 1,460.2 1,213.0
Net asset value per share (p) - diluted 15 1,460.1 1,213.0
The financial statements on pages 67 to 87 were approved by the Board on 31 March 2021 and were signed on its behalf by:
Martin Bralsford
Chairman
The accompanying notes on pages 71 to 87 are an integral part of these financial statements.
Fundsmith Emerging Equities Trust plc – Company Registration Number 08756681 (Registered in England and Wales)
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Statement of Changes in Equity
69
Financial Statements
For the year ended 31 December 2020
Share Share Capital Revenue
Capital Premium Reserves Reserve Total
Notes £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2020 266 81,595 238,732 2,550 323,143
Profit for the year – – 65,444 1,188 66,632
266 81,595 304,176 3,738 389,775
Ordinary shares bought back and held in treasury – – (455) – (455)
Dividends paid 9 – – – (852) (852)
Balance at 31 December 2020 15 266 81,595 303,721 2,886 388,468
For the year ended 31 December 2019
Share Share Capital Revenue
Capital Premium Reserves Reserve Total
£’000 £’000 £’000 £’000 £’000
Balance at 1 January 2019 264 78,560 242,391 1,271 322,486
(Loss)/profit for the year – – (3,659) 1,812 (1,847)
264 78,560 238,732 3,083 320,639
Issue of Share Capital 2 3,035 – – 3,037
Dividends paid 9 – – – (533) (533)
Balance at 31 December 2019 15 266 81,595 238,732 2,550 323,143
The accompanying notes on pages 71 to 87 are an integral part of these financial statements.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
70
Statement of Cash Flows
Financial Statements
For the year ended For the year ended
31 December 2020 31 December 2019
Notes £’000 £’000
Cash Flows used in Operating Activities
Profit/(loss) for the year before taxation 71,528 (879)
Adjustments for:
Finance costs – 2
Net (gain)/loss on investments held at fair value through profit or loss 10 (69,907) 2,944
Loss on foreign exchange 135 215
Decrease/(increase) in other receivables 54 (124)
Increase/(decrease) in other payables 1,173 (179)
Overseas taxation paid 6 (568) (459)
Net Cash Flow from Operating Activities 2,415 1,520
Cash Flows used in Investing Activities
Sales of investments held at fair value through profit or loss 10 35,731 50,123
Purchases of investments held at fair value through profit or loss 10 (36,092) (43,841)
Net Cash Flow from Investing Activities (361) 6,282
Cash Flows used in Financing Activities
Proceeds from issue of new shares – 3,052
Issue costs relating to new shares – (15)
Finance costs – (2)
Dividends paid (852) (533)
Purchase of Treasury shares (455) –
Net Cash Flow from Financing Activities (1,307) 2,502
Net Increase in Cash and Cash Equivalents 747 10,304
Effect of foreign exchange rates (135) (215)
Change in cash and cash equivalents 612 10,089
Cash and cash equivalents at start of the year 12,798 2,709
Cash and cash equivalents at end of the year 16 13,410 12,798
Comprised of:
Cash at bank 13,410 12,798
Cash Flow from Operating Activities includes
Interest paid – (2)
Dividends received 6,016 6,733
The accompanying notes on pages 71 to 87 are an integral part of these financial statements.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Notes to the Financial Statements
71
Financial Statements
1. Accounting Policies
The financial statements of the Company have been prepared in accordance with international accounting standards in conformity with
the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the International
Accounting Standards Board (IASB).
(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 international accounting standards in conformity with the
requirements of the Companies Act and IFRSs as issued by the International Standards Board (IASB) 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 October 2019). 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 48. 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.
Critical accounting judgements and sources 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 Statement of Comprehensive Income
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 Income Statement between items of a revenue and capital nature has been
presented alongside the Statement of Comprehensive Income. Net revenue return 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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72
Notes to the Financial Statements
Financial Statements
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 Statement of Comprehensive Income. All other expenses are charged
to the revenue column except expenditure of a capital nature, in which case they are charged to the capital column.
(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 Statement of Comprehensive Income 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.
All the investments are defined by IFRS as investments held at fair value through profit or 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 or loss”.
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.
(f) Foreign Currencies
Monetary assets and liabilities denominated 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.
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73
1. Accounting Policies continued
(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) Other Receivables and Other Payables
Other receivables and other payables do not carry any interest and are short term in nature. Accordingly, they are stated at their
amortised cost, which is the same as fair value.
Financial assets held at amortised cost are reviewed for impairment using the credit loss model. Given the nature of the Company’s
short-term receivables, no credit losses have occurred to date and no credit losses are currently expected to occur in the future.
(j) Nature and Purpose of Reserves
Share capital
Represents the nominal value of the issued share capital.
Share premium account
The share premium arose on the issue of new shares.
Capital reserve
This reserve reflects any:
• Shares repurchased and held in treasury
• gains or losses on the disposal of investments
• foreign exchange gains and losses of a capital nature
• the increases and decreases in the fair value of investments which have been recognised in the capital column of the Income
Statement
• expenses which are capital in nature
Any gains in the fair value of investments that are not readily convertible to cash are treated as unrealised gains in the capital
reserve.
Revenue reserve
This reserve reflects all income and expenditure recognised in the revenue column of the statement of comprehensive income
and is distributable by way of dividend.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
74
Notes to the Financial Statements
Financial Statements
1. Accounting Policies continued
(k) 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.
(l) Adoption of new and revised standards
At the date of authorisation of these financial statements the following standards and amendments to standards, which have not
been applied in these financial statements, were in issue, but not yet effective:
• IFRS 17, ‘Insurance contracts’ (effective for accounting periods beginning on or after 1 January 2023).
• IFRS 9, IAS 39, IFRS 7, IFRS 16 and IFRS 4: Interest Rate Benchmark Reform – phase 2 (amended) (effective for accounting
periods beginning on or after 1 January 2021).
• Amendments to IAS1 ‘Classification of liabilities as current or non-current’ (effective for accounting periods beginning on or
after 1 January 2023).
The Company does not believe that there will be a material impact on the financial statements or the amounts reported from the
adoption of these standards.
In the current financial period the Company has applied to the following amendments to standards:
• Amendments to IFRS 3 ‘Definition of Business’ (effective for accounting periods beginning on or after 1 January 2020).
• Amendments to IAS 1 & IAS 8 ‘Definition of Material’ (effective for accounting periods beginning on or after 1 January 2020).
• Amendments to IFRS 9, IAS 39 and IFRS 7 ‘Interest Rate Benchmark Reform’ (effective for accounting periods beginning on
or after 1 January 2020).
There is no material impact on the financial statements or the amounts reported from the adoption of these amendments to the
standards.
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75
2. Dividend Income
2020 2019
£’000 £’000
Overseas dividends 5,987 6,833
Total 5,987 6,833
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 gains and losses 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 Statement of Comprehensive Income
on page 67. A geographical split of the portfolio can be seen on page 11.
4. Investment Management Fee
2020 2019
£’000 £’000
Investment management fee 3,374 3,650
As at 31 December 2020, an amount of £1,785,000 (2019: £840,000) was payable to the Investment Manager.
The investment management fee was reduced from 1.25% to 1.00% of the net asset value of the Company, with effect from 31 May 2019.
Details of the terms of the Investment Management Agreement are provided on page 30.
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76
Notes to the Financial Statements
Financial Statements
5. Other Expenses
Transactions costs on fair value
Revenue
£’000
2020 2019
Capital
£’000
Total Revenue Capital Total
£’000 £’000 £’000 £’000
through profit or loss investments – 103 103 – 206 206
Directors’ fees 109 – 109 109 – 109
Employers’ National Insurance contributions 2 – 2 3 – 3
Auditor’s remuneration 34 – 34 31 – 31
Registrar fees 28 – 28 32 – 32
Broker fee 37 – 37 37 – 37
Company Secretarial fees 100 – 100 100 – 100
Custody fees 244 – 244 311 – 311
Depositary fees 52 – 52 48 – 48
Postage and printing 20 – 20 32 – 32
Legal fees 11 – 11 8 – 8
Administration fees 111 – 111 107 – 107
Other expenses 109 – 109 83 – 83
Total expenses 857 103 960 901 206 1,107
Transaction costs on fair value through profit or loss investments represent such costs incurred on both purchase and sales of
those investments. Transaction costs on purchases amounted to £36,000 (2019: £74,000) and on sales amounted to £67,000
(2019: £132,000).
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77
5. Other Expenses continued
Auditor’s remuneration
The analysis of the Auditor’s remuneration is as follows:
2020 2019
Revenue £’000 £’000
Fees payable to the Company’s Auditor for the audit of the Company’s annual
financial statements 34 31
Total audit fees 34 31
Total fees paid 34 31
6. Finance Costs
2020 2019
Revenue £’000 £’000
Finance costs – 2
7. Taxation
(a) Analysis of tax charge in the year
Revenue
£’000
2020 2019
Capital
£’000
Total Revenue Capital Total
£’000 £’000 £’000 £’000
Taxation on ordinary activities
Irrecoverable overseas withholding tax 568 – 568 468 – 468
Overseas capital gains tax – 4,328 4,328 – 500 500
Total tax 568 4,328 4,896 468 500 968
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78
Notes to the Financial Statements
Financial Statements
7. Taxation continued
(b) Factors affecting current tax charge for the year
The effective corporation tax rate was 19% (2019: 19%). 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:
Profit/(loss) before taxation
1,756
69,772
71,528 2,280 (3,159) (879)
Revenue
£’000
2020 2019
Capital
£’000
Total Revenue Capital Total
£’000 £’000 £’000 £’000
Corporation tax at effective rate of
19% (2019: 19%) 334 13,256 13,590 433 (600) (167)
Effects of:
Expenses not deductible for tax purposes – 20 20 – 39 39
Net (gains)/losses on investments held at
fair value through profit or loss – (13,302) (13,302) – 520 520
Foreign exchange loss – 26 26 – 41 41
Overseas dividends not taxable (1,138) – (1,138) (1,298) – (1,298)
Overseas tax suffered 568 – 568 468 – 468
Overseas capital gain tax – 4,328 4,328 – 500 500
Increase in excess management expenses 804 – 804 865 – 865
Total tax 568 4,328 4,896 468 500 968
As at 31 December 2020, the Company had unutilised management expenses of £26.8 million (2019: £22.6 million) carried forward. It
is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses and therefore no deferred tax
asset in respect of these expenses has been recognised. 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 UK tax on capital
gains and losses arising on the revaluation or disposal of investments.
(c) The Company has made a provision for capital gains payable on Indian stocks of £5,981,000 (2019: £1,653,000). On 1 April
2018, the Indian Government withdrew an exemption from capital gains tax on investments held for twelve months or longer.
Accordingly, the Company has recognised a deferred tax liability of £6,563,000 (2019: £2,138,000) on capital gains which may
arise if Indian investments are sold.
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79
8. Return per Share
Return per Ordinary Share is as follows:
2020 2019
Revenue Capital Total Revenue Capital Total
Profit/(loss) for the year 1,188 65,444 66,632 1,812 (3,659) (1,847)
Return/(loss) per share (basic) (p) 4.46 245.69 250.15 6.81 (13.75) (6.94)
Return/(loss) per share (diluted) (p) 4.46 245.66 250.12 6.81 (13.75) (6.94)
Return per share is calculated based on returns for the year and the weighted average number of shares in issue of 26,636,576 excluding
treasury shares (31 December 2019: 26,612,549).
Diluted return per share is based on returns for the year and the weighted average number of ordinary shares in issue of 26,640,056 (31
December 2019: 26,612,549)
9. Dividends
Dividends relating to the year ended 31 December 2019 which is the basis on which the requirements of Section 1159 of the Corporation
Tax Act 2010 are considered below:
Dividends proposed:
2020 2020 2019 2019
pence £’000 pence £’000
Final dividend proposed* 2.0 532 3.2 852
* Not included as a liability in the year ended 31 December 2020 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 3 June 2021 to shareholders on the register on 16 April 2021. The associated ex-dividend
date is 15 April 2021.
10. Investments Held at Fair Value Through Profit or 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.
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80
Notes to the Financial Statements
Financial Statements
10. Investments Held at Fair Value Through Profit or Loss (continued)
2020 2019
£’000 £’000
Opening cost at 1 January 236,547 248,132
Opening unrealised gain at 1 January 75,720 73,361
Valuation at 1 January 312,267 321,493
Purchases at cost 36,092 43,841
Sales – proceeds (35,731) (50,123)
Investment holding gains/(losses) 69,907 (2,944)
Closing Fair Value at 31 December 382,535 312,267
Closing cost at 31 December 242,860 236,547
Closing unrealised gain at 31 December 139,675 75,720
Valuation at 31 December 382,535 312,267
The Company received £35,731,000 from investments sold in the year (2019: £50,123,000). The book cost of the investments when they
were purchased was £29,799,000 (2019: £55,426,000). These investments have been revalued over time until they were sold and
unrealised gains/losses were included in the fair value of investments.
The total gains of £69,907,000 (2019: loss of £2,944,000) include the transaction costs of £103,000 (2019: £206,000) as shown in
note 5.
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 2020, £364,266,000 (2019: £282,812,000)
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 2020, £18,269,000 (2019: £29,455,000) 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 2020, Philippine Seven Corp (2019: £12,333,000) and Prodia Widyahusada (2019: £4,387,000) were
transferred from level 2 to level 1. This was due to a higher volume of trade. During the year, Nestle Nigeria (£5,318,000) was transferred
from level 1 to level 2 due to a lower volume of trade.
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81
10. Investments Held at Fair Value Through Profit or Loss continued
Fair value measurements recognised in the Statement of Financial Position
2020
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments held at fair value through profit or loss 364,266 18,269 – 382,535
Total 364,266 18,269 – 382,535
2019
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments held at fair value through profit or loss 282,812 29,455 – 312,267
Total 282,812 29,455 – 312,267
11. Receivables
2020 2019
£’000 £’000
Accrued income 682 732
Other receivables 56 60
738 792
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.
12. Payables
2020 2019
£’000 £’000
Management fee payable 1,785 840
Other payables 6,430 1,874
8,215 2,714
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
82
Notes to the Financial Statements
Financial Statements
13. Share capital
2020
Ordinary Treasury Total Nominal
Shares Shares Shares Value 2019 2019
Number Number Number £’000 Number £’000
Issued, allotted and fully paid (ordinary)
Ordinary shares in issue at start of year 26,640,056 – 26,640,056 266 26,390,056 264
Shares issued – – – – 250,000 2
Ordinary shares bought back and held
in treasury (35,684) 35,684 – – – –
Total shares in issue at end of year 26,604,372 35,684 26,640,056 266 26,640,056 266
During the year ended 31 December 2020, the Company repurchased 35,684 shares of £0.01 each (2019: issued 250,000) at a net
consideration of £455,000 (2019: for a net consideration of £3,037,000). Details of the shareholder authorities granted to Directors to
issue and buy back shares during the year are provided on page 2.
14. Share Premium Account
2020 2019
£’000 £’000
Balance at 1 January 81,595 78,560
Premium arising on issue of new shares – 3,050
Costs of issuing new shares – (15)
81,595 81,595
15. Net Asset Value per Share
2020 2019
pence pence
Net asset value per share – basic 1,460.2 1,213.0
Net asset value per share – diluted 1,460.1 1,213.0
The net asset value per share is based on the net assets attributable to equity shareholders of £388,468,000 (2019: £323,143,000) and
on 26,604,372 excluding treasury shares (2019: 26,640,056) shares in issue at 31 December 2020.
The diluted net asset value per share is based on the net assets attributable to equity shareholders of £388,972,000 (2019:
£323,143,000) and on 26,640,056 (2019: 26,640,056) shares in issue at 31 December 2020.
16. Risk Management and Financial Instruments
The Company’s investing activities undertaken in pursuit of its investment objective, as set out on page 9, 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.
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83
16. Risk Management and Financial Instruments continued
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 quarterly, designed to manage the risk inherent in managing a portfolio of investments.
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.
The carrying amounts of financial assets best represents the maximum credit risk exposure at the statement of financial position date,
and the main exposure to credit risk is via the Company’s Custodian who is responsible for the safeguarding of the Company’s Investments
and cash balances.
At the reporting date, the Company’s financial assets exposed to credit risk amounted to the following:
2020 2019
£’000 £’000
Cash and cash equivalents 13,410 12,798
Receivables 738 792
All the assets of the Company which are traded on a recognised exchange are held by Northern Trust, the Company’s Custodian. Bankruptcy
or insolvency of the Custodian may cause the Company’s rights with respect to securities held by the Custodian to be delayed or limited.
The Board monitors the Company’s risk as described in the Strategic Report on pages 32 to 33.
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84
Notes to the Financial Statements
Financial Statements
16. Risk Management and Financial Instruments continued
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.
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 2020
Investments Cash Receivables Payables Total
£’000 £’000 £’000 £’000 £’000
Bangladeshi Taka 4,740 – – – 4,740
Brazilian Real 11,422 – 263 – 11,685
Chinese Yuan 31,002 – – – 31,002
Egyptian Pound 9,897 – 389 – 10,286
Hong Kong Dollar 32,017 – – – 32,017
Indonesian Rupiah 3,762 – – (5,981) (2,219)
Indian Rupee 172,672 – – – 172,672
Kenyan Shilling 4,037 – – – 4,037
Mexican Peso 7,153 – – – 7,153
Nigerian Naira 5,318 85 – – 5,403
Philippine Peso 9,484 – – – 9,484
South African Rand 6,642 – – – 6,642
Sri Lankan Rupee 4,388 – – – 4,388
Turkish Lira 6,939 – – – 6,939
US Dollar 60,176 – 30 – 60,206
Vietnam Dong 10,153 – – – 10,153
379,802 85 682 (5,981) 374,588
As at 31 December 2020, the investment portfolio included £5.318 million (2019: £6.266 million) of Nigerian securities out of the total
investment portfolio of £382.5 million (2019: £312.3 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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85
16. Risk Management and Financial Instruments continued
31 December 2019
Investments Cash Receivables Payables Total
£’000 £’000 £’000 £’000 £’000
Bangladeshi Taka 4,011 – – – 4,011
Brazilian Real 11,675 – 298 11,973
Chinese Yuan 14,768 – – – 14,768
Egyptian Pound 18,366 – 354 – 18,720
Hong Kong Dollar 35,431 – – – 35,431
Indian Rupee 135,521 – – (1,653) 133,868
Indonesian Rupiah 4,387 – – – 4,387
Kenyan Shilling 5,665 – – – 5,665
Mexican Peso 7,540 – – – 7,540
Nigerian Naira 6,266 – – – 6,266
Philippino Peso 12,333 – – – 12,333
South African Rand 10,474 – – – 10,474
Sri Lankan Rupee 4,984 – 4,984
Turkish Lira 5,527 – – – 5,527
US Dollar 22,777 – – – 22,777
Vietnam Dong 9,312 22 80 – 9,414
309,037 22 732 (1,653) 308,138
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.
2020 2019 2020 2019
as at 31 December £’000 £’000 £’000 £’000
+5% +5% -5% -5%
Effect on net assets for the year 18,729 15,407 (18,729) (15,407)
Effect on capital return 18,691 15,452 (18,691) (15,452)
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86
Notes to the Financial Statements
Financial Statements
16. 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 £13,410,000 (2019: £12,798,000) 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 £67,000
(2019: £64,000). 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 £67,000 (2019: £64,000). The calculations are based on the cash balances at the respective balance sheet date and are not
representative of the year as a whole.
Other price risk exposure
If the investment valuation had fallen by 10% at 31 December 2020, the impact on profit or loss and net assets would have been negative
£38.3 million (2019: £31.2 million). If the investment portfolio valuation rose by 10% at 31 December 2020, the impact on profit or loss
and net assets would have been positive £38.3 million (2019: £31.2 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
2020
£’000
2019
£’000
Assets at fair value through profit or loss 382,535 312,267
Cash 13,410 12,798
Investment income receivable 682 732
Other receivables 56 60
Other payables (8,215) (2,714)
388,468 323,143
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.
Liquidity risk is not significant as the majority of the Company’s assets are investments in quoted securities that are easily and readily
realisable. The Company does not have any borrowing facilities and as at 31 December held £13,410,000 (2019: £12,798,000) cash.
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
87
16. Risk Management and Financial Instruments continued
The Company’s capital is its equity share capital and reserves that are shown in the Statement of Financial Position at a total of
£388,468,000 (2019: £323,143,000).
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.
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.
17. Contingent Liabilities
As at 31 December 2020 there were no contingent liabilities or capital commitments (2019: nil).
18. 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 and the terms of their appointments are set out in the Directors’ Remuneration Report
beginning on page 56. There were no other 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 75.
Terry Smith, the Managing Partner at Fundsmith LLP, the Company’s AIFM and Investment Manager holds interests in 847,000 shares in
the Company (2019: 847,000) amounting to 3.2% (2019: 3.2%) of the Company’s issued share capital as at the date of this report.
19. Events after the Reporting Period
There are no significant events that have occurred after the end of the reporting period to the date of this report which require disclosure.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
88
Shareholder Information
Further Information
Financial Calendar
31 December
Financial Year End
March
May
June
30 June
July/August
Final Results Announced
Annual General Meeting
Final Dividend Paid
Half Year End
Half Year End Results Announced
Annual General Meeting
The Annual General Meeting of Fundsmith Emerging Equities Trust plc will be held on Wednesday, 26 May 2021 at 12 noon.
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 Group, 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 2020
31 December 2020
31 December 2019
● Retail 59.0%
● Corporate 22.0%
● Banks 8.5%
● Pension Funds 7.1%
● Investment Companies 3.4%
● Retail 81.2%
● Corporate 12.5%
● Banks 4.3%
● Pension Funds 1.5%
● Investment Companies 0.5%
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Alternative Investment Fund Managers Directive Disclosures (Unaudited)
89
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 16 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 2020
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
90
Alternative Investment Fund Managers Directive Disclosures (Unaudited)
Further Information
Remuneration Disclosure
During the year ending 31 March 2020, Fundsmith LLP (‘Fundsmith’) had 27 members of personnel in total, including employees and
Partners. The total amount of remuneration paid to Fundsmith personnel during this period was £58,468,366. Out of this figure, the total
amount of remuneration paid to the Partners of Fundsmith LLP was £48,483,057 whilst the total amount of remuneration paid to the
employees of Fundsmith LLP was £9,985,309.
Of the £9,985,309 paid to Fundsmith employees, £7,315,835 was variable remuneration and £2,669,474 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 2019 to 31 March
2020. 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 and the Fund Managers.
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 1.2% 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
91
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 £13,000,000 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.
Fundsmith LLP
AIFM
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
92
Glossary of Terms
Further Information
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.
Alternative Performance Measures (“APMs”)
The measures the Board of Directors uses to assess the Company’s performance, which are not specifically defined under the International
Financial Reporting Standards but which are viewed as particularly relevant for investment trusts. Definitions of the terms used and the
basis of calculation are set out in this Glossary and the APMs are indicated with an asterisk (*).
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.
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
93
NAV Total Return*
The theoretical total return on shareholders’ funds per share, 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 the investment management performance of
investment trusts which is not affected by movements in the share price.
31 Dec
2020
1,213.0p
Opening NAV
247.2p
Increase/(decrease) in NAV
1,460.2p
Closing NAV
% increase/(decrease) in NAV
20.4%
Impact of reinvested dividends 0.3%
20.7%
NAV Total Return
Diluted NAV Total Return*
31 Dec
2020
1,213.0p
Opening diluted NAV
247.1p
Increase/(decrease) in diluted NAV
1,460.1p
Closing diluted NAV
20.4%
% increase/(decrease) in diluted NAV
Impact of reinvested dividends 0.3%
20.7%
Diluted NAV Total Return
Neutral Free Cash Flow (“NFCF”)
A company’s free cash flow after adding back capital expenditures in excess of depreciation.
31 Dec
2019
1,222.0p
(9.0p)
1,213.0p
(0.7%)
0.2%
(0.5%)
31 Dec
2019
1,222.0p
(9.0p)
1,213.0p
(0.7%)
0.2%
(0.5%)
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
Average net assets during the year
Ongoing charges (annualised)
31 Dec
2020
£’000
4,231
337,757
1.30%
31 Dec
2019
£’000
4,552
331,375
1.40%
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
94
Glossary of Terms
Further Information
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.
Return Per Share
The proportion of a Company’s profit allocated to each ordinary share.
Share Price Total Return*
The return to the investor reflecting the change in the share price, on a last traded price to a last traded price basis, assuming that all
dividends paid were reinvested, without transaction costs, into the shares of the Company at the time the shares were quoted ex-dividend.
1,100.0p
Opening share price
315.0p
Increase/(decrease) in share price
1,415.0p
Closing share price
28.6%
% increase/(decrease) in share price
Impact of reinvested dividends 0.5%
29.1%
Share Price Total Return
* Alternative Performance Measures.
31 Dec
2020
31 Dec
2019
1,190.0p
(90.0p)
1,100.0p
(7.6%)
0.2%
(7.4%)
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
How to Invest
Further Information
95
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/
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/
Stocktrade https://www.stocktrade.co.uk
Link Group – Share Dealing Service
A quick and easy share dealing service is available to existing shareholders through the Company’s Registrar, Link Group, 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
96
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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Notice of the Annual General Meeting
97
Further Information
Notice is hereby given that the Annual General Meeting of Fundsmith Emerging Equities Trust plc will be held at 33 Cavendish Square,
London W1G 0PW on Wednesday, 26 May 2021 at 12 noon for the following purposes:
Ordinary Business
To consider and, if thought fit, pass the following as ordinary resolutions:
1. To receive the Annual Report for the year ended 31 December 2020, including the financial statements and the directors’ and auditors’
reports thereon.
2. To approve the Directors’ Remuneration Report for the year ended 31 December 2020.
3. To approve the Directors’ Remuneration Policy.
4. To approve the payment of a final dividend of 2.0 pence per ordinary share for the year ended 31 December 2020.
5. To re-elect Martin Bralsford as a Director of the Company.
6. To re-elect Rachel de Gruchy as a Director of the Company.
7. To re-elect David Potter as a Director of the Company.
8. To re-elect John Spencer as a Director of the Company.
9. 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 11, 12, 13, 14 and 16 will be proposed as special
resolutions:
Authority to Issue Shares
10. 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 £26,604.37 (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
2,660,437 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 2022 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
11. 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:
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
98
Notice of the Annual General Meeting
Further Information
(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
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 £26,604.37;
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
12. 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 £26,604.37, being 10% of the
issued share capital of the Company as at the date of this Notice of Annual General Meeting and representing 2,660,437 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
99
Authority to Repurchase Ordinary Shares
13. 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 the number of Shares which is equal to 14.99% of the
issued share capital of the Company as at the date of the passing of this resolution;
(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 2022
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
14. 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.
Amendment to Investment Objective and Investment Policy
15. THAT the Investment Objective and Investment Policy as set out in the Company’s Annual Report and Financial Statements for the
year ended 31 December 2020 as produced to the meeting, be and are hereby approved in substitution for the Company’s existing
Investment Objective and Investment Policy.
Amendment to the Company’s Articles of Association
16. That the amended Articles of Association giving authority to the Directors to convene, if necessary, a general meeting as a Hybrid
meeting, produced to the meeting for the purposes of identification be approved and adopted as the Articles of the Association of the
Company in substitution for, and to the exclusion of, the existing Articles of Association.
Registered office:
By order of the Board
33 Cavendish Square
London W1G 0PW
Frostrow Capital LLP
Company Secretary
31 March 2021
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
100
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. 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 Group, PXS1, 10th Floor, Central Square, 29 Wellington Street, Leeds LS1 4DL no later than 12 noon on
24 May 2021.
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 24 May 2021 (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 30 March 2021 (being the last business day prior to the publication of this notice) the Company’s issued share capital consists of
26,640,056 ordinary shares, carrying one vote each, 35,684 shares are held in treasury. Therefore, the total voting rights in the Company as at
30 March 2021 is 26,604,372.
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).
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
101
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 Group on 0871 664 0321 (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 Group, PXS1, 10th Floor, Central Square, 29 Wellington Street, Leeds LS1 4DL.
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.
20. Members representing at least 5% of the total voting rights of the Company (excluding any voting rights attached to any Treasury Shares), or at least
100 members who have a right to vote at the AGM, may require the Company to give notice of a resolution which may properly be moved and is intended
to be moved at the meeting. Such members may also request the Company to include in the business to be dealt with at an annual general meeting
any matter (other than a proposed resolution) which may properly be included in the business. Any such requests may be in hard copy or electronic
form; must identify the resolution of which notice is to be given (if applicable); must be authenticated by the person or persons making it; and must be
received by the Company not later than six weeks before the meeting.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
102
Notice of the Annual General Meeting
Further Information
If you hold your shares directly you can:
• Log on to www.myfeetshares.co.uk and follow instructions; or
How To Vote
• Request a hard copy form of proxy from the Company’s registrars, Link Group, by emailing enquiries@linkgroup.co.uk or by
calling +44(0)371 664 0321 and returning the completed and signed form to Link Group, PXS 1, 10th Floor, Central Square,
29 Wellington Street, Leeds LS1 4DL no later than 12 noon on 24 May 2021.
If you hold your shares via an investment platform (e.g. Hargreaves Lansdown) or a nominee, you should contact them to inquire about
arrangements to vote.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
Explanatory Notes to the Resolutions
103
Further Information
Resolution 1 – To receive the Annual Report and Financial Statements
The Annual Report for the year ended 31 December 2020 will be presented to the Annual General Meeting. The financial statements and
the Directors’ & Auditor’s reports thereon accompanied this Notice of Meeting and shareholders will be given an opportunity at the meeting
to ask questions.
Resolution 2 – Remuneration Report
The Directors’ Remuneration Report is set out in full in this annual report on pages 56 to 57.
Resolution 3 – Remuneration Policy
The Directors’ Remuneration Policy is set out in full on page 58.
Resolution 4 – To approve a Final Dividend
The rationale for the payment of a final dividend is set out in the Chairman’s Statement beginning on page 6 and in the Report of the
Directors on page 47.
Resolutions 5 to 8 – Re-Election of Directors
Resolutions 5 to 8 deal with the re-election or election of each Director. Biographies of each of the Directors can be found on page 36 of
this Annual Report.
The Chairman has confirmed, following a performance review, that all the Directors continue to perform effectively. The specific reasons
why (in the Board’s opinion) each Director’s contribution is, and continues to be, important to the Company’s long-term sustainable success
are as follows:
Martin Bralsford
Martin’s leadership of the Board draws on his long and varied experience on the boards of a number of commercial, banking and investment
companies. Martin’s openness and style are considered important in maintaining a good relationship and constructive engagement with
the Investment Manager. He focuses on long-term strategic issues, which are a central topic of Board discussion.
David Potter
David brings a wealth of experience to the Board as a result of his long career in the City. He is Chairman of the Management Engagement
Committee.
John Spencer
As a chartered accountant with extensive experience from a variety of boards and audit committees, John brings to the Board, and the
Audit Committee under his chairmanship, an incisive perspective on the Company’s financial position and its risk control environment.
Rachel de Gruchy
Rachel has over thirty years of international investment industry experience and her first-hand knowledge enables the Board to engage
authoritatively with the Investment Manager on their investment strategy.
Resolution 9 – Re-Appointment of Auditor and the determination of their remuneration
Resolution 9 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 10 and 11 – Issue of Shares
Ordinary Resolution 10 in the Notice of Annual General Meeting will renew the authority to allot unissued share capital up to an aggregate
nominal amount of £26,604.37 (equivalent to 2,660,437 shares, or 10% of the Company’s existing issued share capital on 30 March 2021,
being the nearest practicable date prior to the signing of this Annual Report). Such authority will expire on the date of the next Annual
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
104
Explanatory Notes to the Resolutions
Further Information
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 11 will, if passed, give the Directors power to allot for cash equity securities up to 10% of the Company’s existing share
capital on 30 March 2021, 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 10. 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 10 and 11 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.
Resolution 12 – 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 13 – 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 13 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 as at the date of the passing of the resolution. 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.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
105
Resolution 14 – General Meetings
Special Resolution 14 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.
Resolution 15 – Investment Objective and Policy
Ordinary Resolution 15 seeks shareholder approval to amend the Company’s Investment Objective and its Investment Policy.
Resolution 16 – Articles of Association
Special Resolution 16 seeks to amend the Company’s Articles of Association so that the Directors be authorised, subject to and in
accordance with the provisions of the Companies Act 2006, to convene General Meetings as a “physical meeting”, being a general meeting
held and conducted by physical attendance by members and/or proxies at a particular place, or a “Hybrid meeting”, a general meeting
held and conducted by both physical attendance by members and/or proxies at a particular place and by members and/or proxies also
being able to attend and participate by electronic means without needing to be in physical attendance at that place. The Board may decide
in relation to any general meeting (including a postponed or adjourned meeting) whether the general meeting is to be held as a physical
meeting or as a Hybrid meeting and shall, for the avoidance of doubt, be under no obligation to convene a meeting as a Hybrid meeting
whatever the circumstances.
The amended Articles also contain provisions dealing with how the quorum is counted for the various types of meeting covering members’
rights to participate in each case; the authorisation and adequacy of electronic applications; the authority to make arrangements to ensure
the security of a Hybrid meeting; and giving additional powers to postpone or adjourn meetings in appropriate circumstances. Where
meetings are held as a Hybrid meeting, then voting must be on a poll.
In relation to electronic participation at a general meeting, the right of a member to participate electronically shall include without limitation
the right to speak, vote on a poll, be represented by a proxy and have access (including electronic access) to all documents which are
required by the Act or these Articles to be made available at the meeting.
The amendments are being sought in response to challenges posed by Government restrictions on social interactions as a result of the
COVID-19 pandemic, which have made it difficult for shareholders to attend physical general meetings. The Board’s aim in introducing
these changes is to make it easier for shareholders to participate in general meetings through introducing electronic access for those not
able to travel, and also to ensure that appropriate security measures are in place for the protection and wellbeing of shareholders. The
Board is cognisant of the importance to shareholders of the ability to meet the members of the Board and representatives of the Investment
Manager face to face, and is committed to ensuring that future general meetings (including AGMs) incorporate a physical meeting where
law and safety permits.
The amended Articles can be reviewed in full at https://www.feetplc.co.uk/, in both a standard version and one highlighting the
amendments proposed to be made as described in this notice. The amended Articles will also be available for inspection from the date of
dispatch of this circular to the date of the Annual General Meeting at 33 Cavendish Square, London W1G 0PW in compliance with the
state of UK COVID-19 restrictions in place at that time.
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
126,996 shares.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
106
Company Information
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)
The Chairman can be contacted by writing to The Company
Secretary or by email: FEETchairman@fundsmith.co.uk. The
Senior Independent Director can be contacted by emailing
FEETSID@fundsmith.co.uk
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 and is a company limited by
shares
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
Registrar
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds LS1 4DL
Telephone (in UK): +44(0) 371 664 0300†
Telephone (from overseas): +44 (0)371 664 0300
E-Mail: enquiries@linkgroup.co.uk
Website: www.linkgroup.eu
Please contact the Registrars if you have a query about a
certificated holding in the Company’s shares.
†Calls are charged at the standard geographic rate and will vary by
provider. 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
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
107
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
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
108
Appendix
Proposed Changes to the Investment Objective
and Investment Policy
The new Investment Objective and Investment Policy, as proposed
in resolution 15 on page 99 of this Annual Report, are set out below.
Changes to the existing Investment Objective and Investment Policy
are included in black-line.
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;
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 or to the
broader social and/or economic development of those countries.
(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
Investment Policy
The Company maintains a portfolio diversified by
issuer
concentration and the Company’s portfolio will normally comprise
3525 to 5540 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;
(ii) not more than 40% of the Company’s gross assets can be
invested in shares issued by companies domiciled in any single
jurisdiction. Where, as a result of investment performance, the
total value of the companies in a particular jurisdiction exceeds
40% 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
(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 27 for further information
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020
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.
Annual Report
for the year ended 31 December 2020
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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 260382