Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Annual Report
for the year ended 31 December 2021
Fundsmith Emerging Equities Trust plc
1
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Contents
1
Strategic Report
2
Company Summary
3
Financial Highlights
5
Chairman’s Statement
9
Investment Objective and Policy
10
Investment Portfolio
12
Investment Manager’s Review
29
Investment Philosophy
32
Business Review
2
Governance
38
Board of Directors
41
Corporate Governance Report
50
Report of the Directors
54
Statement of Directors’
Responsibilities
55
Audit Committee Report
60
Directors’ Remuneration Report
62
Directors’ Remuneration
Policy Report
3
Financial Statements
63
Independent Auditor’s Report
71
Statement of Comprehensive Income
72
Statement of Financial Position
73
Statement of Changes in Equity
74
Statement of Cash Flows
75
Notes to the Financial Statements
4
Further Information
92
Shareholder Information
93
Alternative Investment Fund
Managers Directive Disclosures
96
Glossary of Terms and Alternative
Performance Measures
99
How to Invest
101
Notice of Annual General Meeting
107
Explanatory Notes
to the Resolutions
110
Company 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 total liabilities as at 31 December 2021 were
£397.7 million (2020: £388.5 million) and the market capitalisation
was £358.8 million (2020: £376.5 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 32.
Performance is measured against the MSCI Emerging and Frontier
Markets Index measured on a net total return, sterling adjusted
basis.
Website
www.feetplc.co.uk
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 85.
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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 or to the broader social
and/or economic development of these countries.
*See Fundsmith’s Investment Philosophy beginning on page 29 for further information
3
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Financial Highlights
Performance Summary
*Alternative Performance Measure (see Glossary beginning on page 96)
1MSCI Emerging and Frontier Markets Index (measured on a net total return, sterling adjusted basis)
Please refer to the Glossary beginning on page 96 for definitions of these terms and the basis of their calculation.
Performance over one year
As at
As at
31 December 2021
31 December 2020
Net asset value per share - basic
1,512.9p
1,460.2p
Net asset value per share - diluted
1,510.9p
1,460.1p
Share price
1,365.0p
1,415.0p
Discount of the share price to the net asset
value per share*
9.8%
3.1%
Ongoing charges ratio*
1.3%
1.3%
For the year ended
For the year ended
31 December 2021
31 December 2020
Net asset value per share (total return)*
+3.8%
+20.7%
Share price (total return)*
-3.4%
+29.1%
Index (total return)1
-1.4%
+14.4%
Share Price
NAV
MSCI Emerging + Frontier Markets Index
80
85
90
95
100
105
110
115
Jan-21
Dec-20
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
%
Source: MSCI/Bloomberg
Figures rebased to 100 as at 31 December 2020
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Premium/
(discount)
of the
Net asset share price
Shareholders’ value to the net
funds per share – Share asset value
Dividend
Ongoing
31 December £’000 basic price per share*
per share
charges*
2016 238,583 1,039.0p 1,055.5p 1.6%
N/A
1.7%
2017 310,673 1,259.7p 1,314.0p 4.3%
N/A
1.7%
2018 322,486 1,222.0p 1,190.0p (2.6)%
2.0p
1.5%
2019 323,143 1,213.0p 1,100.0p (9.3)%
3.2p
1.4%
2020 388,468 1,460.2p 1,415.0p (3.1)%
2.0p
1.3%
2021 397,720 1,512.9p 1,365.0p (9.8)%
N/A
1.3%
*Alternative Performance Measure (see Glossary beginning on page 96)
Share Price
Launch Date 25 June 2014
NAV
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
Launch
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
(p)
Performance since launch
Five Year Record
Source: MSCI/Bloomberg
Financial Highlights
5
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Chairman’s Statement
“Demand for the Company’s shares led to the issue of a total of 1,727,500
new shares during the year, raising £21.5 million”
Performance
Following both strong absolute and relative performance in 2020,
I am pleased to report that the Company’s net asset value (NAV) per
share has again significantly outperformed our benchmark during
the Year under review. The Company’s NAV per share total return*
for the Year was +3.8% (2020: +20.7%) compared to a fall of 1.4%
in the Emerging and Frontier Markets Index, measured on a net total
return, sterling adjusted basis, (2020: +14.4%). The Company’s
share price total return* over the Year, however, fared less well,
being -3.4%(2020: +29.1%), and as a consequence a widening in
the discount of the Company’s share price to the NAV per share at
end of the Year to 9.8% (2020: 3.1%). While recent NAV per share
performance has been strong, the compound annual return of 5.8%
since inception continues to remain below our aspiration over the
longer term.
* Alternative Performance Measure (see Glossary beginning on page 96)
The portfolio benefitted from its high weighting to India, despite
currency weakness, with the top five contributors to performance
all coming from the sub-continent. In addition, the underweight
exposure to China also helped relative performance as 2021 saw a
number of the concerns that our Investment Manager has about
investing in China, including overseas listings, regulation, slower
rates of economic growth and State interference, come to the fore.
As a result of the increased scope of the Company’s Investment
Objective, as approved by shareholders at last year’s Annual
General Meeting, the Year has seen some significant changes in
the composition of the portfolio.
Our Investment Manager’s focus continues to be buying good quality
companies which have the ability to invest in their businesses at
attractive rates of return and as such those businesses in which
they invest will typically have no debt or only a conservative level of
financial leverage.
A comprehensive analysis by our Investment Manager of the
performance of the Company’s portfolio during the Year, amplifying
on this Statement, begins on page 12.
Capital Structure
I mentioned in my Statement last year, that the Board continues to
believe that the Company’s shares should 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 continues to monitor the position very closely and, as
part of the Board’s discount management strategy, the Company
repurchased a total of 316,089 shares during the Year to be held
in treasury at a total cost of £4.5m. The Board and its advisers will
continue to monitor the discount closely and the Company will make
further purchases of shares if the Board deems it to be appropriate.
No shares were issued during the Year either from treasury or
through the allotment of new shares.
Introduction
This is our eighth Annual Report which covers the year ended 31 December 2021
and also the Company’s seventh full year.
“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.”
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Chairman’s Statement
As at 31 December 2021, the Company had 26,288,283 shares of
1p each in issue excluding 351,773 shares held in treasury (2020:
26,604,372 – excluding 35,684 shares held in treasury).
At the last Annual General Meeting in May 2021, 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.
Dividend
The Company made a small revenue profit during the year (see
page 71 for further information). However, due to a reduction in the
portfolio’s yield, it is below the threshold that requires the Company
to pay a dividend. Shareholders will be aware that 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. The Board therefore does
not recommend the payment of a final dividend to shareholders this
year (2020: a final dividend of 2.0p per share was paid). 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 Composition
The Board continues to be conscious of the need to refresh its own
membership over the medium term. Professor Heather McGregor,
CBE, joined the Board at the conclusion of last year’s Annual
General Meeting and she has already begun to make a valuable
contribution to the Board and its Committee deliberations.
David Potter, John Spencer and I all joined the Board at the
Company’s inception in 2014 and the Board has given much
thought as to how an orderly refreshment and succession process
will work. After discussion and extensive consultation with advisers
by Rachel de Gruchy and Professor Heather McGregor, it has been
agreed that David Potter, who serves as the Company’s Senior
Independent Director and Chairman of the Management
Engagement Committee, will retire at the conclusion of this year’s
Annual General Meeting and so will not stand for re‑election. As a
Director in the early life of the Company, David played a significant
role in establishing its foundations and he has made an active and
purposeful contribution during his time on the Board. His strong
personality and his creative, challenging and fair-minded approach
will be greatly missed by his fellow Directors. We have all much
enjoyed working with him and wish him all the best for the future.
John Spencer will succeed David as the Senior Independent Director
and Rachel de Gruchy will become Chair of the Management
Engagement Committee.
John Spencer will retire at the conclusion of the 2023 Annual General
Meeting and I will retire the year after that. Heather McGregor will
take over as Chair of the Audit Committee following John’s retirement.
The Board will keep shareholders informed of its progress to recruit
new Directors. The Board considers that four Directors is
appropriate for the size of this Company, although this number may
increase on a temporary basis as part of an orderly refreshment
and succession process.
In accordance with the Board’s policy and the AIC Code of Corporate
Governance, all current Directors, with the exception of David Potter,
will be standing for election or 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 beginning on page 107.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Continuation Vote
As I mentioned in my Statement last year, the Company’s
constitutional documents require that the Directors should consider
calling 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 NAV per share in a relevant
year. The Board has kept this under close review and, as the
Company’s shares traded at an average discount of 6.6% during the
Year, it believes that such a vote should not be put before
shareholders this year. The Board will continue to keep this under
close review on an annual basis.
Environmental, Social and Governance (ESG)
Our Investment Manager continues to consider 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 the reporting of non-financial data pertaining to
ESG and also climate change in emerging markets. As long-term
investors, they consider this a fundamental part of how they assess
the long-term sustainability of a company’s returns in their
investment process. As part of this, they engage with companies on
a regular basis on areas that it can add value and they also vote all
available proxies to promote the sustainability of long-term returns.
Please refer to the Investment Manager’s Review on pages 12 to
28 for more information on both ESG and climate change.
The Board believes that companies that address ESG issues and
adopt sustainable business practices are better placed to generate
sustainable strong performance and create enduring value for
shareholders. Further details regarding the Company's approach to
ESG and climate change can be found in the Business Review on
page 37.
Outlook
Since the start of this Year the world’s stock markets have
experienced significant falls, with major indices showing falls of
more than 10% with heightened levels of volatility. Emerging
markets funds generally have suffered even sharper declines in
value and the Company is not immune. The Company’s NAV has
fallen by over 15% compared with the NAV at the Year end, and the
share price has fallen by over 20%.
At the Year end, the Company’s shares traded at a discount to the
NAV per share of just under 10%, and since the start of the Year the
discount has widened to over 15%. The Board will continue to
monitor the situation closely and in the event that the discount
persists at this level, the Board will take appropriate action if it
believes that this will reduce the discount for a sustained period.
Political risk continues to be a significant issue for developing
markets and this is an area that our Investment Manager keeps
under close review.
The first 10 weeks of 2022 have clearly been very challenging for
investors, but our Investment Manager and the Board encourage
shareholders to take a long-term perspective on their investment.
The level of uncertainty in the world has increased. We continue to
remain cautiously optimistic, however, on the longer-term outlook
for emerging markets from this new lower level, following the
invasion of Ukraine on 24 February 2022, 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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Annual General Meeting (AGM)
The Company’s AGM will be held at 12.30 p.m. on Wednesday,
25 May 2022 at Barber-Surgeons’ Hall, Monkwell Square,
London EC2Y 5BL.
It will be good to be able to meet again with shareholders in person
after the imposed restrictions of the last two years. The AGM will
provide an opportunity for shareholders to meet the Directors and
to receive a presentation from our Investment Manager. We hope
as many shareholders as possible will attend. I look forward to
meeting you at that time, together with my Board colleagues. If any
shareholders are unable to attend or wish to raise a matter with the
Board, please contact me at FEETchairman@fundsmith.co.uk or
through the Company Secretary at info@frostrow.com. An edited
video of the Investment Manager’s presentation will be made
available on the Company’s website (www.feetplc.co.uk) shortly
after the event.
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.
Martin Bralsford
Chairman
16 March 2022
“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.”
Chairman’s Statement
9
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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.
Investment Policy
The Company maintains a portfolio diversified by issuer
concentration and the Company’s portfolio will normally comprise
25 to 40 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
if the Company has the power to influence significantly the
conduct of business of that company (or would be able to do
so after the acquisition of the shares). The Company is to be
taken to have power to influence significantly if it exercises or
controls the exercise of 20% or more of the voting rights in that
company; and
(vii) the Company must not acquire shares which do not carry a right
to vote on any matter at a general meeting of the company that
issued them and represent more than 10% of these securities
issued by that company.
Uninvested cash or surplus capital or assets may be invested on a
temporary basis in:
• cash or cash equivalents, money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a single-A (or equivalent) or higher credit
rating as determined by an internationally recognised rating
agency; or
• any “government and public securities” as defined for the
purposes of the FCA rules.
In general, the Company will not use portfolio management
techniques such as interest rate hedging and credit default swaps.
However, the Company may use currency hedging, through
derivatives if necessary, as a portfolio management technique.
Whilst the Company, generally, will not hedge its currency exposure,
it does reserve the right to do so in the circumstances where, in the
opinion of the Investment Manager, a significant depreciation of a
currency has become likely but the Investment Manager wishes to
continue owning the companies in the portfolio denominated in that
currency and where the cost of hedging that currency is unlikely, in
the opinion of the Investment Manager, to extinguish any gains
from hedging.
Investment Objective and Policy
*See Fundsmith’s Investment Philosophy beginning on page 29 for further information
10
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Investments held as at 31 December 2021
Security Country of incorporation Fair value £’000
% of investments
MercadoLibre Inc USA1 24,114
6.0
Foshan Haitian Flavouring China 21,874
5.5
Asian Paints Ltd India 21,105
5.3
Havells India Ltd India 20,046
5.0
Info Edge (India) Ltd India 18,513
4.6
Avenue Supermarts India 18,403
4.6
Nestlé India Ltd India 15,175
3.8
Marico Ltd India 13,243
3.3
Tata Consultancy Services India 13,079
3.3
Tencent Holdings Cayman Islands2 12,669
3.2
Top 10 Investments 178,221
44.6
Taiwan Semiconductor Manufacturing Taiwan 12,588
3.1
WNS Holdings Ltd Jersey3 12,582
3.1
Genpact Bermuda4 12,422
3.1
Hindustan Unilever Ltd India 12,392
3.1
Metropolis Healthcare Ltd India 11,852
3.0
Dr Lal Pathlabs Ltd India 11,140
2.8
Godrej Consumer Products Ltd India 11,025
2.8
NetEase Inc Cayman Islands2 10,915
2.7
Integrated Diagnostics Holdings Plc Jersey5 10,095
2.5
Walmart De Mexico SAB de CV Mexico 9,546
2.4
Top 20 Investments 292,778
73.2
Vitasoy International Holdings Ltd Hong Kong 8,955
2.2
Vietnam Dairy Products JSC Vietnam 8,241
2.1
Clicks Group Ltd South Africa 7,705
1.9
Dabur India Ltd India 7,308
1.8
British American Tobacco Bangladesh 7,093
1.8
Philippine Seven Corp Philippines 6,832
1.7
Thyrocare Technologies Ltd India 6,655
1.7
Hypera SA Brazil 6,532
1.6
Eastern Company S.A.E Egypt 6,452
1.6
Eris Lifesciences Ltd India 5,944
1.5
Top 30 Investments 364,495
91.1
Nestlé Nigeria Plc Nigeria 5,693
1.4
PB Fintech Ltd India 5,596
1.4
Procter + Gamble Hygiene India 5,560
1.4
XP Inc Brazil 5,376
1.3
Medlive Technology Ltd China 5,365
1.3
DP Eurasia NV Netherlands6 5,292
1.2
Yihai International Holdings Cayman Islands2 2,520
0.5
Ceylon Tobacco Co Plc Sri Lanka 2,038
0.4
Total Investments (38) 401,935
100.0
1 Principal place of business Brazil 2 Principal place of business China 3 Principal place of business India
4 Principal place of business USA 5 Principal place of business Egypt 6 Principal place of business Turkey
Investment Portfolio
11
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
10.2%
16.9%
15.0%
47.1%
5.5%
3.9%
1.4%
By Geography (by Country of Listing)
● India
● US
● Other Countries
● Hong Kong
● China
● UK
● Cash Incl. Money Market a/c’s
as at 31 December 2020
3.1%
10.5%
6.8%
4.7%
3.7%
15.1%
● Materials
By Sector (based on net asset value GICS® Categories)
2.4%
52.0%
1.9%
● Consumer Staples
● Financials
● Technology
● Consumer Discretionary
● Communication Services
● Healthcare
● Cash Incl. Money Market a/c’s
● Industrials
8.2%
21.6%
13.3%
42.9%
8.0%
3.1%
2.9%
By Geography (by Country of Listing)
● India
● Other Countries
● US
● Hong Kong
● China
● Cash Incl. Money Market a/c’s
● Brazil
Top Purchases and Sales in 2021
Top Purchases
Top Sales
Security
Country of incorporation
Security
Country of incorporation
1
Tata Consultancy Services
India
1
Metropolis Healthcare Ltd
India
2
NetEase Inc
Cayman Islands
2
Britannia Industries Ltd
India
3
Genpact
Bermuda
3
MercadoLibre Inc
USA
4
WNS Holdings Ltd
Jersey
4
Dali Foods Group Co Ltd
Cayman Islands
5
Yihai International Holdings
Cayman Islands
5
Dr Lal Pathlabs Ltd
India
6
Tencent Holdings
Cayman Islands
6
Eris Lifesciences Ltd
India
7
PB Fintech Ltd
India
7
BIM Birlesik Magazalar AS
Turkey
8
Medlive Technology Ltd
China
8
East African Breweries Ltd
Kenya
9
Taiwan Semiconductor Manufacturing
Taiwan
9
PT Prodia Widyahusada Tbk
Indonesia
10
Procter + Gamble Hygiene
India
Portfolio Distribution
as at 31 December 2021
4.7%
12.7%
10.3%
8.8%
5.0%
14.0%
● Materials
By Sector (based on net asset value GICS® Categories)
1.5%
41.6%
1.4%
● Consumer Staples
● Financials
● Technology
● Communication Services
● Cash Incl. Money Market a/c’s
● Consumer Discretionary
● Healthcare
● Industrials
12
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Investment Manager’s Review
The Fundsmith Emerging Equities Trust had a positive 2021 in terms
of both absolute and relative performance.
Total return
1 January – 31 December 2021 %
FEET Net Asset Value Per Share +3.8
FEET Share Price -3.4
MSCI Emerging and Frontier Markets Index -1.4
Source: MSCI, Bloomberg
The net asset value (NAV) per share increase of 3.8% compared to
a decline in the MSCI Emerging & Frontier Markets Index (MSCI
Index) of 1.4%. The share price declined over the course of the year
because of the discount increasing in the latter stages of the year.
Since launch to the end of 2021, the Company has (after fees)
produced a cumulative NAV per share return of 52.9%, or a return
of 5.8% on an annualised basis.
2021 was a year where markets were impacted by the ongoing
global pandemic, increased talk of an end of quantitative easing
measures and, in the case of emerging markets, increased
regulatory activity in a number of sectors of China’s economy. The
impact of these, and how the portfolio was positioned to deal with
them, will be discussed later.
As with the prior year (2020), the Company comfortably
outperformed its index, with its NAV per share rising and the index
declining marginally, leading to outperformance of c.520bps, down
slightly on the outperformance of c.630bps recorded in 2020.
Performance in more detail can be seen below;
%
Since
incep-Annual-
2021 2020 2019 2018 2017 2016 2015 2014* tion ised
FEET
NAV1 +3.8 +20.7 -0.5 -3.0 +21.2 +12.0 -7.0 +0.1 +52.9 +5.8
FEET Share
price2 -3.4 +29.1 -7.4 -9.4 +24.5 +10.5 -10.9 +7.2 +37.4 +4.3
Emerging
Markets3 -1.4 +14.4 +13.9 -9.3 +25.3 +32.4 -10.0 +0.5 +74.8 +7.7
UK Bonds4 -4.5 +4.6 +3.8 +1.2 +1.4 +6.5 +1.0 +7.4 +23.0 +2.8
UK Cash5 +0.1 +0.3 +0.8 +0.7 +0.4 +0.5 +0.6 +0.3 +3.7 +0.5
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 consistently stated since the inception of the Company,
the composition of the index is very different to our portfolio. This
of course makes the Company’s relative performance against that
of the index subject to the impact of ETF fund flows. In 2019, net
inflows into ETF funds into emerging markets were almost
US$14bn. In 2020, emerging markets experienced net outflows of
13
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
$1.9bn, with US$11.5bn of outflows from ETFs and US$9.6bn of
inflows in active funds.
The largest constituents of the index are shown below;
Top 10 MSCI E+FM Index
constituents (at 31.12.2021)
Weight % ROCE1 (%)
Taiwan Semiconductor Manufacturing
6.9
26
Tencent
4.2
13
Samsung Electronics
4.0
14
Alibaba
2.9
7
Meituan Dianping
1.5
-14
Reliance Industries
1.1
7
Infosys
1.1
34
China Construction Bank
0.8
5
Mediatek
0.8
22
JD.com
0.8
2
Total Average
24
12
Source: MSCI
1 See Glossary beginning on page 96.
At the end of 2021 the top ten constituents accounted for 24% of
the index, and are thus ongoing beneficiaries of any sustained ETF
fund flows. The average return on capital employed (ROCE) of these
10 companies is 12%. In the Company’s portfolio, the top ten
holdings accounted for 45% and had an average ROCE of 37%.
Top 10 Portfolio Holdings
Weight (%)
ROCE1 (%)
MercadoLibre
6.0
8
Foshan Haitian
5.5
40
Asian Paints
5.3
30
Havells
5.0
24
Info Edge
4.6
7
Avenue Supermarts
4.6
11
Nestle India
3.8
141
Marico
3.3
43
Tata Consultancy Services
3.3
51
Tencent
3.2
13
Total Average
45
37
Source: Fundsmith
1 See Glossary beginning on page 96.
Our active share (the proportion of our holdings which do not
overlap with the index) at the end of December 2021 was 91%. We
own shares in just two of the top ten index constituents – Taiwan
Semiconductor Manufacturing and Tencent – and between them
they accounted for 6% of the Company’s NAV. We continue to retain
the view that these two stocks are the only two in the top ten index
constituents which are currently of the appropriate quality for the
Company to invest in. We may invest in other major index
constituents over time should we get comfortable with doing so.
2021 was a year in which a number of the concerns we have had
about investing in China came to the fore. Needless to say these
included concerns about overseas listings, regulation across a
number of sectors, slower rates of economic growth and a
controlling political party returning closer to its Marxist origins. Any
thawing of relations between China and the US since the Biden
administration took office has been minimal at best.
We continue to take the view that China is governed by the
Communist Party with its own interests of ideology and self-survival
at the forefront of policy making, whether it be social, economic or
“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”
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Investment Manager’s Review
diplomatic. On the regulatory front, a number of sectors were
materially impacted in 2021. The government announced a ban on
for-profit tuition in core curriculum subjects and also foreign
ownership in the sector. This ban was implemented with almost
immediate effect and no right of appeal. Highlighting the level of
economic disruption which China’s state council is willing to take in
the name of its own policy desires (in this case pressure on students
and cost for their parents), the sector is estimated to be worth over
£100 billion per annum.
Education was not alone. Regulations were brought in on video-
gaming companies restricting the amount of time minors can spend
playing video games to just an hour a day on Fridays, weekends and
holidays and restricting that time to between 8pm and 9pm. This
was a tightening of previous policies limiting game time. There has
also been an apparent slowdown in the rate at which new titles are
approved for release by the authorities. Other technology companies
have been impacted by increased rules on data protection, which
ultimately led to one high profile 2021 listing in the US, Didi Global,
being told by China’s Cyberspace Administration that it could not
take on new customers within two days of listing. Other draconian
regulations have hit sectors such as non-bank lending and property.
Simply put, the rules governing the operation of the ‘free market’ in
China are arbitrary, not transparent and not subject to legal
challenge. We do not expect this to change shortly.
Even if we were to disregard the legal environment for investors (and
particularly foreign ones), we have found an inordinate amount of
companies in China which have inadequate governance,
questionable accounting standards, issues over ownership and
voting rights alongside poor capital allocation. As we have previously
stated, 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 markets in which the Company has the ability
to invest. Others, whether it be fund flows from ETFs or mainland
Chinese private investors investing in Hong Kong stocks, are
welcome to take the risks which we won’t.
Thus, we are not basing an investment approach around a
company’s size, index weighting or susceptibility to liquidity flows.
Instead, our focus continues to be buying good companies and this
will continue to be our one and only priority, assuming of course that
they are operating in jurisdictions where the economic and political
risk is acceptable to our investment approach.
As a result of this focus, the Company continues to provide investors
with a portfolio which, when compared to the index, has higher
returns and margins, stronger cash conversion and, typically, faster
rates of cash flow growth. We seek investments which have the
ability to invest in their businesses at attractive rates of return and
as such those businesses in which we invest will typically have no
debt and, if not, only a conservative level of financial leverage. We
believe that these characteristics will be reflected in the share price
performance of the businesses which the Company owns. The
characteristics of the Company’s portfolio as of the 31 December
2021 compared with the index were;
MSCI E+FM Index
FEET %
(ex-financials)%
LTM ROCE
35
14
LTM Gross margin
51
32
LTM Operating Margin
20
15
LTM NFCF conversion
99
86
LFY NFCFE growth
21
13
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 96.
Unsurprisingly given our investment process and philosophy, 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” as in assuming that capital expenditure above the level
“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”
15
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
of depreciation is expansionary and can therefore be disregarded
in this calculation).
MSCI EM&FM
FEET
(ex-financials)
LTM NFCF yield
3.2
4.5
LTM portfolio dividend yield
1.3
2.0
Source: Fundsmith, MSCI, Bloomberg
As we have previously remarked, 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.
Somewhat impacted by the changes to the investment policy which
were approved in 2021, portfolio turnover in the year was 38% (or
39% when adjusted for share buybacks), compared to 21% in 2020.
The OCF (ongoing charges fees) was 1.25% of net asset value, whilst
actual dealing costs were 0.06% of net asset value.
At the end of 2020, the portfolio had 38 holdings. During the year,
we acquired seven new holdings and exited seven. The portfolio
closed 2021 with 38 holdings, in line with where it ended the prior
year. This is in line with the changes to the investment mandate
approved in 2021 which will see the portfolio typically having
between 25 and 40 holdings.
The seven new holdings were Genpact, Medlive, NetEase,
PolicyBazaar (PB Fintech), TCS (Tata Consultancy Services), WNS
and Yihai. We exited our positions in BIM, Britannia, Dali Foods, East
African Breweries, EDITA, Lojas Renner and Prodia.
Several of the new holdings reflect the wider range of opportunities
open to the Company since the investment policy change approved
by shareholders at the Annual General Meeting in 2021. The policy
change has given the Company a wider investment remit and has
broadened it to include being able to invest in businesses which are
exposed to ‘the broader social and/ or economic development’ of the
countries in which they operate. The addition of two holdings in the
Business Process Management (BPM) space – Genpact and WNS,
and that of TCS in the IT services space reflected us taking advantage
of this change. All of these are businesses we had followed for a
considerable period before the change in investment policy.
Genpact and WNS both operate in a market which has gone through
three phases. The first phase of industry development targeted
Business Process Outsourcing (BPO) customers who were focused
on the outsourcing of basic business processes to save costs, the
second (BPM) was focused on outsourcing more complex activities
with the outsourcing company taking responsibility for the services
and the third phase of digitalisation.
Since its inception in the late 1960s, both the Indian IT services and
BPO/ BPM industries have consistently gained market share from
international peers in a growing market. This has been driven by the
competitive advantages of strong brand, client relationships,
consistency of service delivery, technology expertise, labour
availability, language, scale and cost of delivery. Whereas it is
estimated that over 50% of IT services are outsourced globally, the
penetration of BPM services is much lower at around 15% to 20%.
The origins of the two BPM businesses in itself is interesting, and
shows just how outsourcing has developed from serving just captive
customers looking for cost savings. WNS originally emerged as
British Airways’ World Network Services operation in 1996, before
being sold to a private equity group and subsequently listing in the
US in 2006. Similarly, Genpact, was founded as a subsidiary of GE
Capital in 1997 to manage the outsourcing of its in-house business
“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”
16
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
“Weakness in emerging market currencies adversely affected our performance”
processes, before becoming independent of GE and listing on the
NYSE in 2007.
There have been several common themes shared in the
development of both of these businesses. First, developing
processes for an in-house client typically taking advantage of
developing world labour rates; second, selling those services to third
party customers; third a change of ownership which takes the
business out of the ‘orbit’ of its original parent and potentially
provides sharper commercial focus; and fourth, the development of
new products and services which they can sell to both existing and
new customers. Although in a different market and still with a
controlling shareholder in the form of Tata Sons, TCS has been able
to also exhibit many of these traits.
The original growth of the businesses came from cost-saving and
the arbitrage between labour costs and skills between the
developed world and the developing world (although both industries
have built their largest footprint in India, there are other emerging
markets where they are a notable presence). Since then, both have
grown in scale, typically by greater client confidence in the
advantages outsourcing can bring, including easing the regulation
and compliance burdens on customers and the need to analyse
increasing amounts of data.
Thus, whilst clients are still looking to benefit from process
efficiency, cost advantage and labour arbitrage from their BPO/
BPM or IT services providers, there is now a strong focus on
providing value-added services like customer experience, data-led
insights, and digital solutions. The increased focus on variable cost
structures have resulted in alternative service delivery and pricing
models
such
as
transaction-based,
outcome-based
and
subscription models. And as the services operated by both sectors
become more complicated, they become more embedded in their
client’s business processes thus making them harder to replace
with competitors.
The Company also initiated a holding in NetEase in the year. In spite
of having its origins in free internet services, NetEase is the world’s
second largest mobile gaming company and is one of China’s
largest internet technology businesses. Video games (both PC and
mobile) account for c.80% of revenues and comprises both self-
developed games marketed in China and overseas, alongside
licensing games from third parties and distributing them within
the PRC.
One of the attractions of NetEase to us is its focus on deliberately
creating games with longevity in mind, thus allowing them to
become a long-established franchise, typically with follow-on titles
and the development of content across genres. For example,
NetEase launched its first PC game Westward Journey in 2001, yet
in 2019 this was the sixth highest ranked mobile game in China in
terms of user spending.
The group is targeting to derive 30% of its gaming sales from
international markets. 2022 will see the international launch of
Harry Potter: Magic Awakened after a highly successful 2021 launch
in China where it debuted at number one in the iOS charts. NetEase
has a considerable net cash position on its balance sheet, which
will allow it to develop both its gaming operations and other
businesses such as streaming.
Another business we bought following the change to the investment
policy was Medlive. Medlive is both China’s largest online
professional physician platform and its largest physician platform-
based digital healthcare marketing service providers. The stake was
acquired at IPO (Initial Public Offering) (a relatively rare event for
the Company) and neither of the two major investors, M3 of Japan
(a business well-known to Fundsmith) and the founders, sold stock.
Investment Manager’s Review
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Medlive’s main source of revenue comes from the precision
marketing of drugs to physicians. Digital marketing has significant
cost and time efficiencies. Frost and Sullivan estimate that the
average click-through rate for content using general digital
marketing is 1 to 3%, whilst the efficiency rate for content delivered
using precision digital marketing is typically between 20% and 40%.
Thus, drug companies have every incentive to move marketing
online. Of the estimated 3.9m registered physicians in China, 2.5
million are on Medlive’s platform, and we estimate only 400k of
these are regular users who make a meaningful economic
contribution. Herein lies one opportunity.
Another opportunity is although the government price regulation of
drugs and healthcare products, such as implants, is increasing,
there are still a number of facets which make China’s healthcare
industry, in certain instances, attractive. These include an aging
population, increasing disposable income, a greater prevalence of
lifestyle and acute diseases such as cancer and heart problems,
greater health awareness and a move from traditional medicine into
scientifically developed drugs.
PolicyBazaar (or PB Fintech) was an Indian IPO where we invested
after having become familiar with the business through our
investment in Info Edge, a major shareholder in PB Fintech.
PB Fintech is the largest distributor of life and health insurance to
retail customers in India, with a 90% plus market share in these
categories from its eponymous online insurance platform.
PB Fintech was founded in 2008 in order to capitalise on the
opportunity to professionalise the way insurance in India is
distributed. The majority of insurance in India is sold by offline
agents to consumers, leading to high commissions, the risk of fraud
and unprofessional service. Meanwhile, customers are often
unwilling to fully disclose their health conditions and thus it makes
it hard for insurers to ascertain likely claim rates reliably. The
insurance market in the main categories represented by
PolicyBazaar are growing at around 15 - 20% per annum.
PB Fintech’s model benefits both suppliers of insurance and their
customers. For insurance providers, by disintermediating the agent,
it reduces policy commissions (and the cost to customers) and also
both the scope for fraud, misspelling and poor customer services
from agents. Insurance companies benefit as PB Fintech’s signing
on process reduces the ability of customers to mislead insurers
about their ailments. Thus, both provider and customer benefit from
using the platform.
Insurance in India is a nascent market. The health and life insurance
markets in the country are highly underpenetrated and growing
quickly. At present, online insurance distribution accounts for under
1% of the market (in the UK it is around 30%). As such, there is
considerable scope for growth in a fragmented market. India is just
the world’s tenth largest life-insurance market. Supporting growth
is a greater awareness of illness, a wider incidence of serious
medical conditions and a lack of social safety net. Per capita
healthcare spending in India significantly lags both that of the
developed world and other large emerging markets such as China
and Brazil.
Yihai was the smallest new investment we made in the year, and
also the most disappointing to date. Yihai was founded in 2005 as
an internal supplier to Haidilao (China’s largest hot pot restaurant
chain) for soup flavourings. It first started supplying hot pot
condiments to the retail market outside of Haidilao in 2007, and
now third party sales are the majority of Yihai’s sales. The hot pot
market is the largest segment of China’s catering market,
accounting for 14% of a market which is seemingly valued at around
US$550bn. In the long term, we believe that Yihai through its brand,
distribution presence, market position (it is the second largest hot
pot condiment manufacturer in the PRC) and ability to further
“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”
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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”
develop its premium product offer will continue to gain share in a
highly fragmented market.
Although we believe that formal food manufacturers will ultimately
be beneficiaries of greater awareness about food provenance in the
post Covid world, Yihai’s share price has been affected by China’s
‘zero-Covid’ restrictive policy impacting restaurant trade customers
and the surge in ‘eat at home’ sales of early 2020 when Covid first
hit China not being sustained. Sentiment has also been affected by
Haidilao slowing its opening schedule as break-even for new
openings take longer.
Our holding in Dali Foods, the Hong Kong listed Chinese foods
business, was sold. Much of Dali’s future growth was predicated on
the development of short shelf life bread and plant based
beverages; we agreed with the company that they could be
RMB10bn per annum product categories. Unfortunately, growth has
not matched its (or our) expectations. Over the last five full financial
years, the group’s revenue grew at a CAGR of c.4% and EBIT at a
CAGR of 3%, with a sharp deterioration over the last three years.
Return on Invested Capital has also fallen over the period. We do
not sense a particular urgency amongst management to address
this and believe that management have been slow to evaluate other
potential growth opportunities for the business.
We also exited our holding in Prodia, the Indonesian medical
diagnostics business. Although the business has seen a marked
benefit from Covid-19 testing, we feel that this will ease off as the
pandemic becomes increasingly manageable and Indonesia has
been one of the more progressive Asian economies for dealing with
Covid, with only limited lockdowns. We have become increasingly
concerned as to the underlying scope of growth for Prodia’s branch
network for traditional diagnostic tests. We believe that this is
leading the group to allocate capital to more esoteric areas such as
clinics and wellbeing testing where we have doubts about the
opportunities in the market.
We also exited our holding in BIM, the Turkish discount retailer. We
believe that the business itself is sound and the fact that foreign
food retailers have largely avoided establishing businesses in Turkey
is witness to this. Unfortunately, for BIM, the operating environment
in Turkey has deteriorated due to the implosion of the Turkish Lira,
the interlocking impact of increasing inflation on that and a
government which has threatened to both impose controls on prices
and profit margins of the food retailing sector. Add to that the
increasingly populist policies of President Erdogan and the potential
for it to be declassified as an emerging market brings a degree of
external risk to the investment that we are currently unwilling to
countenance.
We also took the decision to sell our holding in Lojas Renner, a
business where we took a small position in the previous year.
Setting aside the macro issues facing Brazil of currency weakness,
a volatile political situation ahead of the autumn 2022 Presidential
election and a poor response to the pandemic, it became
increasingly clear to us that Lojas Renner had a number of
challenges that were not clear to investors at the time of investment.
These include the need for higher investment in the digital offer than
we (and it) had originally anticipated and the broader development
of the product offer and service offer, both of which do not come
without ongoing investment cost, both in terms of capital and
operating spend. As part of this process, it became clear that the
amount of capital being diverted to building the low-return financial
services segment of the business was disproportionately high.
Investment Manager’s Review
19
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Our stake in East African Breweries was sold, leading to the
Company now having no exposure to the alcohol segment. As we
opined in the 2021 half-year report, when the Company was
launched we believed that the brewing segment would offer an
attractive investment opportunity capitalising on a number of the
trends we felt the Company could benefit from. These included
consumption growth, changing tastes benefiting formally
manufactured products, premiumisation and the strength of brands
that have been protected from imports due to distribution and
import tax barriers. Unfortunately, our experience in the sector has
been disappointing, driven by higher demand elasticity than we
expected, irrational competition, whilst margins can often be put at
risk due to the impact of currency movements on raw material
imports.
Again flagged in the 2021 half-year report, we exited our stake in
Britannia, with the capital reallocated to WNS. Britannia had
performed strongly since we owned it and we felt that WNS, the
business into which we reinvested the capital, was more
appropriately valued. Although Britannia is run by a strong
management team led by Varun Berry, we became concerned about
the company’s related party loans to other companies owned by the
Wadia family.
The stake in EDITA was sold due to inconsistent returns over recent
years, in spite of the opportunities open to it in the Egyptian market.
In spite of its undoubted promise and market position, EDITA had
proven to be a business which flatters to deceive, with return on
capital approximately halving over the 2015-2020 period.
Portfolio Commentary
By sector, the breakdown of the portfolio as at 31 December 2021
is as below:
GICS Sector Split
%
Consumer Staples
41.6
Health Care
14.0
Information Technology
12.7
Communication Services
10.3
Consumer Discretionary
8.8
Materials
5.0
Industrials
4.7
Financials
1.5
Cash
1.4
TOTAL
100
Source: Fundsmith, Bloomberg
Compared with the Index:
GICS Sector Split
%
Information Technology
22.4
Financials
19.6
Consumer Discretionary
13.4
Communication Services
10.7
Materials
8.6
Consumer Staples
5.9
Energy
5.5
Industrials
5.1
Health Care
4.3
Real Estate
2.1
Utilities
2.4
TOTAL
100
Source: Fundsmith, Bloomberg
20
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
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.
Our geographical weightings and those of the index continue to
markedly differ;
FEET Country Breakdown
Weight (%)
India
53.3
China (including Hong Kong)
15.7
Argentina
6.0
Egypt
4.1
Taiwan
3.2
Brazil
3.0
Other Emerging Markets
7.4
Frontier Markets
5.8
Cash
1.4
TOTAL
100
Source: Fundsmith
MSCI EM&FM Index Country Breakdown
Weight (%)
China (including Hong Kong)
32.0
Taiwan
15.9
South Korea
12.7
India
12.3
Brazil
3.9
Other Frontier & Emerging Markets
23.2
TOTAL
100
Source: MSCI, Bloomberg
In terms of contributors to performance, the tables below show the
top five contributors to and detractors from the Company’s
performance.
Top Five Contributors
Country
%
Avenue Supermarts
India
2.15
Metropolis
India
1.96
Havells
India
1.82
Dr Lal Pathlabs
India
1.59
Asian Paints
India
1.09
Source: Fundsmith
The top five performers share the common theme of being Indian
companies. In spite of the impact of Covid on the country, the
underlying trends in which our investments in the country will take
advantage of continue to increase, and we also benefited from
holdings in three medical diagnostic testing businesses that have
been beneficiaries of the Covid outbreak.
The biggest contributor to performance was Avenue Supermarts,
the Indian grocery retailer. The business has reported strong
revenue and EBIT growth as Covid related store disruptions eased.
The group added 29 stores in the first nine months of its 2021/22
financial year and alongside an accelerated rate of openings the
average size of new stores continues to be higher than the average.
We believe its value for money proposition makes it well placed to
mitigate inflationary pressures and the group continues to take a
cautious approach to e-commerce, concentrating its offer on a
select range of geographies where it can target high basket sizes.
Metropolis and Dr Lal Pathlabs both benefitted from the impact of
Covid on the testing market, leading to a sharp increase in overall
tests. Experience from the first wave of Covid affecting the country
led people to understand how to go about their way of life safely in
subsequent waves, leading to more resilient demand for testing in
subsequent waves. Covid, in our view, has accelerated health
awareness in India and both businesses are well placed to benefit
from this. The market remains fragmented, allowing considerable
Investment Manager’s Review
21
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
scope for growth for branded players through a combination of
greenfield sites and acquisitions, with a particular opportunity for
businesses to expand their footprint in smaller cities and towns.
Both Dr Lal and Metropolis made acquisitions of complementary
chains in the year.
All three businesses we own in this segment (Thyrocare being the
third) also have the benefit of economies of scale as they build their
networks. Digitalisation has helped this, and an Indian online
pharmaceutical retailer, PharmEasy, acquired a controlling stake in
Thyrocare in the period.
We did, however, take the opportunity to reduce our holdings in all
three as we felt that there were better investment opportunities
elsewhere, with the proceeds typically used to fund the investment
in the Indian BPO/ BPM space and also the PB Fintech investment.
Both Havells and Asian Paints benefitted from increasing spend on
home improvements due to a combination of the impact of the
pandemic and the long-term growth drivers for both businesses,
including market share gains from both other branded players and
informal operators. The Indian real estate market, although not an
area we would likely directly invest in, is showing a recovery after a
difficult past decade.
Havells performed strongly in spite of the second wave of Covid
heavily disrupting the peak selling period of its air-conditioning
business. Positive drivers of the business include a resilient supply
chain, new product launches, increased capacity and import
restrictions of air conditioning components from China. The group’s
larger, non-consumer business is benefiting from formalisation as
both consumers and distributors move towards larger branded
players in the aftermath of Covid. The group’s consumer switch gear
and electrical products business will be a beneficiary of increased
residential construction activity commensurate with both post-Covid
recovery and the long-term economic growth of the country, whilst
its industrial products business is well placed to benefit from the
development of trends such as energy efficiency, the Internet of
Things and smart cities. Havells is a business which, to us, positively
surprises in difficult market conditions, helped by a strong
relationship with its dealer network.
Like Havells, Asian Paints has a strong dealer network and the scale
and efficiency of its technology enabled supply infrastructure and
ability to forecast demand gives it a major competitive edge. The
business continues to exhibit exposure to multiple growth drivers,
including an increasing (albeit still relatively small) proportion of
homes made from modern construction materials which lend
themselves to painting; and higher incomes resulting in a greater
use of both paints and adjacent products like waterproofing to
enhance property usability. Although inflationary pressures may be
a short-term issue, the group has a proven ability to pass on price
rises, The group is in the embryonic stages of developing a home
décor and services initiative and believes that the proportion of
revenues derived from this segment could triple over the next three
years.
The group is to undertake significant investment in manufacturing
capacity over the next three years to allow it to benefit from the
growth of its underlying markets.
The Top five detractors from performance were;
Top Five Detractors
Country
%
Foshan Haitian
China
-2.29
Vitasoy
Hong Kong
-2.06
Yihai
China (listed in HK)
-1.43
MercadoLibre
Argentina (listed in US)
-1.16
Tencent
China (listed in HK)
-0.84
Source: Fundsmith
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Foshan Haitian was the biggest single detractor from performance,
after a number of years of being a strong portfolio performer.
Foshan Haitian’s strategy (and strengths) remain unchanged,
although the business had two factors to contend with in the year.
The first of these was on and off restrictions on the catering trade
in the PRC, which is the group’s main end market in spite of efforts
to develop its consumer offer. In addition, and not unique to Foshan
Haitian, the group has had to deal with significant raw material price
pressures in the year. As discussed elsewhere, Yihai suffered from
similar factors, exacerbated by the impact of Covid-19 on its sister
restaurant company Haidilao.
Vitasoy was the second largest detractor from performance,
following on from 2020 where its Wuhan factory was forcibly closed
by Chinese authorities for several weeks during the initial phases
of the Covid outbreak, and subsequent lockdowns and school
closures in both China and Hong Kong. In 2021, continued
movement restrictions and school closures continued to impact
Hong Kong and as Vitasoy’s products are typically sold for ‘on the
go’ consumption, the impact has been marked. Worse, however,
was to come over summer after the group became subject to a
netizen’s boycott of product in the PRC after one of its employees
was involved in the stabbing of a police officer during pro-democracy
protests in Hong Kong. This led to a sharp fall in sales in the group’s
China business, something which it had previously built up into the
largest part of its business over several decades. We suspect that
sales in China will recover (and there is some early evidence of that)
but the speed of this remains uncertain.
Tencent was a further weak performer, and was the fifth largest
detractor from the Company’s performance. As noted elsewhere,
regulatory moves in China have affected a number of sectors, and
‘platform’ businesses such as Tencent have been impacted. China
has placed time restrictions on the use of gaming by minors, which
has affected the revenues of the group’s gaming business which
derives most of its revenues from the PRC. In addition, scrutiny of
apps, content of chat sites and the handling of data have all become
issues for regulators in China. We believe, however, that Tencent will
be able to adapt to these regulations and we also believe that there
remains significant opportunity in its investment portfolio.
After two years of strong positive contribution, MercadoLibre was
the fourth largest detractor from performance. The group’s share
price weakness primarily came in the closing months of the year,
caused by a combination of increasing fears of competition from
players such as SEA and Amazon, deteriorating sentiment towards
high-growth stocks and a surprise issue of new equity, which caught
both the market and ourselves unawares. We continue to believe
that the group’s position in both the Latin American e-commerce
and payments market stands it in good stead.
The table below shows the impact of currencies on the portfolio.
Top Five
%
Bottom Five
%
China
0.53
India
-0.42
United States
0.20
Turkey
-0.34
Vietnam
0.04
South Africa
-0.13
Egypt
0.03
Philippines
-0.10
Kenya
0.00
Brazil
-0.10
Source: Fundsmith
The China category includes both the Chinese RMB and the Hong
Kong dollar, the latter which is pegged to the US dollar. The Chinese
RMB was strong in the year, helped by China posting yet another
record trade surplus in spite of efforts by successive US
administrations to rectify this. The Vietnamese Dong, another
currency that benefits from an export orientated economy was also
a small positive contributor to performance.
Investment Manager’s Review
23
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
The Indian Rupee was the largest single detractor to performance.
Although efforts are being made to improve the situation, India has
a material structural trade deficit (not helped by a reliance on
imported oil) and has seen a marked uptick in inflation. Although a
much smaller absolute exposure, the Turkish Lira’s collapse in 2021
which was driven by continued Presidential interference in monetary
policy leading to inflation reaching 36% by the end of 2021.
The regional geographic breakdown of the portfolio by listing at the
end of December 2021 is shown below
Region
Percentage of Portfolio (%)
India
47.1
US
16.9
Hong Kong
10.2
China
5.5
UK
3.9
Other Countries
15.0
Cash
1.4
TOTAL
100
Source: Fundsmith
India remains the largest geography in the portfolio and made a
material positive contribution to 2021 performance. As we have
previously said, our weighting in India is not a deliberate policy but
instead an outcome of where we have pursued the most attractive
investment opportunities open to us.
Reflected in the opportunities open to our investments in India are
a growing population, rising incomes, urbanisation, premiumisation
and established, functioning institutions. Specifically, sectors such
as IT Services and BPM benefit from high levels of educational
aspiration and achievement, the English language and the rapid
development of a venture capital infrastructure in the country.
Although India’s Fast Moving Consumer Goods (FMCG) sector
delivered its worst underperformance against the local index for a
decade, a number of our stocks in this area performed well.
Godrej Consumer appointed a new CEO, Sudhir Sitapati, in the year
who joined from Hindustan Unilever, a move which led to
expectations of improved performance for the group through both
an acceleration of growth in its core categories and the development
and expansion of new products. The group’s African business is
showing improved performance and we expect the Indonesian
business to recover post-Covid. We note that the business was also
ranked number one in India for sustainability by the CSR journal.
Dabur also performed strongly in the year. The group continues to
launch new products both domestically and internationally, with a
focus on premiumisation. The reduced impact of Covid in the
country has led to increased out-of-home consumption, whilst e-
commerce revenues now account for approaching 10% of sales.
Increasing wellness awareness continues to drive interest in its
Ayurveda products in both food and beverage and personal care
segments, which have now been diversified into categories such as
children’s drinks.
Hindustan Unilever has seen a degree of gross margin slippage due
to higher commodity prices, the impact of which have not been fully
passed on in pricing, partially as a result of slowing demand growth.
We believe the group continues to have long-term attractions with
the scope for continued product and category development,
premiumisation and the ability to take advantage of both its
distribution network and the opportunity offered by e-commerce.
We continue to monitor strategic and organisational developments
24
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
at the group’s parent for any impact on its listed subsidiaries in
which the Company can invest.
In spite of being impacted by a moderation in rural demand growth
rates, due to a combination of factors such as high levels of home
consumption in 2020 unwinding and higher inflation, Marico has
seen a resilient performance in both its core Saffola and Parachute
categories. The group is focused on re -accelerating growth through
a combination of digital marketing, enhanced rural distribution and
the development of its packaged food business. The group’s
Bangladesh business continues to perform well.
Nestlé India continues to exploit India’s size by geo-targeting
products in a focused way, with variants of core products such as
coffee and noodles being adapted for regional markets. As with a
number of our FMCG holdings in India, the group is also expanding
its presence into smaller towns and villages.
Proctor & Gamble India remains the market leader in the female
hygiene market in India, with a market share in excess of 50%. The
penetration of sanitary towels in the country is low (a figure of
15% - 20% is widely stated) and we believe that the market has
strong growth potential through a combination of demographics,
rising incomes, product awareness and diminishing social taboos.
Info Edge’s share price performance was more muted (in 2020 the
shares rose 88%). Although the performance of its core recruitment
and real estate platforms was encouraging, a lot of 2020’s
performance was due to the anticipated listing of both Zomato and
PolicyBazaar, which took place in 2021. We remain encouraged by
the standards of corporate governance exhibited by the group, and
believe this also be carried into those companies in which it has
material investments.
Eris Lifesciences operates in India’s growing branded generics
pharmaceutical market with a focus on chronic therapies such as
diabetes and cardiology. Eris has reached a stage in its
development where nine out of its 15 brands have top five market
positions. Eris has accelerated investment to support capacity
growth that will be focused on the domestic market where it is
growing share. More recently, the group announced a joint venture
with MJ Biopharma to enter the insulin market, which will
complement its existing diabetes treatments and allow it to treat
the progression of the diseases in patients.
We increased our holding in Taiwan Semiconductor Manufacturing
(TSMC) during the year. The global chip industry has a number of
strong end market drivers - 5G, high performance computing and
servers, artificial intelligence, the internet of things and the
increasing use of chips in sectors such as automotive. TSMC is the
leader in the fabless sector and will bring 3nm chips into
commercial production later this year. This is an industry where the
barriers to entry are high, the risk of switching for customers
potentially disastrous and where market leaders are well placed to
improve returns on investment in new technologies.
Elsewhere in Asia, we have retained our holdings in both Vietnam
Dairy and Philippine Seven. Both share a number of characteristics
which the Company was set up to invest in - operating in countries
with growing populations, long-term economic growth and the
changing tastes this brings in areas such as formalisation and
premiumisation. Both countries Vietnam and, in particular, the
Philippines have not been exempt from the impact of the pandemic.
Whilst Vietnam has experienced disruption from a zero-Covid
approach, the Philippines has struggled to deal with the pandemic,
with multiple movement restrictions and the longest school closure
in the world. Both countries, we believe, will be well placed to
resume strong economic growth when the pandemic subsides.
Investment Manager’s Review
25
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Our two South Asian cigarette stocks had divergent performance.
BAT Bangladesh performed well on the back of share gains, its
strong position in the premium segment and, additionally capital
expenditure which will allow it to take advantage of export
opportunities. The shares also benefitted from enhanced liquidity
following a share split. Ceylon Tobacco on the other hand has not
been fully insulated from an economic slowdown in Sri Lanka, which
has been exacerbated by the impact of Covid on tourism and a ban
on fertiliser imports which has led to reduced agricultural
production, both of which have hampered incomes. The economic
situation in the country, which has unsustainable levels of
government external borrowing, is likely to remain difficult for a
while, with an impact on cigarette demand and increased switching
to lower cost informal products such as bidi.
Our third tobacco stock is Eastern Group, Egypt’s largest cigarette
producer. The shares were impacted in the year by concerns over
the potential issuance of a new license to produce cigarettes in the
country, which would have increased competition. The first license
tender failed to produce a successful bidder, leading to a second
license tender. On this we await developments, although we take
the view that even if a new producer enters the country, Eastern’s
strong market position and government shareholding will insulate
it somewhat. In our view, there are also significant self-help
measures Eastern can undertake to improve returns.
Integrated Diagnostic Holdings, our other Egypt focused holding was
a beneficiary of Covid, which has led to revenues more than
doubling. Stripping out the impact of Covid tests, the group’s
revenues will have risen by around 30% year on year, with a strong
single digit percentage increase in pricing, helped by an increase in
capacity of its house call service.
Supported by the cash flow coming from the strong performance of
the business, towards the end of the year the group announced the
acquisition of a 50% stake in one of Pakistan’s largest integrated
diagnostics providers which has a network of over 80 centres in 30
cities in Pakistan. This looks a sensible extension of the group’s
geographic footprint and, like Egypt, diagnostic test prices are not
regulated by government and healthcare spending as a percentage
of GDP is well below the global average.
Nestlé Nigeria saw revenue growth of over 20% in the year,
indicating to us that volume growth in the food segment has
returned. Nigeria continues to be a difficult operating environment
due to a combination of currency, logistics and security and we
believe the group’s performance is a testimony to its underlying
quality, although suspect that elevated commodity prices may hold
back returns over coming quarters.
Clicks was impacted by two events which were outside of investor
control - the departure of its well-respected CEO to run a business
in Australia, an event all too reflective of South Africa’s ongoing
brain-drain. His internal replacement does not have operational
experience in the group, something which has concerned investors
in a business renowned for operational excellence. In addition, the
business was caught up in the July looting in Kwazulu-Natal, which
affected both a number of distribution centres and stores.
Underlying trading remains encouraging, helped by the vaccination
programme encouraging people to visit stores. Both retail and
wholesale growth have shown positive like for like sales in the first
few months of the group’s new financial year.
Although not a top-five contributor to performance, DP Eurasia
performed well in the year, helped by the early signs of a turnaround
at its Russian business during the course of 2021 and strong like-
26
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
for-like performance at its main operation in Turkey. The business
also attracted corporate attention, with Jubilant Foodworks, the
master Dominos franchise in India acquiring a 32.8% stake in the
business and then making a tender offer (which was subsequently
largely rebuffed) to take its holding up to 49.99%. We believe that
Jubilant may ultimately return and have suggested that DP Eurasia
improve the protection mechanisms in place for minority
shareholders should such an event recur.
After negative Q1 2021/22 like for like sales, Walmart de Mexico
has shown like for like sales growth over subsequent quarters and
continues to capture market share, a trend which it has enjoyed
since 2015. As well as new store openings, the group continues to
convert its underperforming Superama chain into the Walmart
Express format with encouraging results, whilst Sam’s Club is
exhibiting strong momentum in the country of 130 million people.
The group has recently announced a strategic review over part of
its central American business covering Honduras, El Salvador and
Nicaragua.
XP was a business we acquired at the start of the pandemic and we
believed that it was well placed to benefit from increased consumer
interest in Brazil’s financial markets. 2021 has not proved easy for
XP as Brazilian interest rates have soared, making non-equity
investments more attractive and the local economy has struggled,
placing pressure on share prices and dampening investor
enthusiasm for the local equity market. XP has ambitious plans to
develop a broader Fintech offer, although we are monitoring the
impact of this on returns closely.
Aside from the travails of the Brazilian economy and political
situation, Hypera shares were also impacted by a court ordering it
to return half the proceeds of the sale of its nappy business in 2017
to the acquirer. The group continues to focus on its domestic market
and sold a portfolio of pharmaceutical products in Colombia and
Mexico towards the end of the year. Although we continue to watch
events at the company closely, we believe the acquisition of product
portfolios from multinationals is the correct strategy. We expect to
see evidence of these seemingly low-risk acquisitions bedding down
increasingly impact the group’s financial performance.
Environmental, Social and Governance (ESG) and
Climate Change
ESG factors have increasingly become of concern to investors.
Fundsmith are signatories of the UN PRI* and our ESG approach is
overseen by the Fundsmith Stewardship and Sustainability
Committee, on which the Company’s Portfolio Manager sits.
*See the Glossary on page 98.
As we have commented in the past, as long-term investors, we
approach ESG in the widest possible sense taking into account all
of the factors that may impact a business’s potential to sustain
returns into the long term. We very much take the view that why
would you buy shares in a company for the long term which is busy
destroying its environment and economic sustainability, behaves
unethically towards stakeholders or has unacceptable governance,
all factors which are likely to lead to a company’s share price to
go down.
Our approach thus means that ESG is an integral part of our
investment approach and we believe that the Company provides an
attractive outcome for investors in this regard, supported by the fact
that as long-term investors we are concerned about the
sustainability of a company’s returns. Our view is that businesses
with weak ESG facets are unlikely to be able to produce the long-
term sustainable returns which we seek.
Dealing first with the environment, whilst we do not actively seek to
invest in ‘positive good’ sectors, our investment process, driven by
Investment Manager’s Review
27
the facets of what make a ‘good company’, leads us to avoid-asset
intensive, low return and cyclical businesses. Examples of these
industries in which we would never invest include mining, oil and
gas, cement, steel and aluminium manufacturing and palm oil
production. Others are welcome to them, but we suspect that the
regulatory and fiscal (i.e. taxes on polluters) environment will
increasingly reduce returns for investors in environmentally
destructive industries and make it harder for them to access capital.
We are also very unlikely to invest in businesses which lend money
to these businesses.
Company specific data relating to climate change in emerging market
companies is limited in scope and quality. We are aware of the risks
of climate change both from an environmental and economic point
of view. Emerging market economies, by their very nature, are less
able to deal with the issues caused by climate change.
How we approach climate change is very much based in our
approach to ESG. As previously mentioned, we are highly unlikely to
invest in carbon intensive, low return industries in sectors such as
heavy manufacturing, oil and gas, coal and cement. We increasingly
believe businesses in these sectors are likely to face higher costs
of capital and greater difficulty in accessing funding, something
which again does not suit our long-term approach to investing. We
believe that the Company’s portfolio has a significantly lower
weighted average carbon intensity than its comparable benchmark.
We expect the businesses we own to produce social positive
outcomes. This comes from the businesses we own typically having
either brands or public perception amongst customers to protect. ESG
and brand stewardship are linked and will increasingly become so,
particularly in areas such as environmental and social awareness.
Governance is a material element of our evaluation of candidates
for our investible universe, which provides the pool of companies in
which we can invest. Although we look at a wide number of
governance metrics, areas we take particular interest in include
board structure, voting rights parity, familial links within
management,
related
party
transactions,
management
remuneration/ incentivisation and share ownership, brand and
subsidiary ownership arrangements and royalty agreements. We
place much greater store on these than the markets oft-quoted
‘quality of management’ which is both subjective and quite often
proven to be wrong.
We vote on all proxies we receive ourselves and regularly engage
with management on areas such as ESG, remuneration, business
performance, strategy and innovation.
Outlook
As we have consistently said, we put the quality and long-term
potential of the companies in which the Company invests ahead of
short-term factors driving investment markets. Simply put, we can
control the former; we cannot second-guess the latter.
At the time of writing, the global pandemic is currently at the
Omicron wave, which is clearly weaker than its predecessor variants.
We are encouraged as to where, on current scientific evidence, the
pandemic appears to be heading.
The one exception to this are those countries that are pursuing a
zero-Covid policy, most notably China. China continues to place
whole cities under quarantine measures following small outbreaks
of the virus, causing significant economic disruption. Hong Kong
has followed similar measures across its leisure and education
sectors. Aside from the concerns about debt and capital investment
at diminishing rates of returns, the zero Covid approach is also likely
to place pressure on the PRC’s economy where growth is already
slowing.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
28
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Aggressive use of central bank balance sheets over the Covid period
will, at some point have to be reversed, resulting in rising interest
rates (although in China where the state has high levels of leverage
over the economy the likelihood is for further cuts). Although this
has affected the valuation of some of the growth companies we own
in the early weeks of this year, we remain confident of the
businesses in which we are invested and were we not, we would not
own them. Therefore, in the short term, the market may favour
sectors such as banks and resource companies, we are happy to
let this pass us by. Just as we have always bought businesses and
not business plans in sectors such as healthcare and technology,
we continue to believe that the investments in the portfolio are well
placed to benefit from the secular trends supporting the
multi-generational growth of these markets.
The businesses we own are well placed to withstand the worst
impacts of rising rates and inflationary pressures. They typically
have high gross margins, do not have energy or hydrocarbon
intensive production processes and by and large have no net debt
on their balance sheets. Over the longer term, we expect these
qualities, and not the ephemeral fickleness of the market, to be the
determinant of share price performance.
Across our investment careers, we have seen multiple examples of
regulation in emerging markets that simply defies economic or
market logic. Over the last two years, this has been exacerbated by
the political imperative of Communist Party of China, which is
moving increasingly back to its harder line, Marxist-derived roots.
We are of the opinion with, Xi Jinping most likely to have his term in
office extended later this year, this trend is only going to continue,
whether it be Beijing’s approach to the governing of Hong Kong,
dissent, criticism (both domestically and internationally) and
international relations. From an investment point of view, although
China’s economy is likely to continue to open up, it will do so very
much in the interests of the party. Do not expect favourable
treatment as a foreign investor.
In particular, Taiwan is an issue, which could, over coming years,
increasingly play on investors’ minds. Beijing’s increasing
belligerence to Taiwan should not be seen as just a territorial
dispute - instead, there are many, particularly on the harder line side
of the Chinese communist party who see the seizure of Taiwan as
the ultimate end of the civil war. Taiwan and China, between them,
account for around half the emerging market index.
Political risk will continue to be a greater issue for developing
markets as against developed ones, and the majority of investments
open to investors in emerging markets do not have the geographical
diversification of larger developed world countries. The year will see
elections in Brazil and the Philippines (amongst others) and it is
clear that a number of other countries in which the fund can or does
invest have challenges. At the time of writing, the Russia-Ukraine
situation remains unresolved. We have no investments that have
their primary business operations focused on Russia.
Cognisant of these risks, we continue to seek high-quality
companies, which offer patient, long-term investors like ourselves
the scope for long-term appreciation by their disciplined approach
to allocating capital in the growth opportunities open to them. From
this, we will not deviate.
Michael O’Brien
Fundsmith LLP
Investment Manager
16 March 2022
Strategic Report
Investment Manager’s Review
29
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Investment Philosophy
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 intend to invest in
manufacturers of consumer durables.
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.
30
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Investment Philosophy
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.”
There is also the problem that the MSCI Emerging Markets Index is
dominated by companies of a sort that we would never own.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
The top ten companies in the MSCI Emerging Markets Index are all
in the banking, energy, technology and telecoms sectors. Although
we own two of these, the rest fail to meet our rigorous investment
criteria and are typically in sectors in which we, as a result, would
never invest 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.
(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
16 March 2022
32
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Business Review
Business Review
The Strategic Report on pages 2 to 37 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 42 to 45.
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.
The Company’s strategy is to create value for shareholders by
addressing its investment objective, which is to provide
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
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 41.
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 early part of the year, Northern Trust Global Services SE
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 Northern Trust
Global Services SE (the “Depositary Agreement”). However,
following the UK’s exit from the European Union, Northern Trust
undertook a reorganisation of its depositary business. As a result
of this, Northern Trust’s depositary functions were transferred from
Northern Trust Global Services SE to Northern Trust Investor
Services Limited (the “Depositary”), an FCA authorised and
regulated entity in the UK, with effect from 1 September 2021. The
Depositary Agreement was amended by means of a Novation and
Amendment Agreement although the terms remained unchanged.
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;
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
• 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.
The Depositary Agreement may be terminated upon three months’
written notice from the Company to the Depositary or the Depositary
to the Company.
Custodian
The Depositary has delegated the custody and safekeeping of the
Company’s assets to The Northern Trust Company which in turn
appoints sub-custodians in each of the jurisdictions in which the
Company’s assets are held. The liability of the Depositary is not
affected by the fact that it has delegated safekeeping to a third party.
The Depositary is entitled to a variable custody fee which depends
on the type and location of the custodial assets of the Company.
Variable transaction charges are also chargeable.
Key Performance Indicators
The 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 total return 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 96).
Please refer to the Glossary beginning on page 96 for definitions of
these terms and an explanation of how they are calculated.
Net asset value (NAV) return against the Index
The Company’s NAV per share is shown on the Statement of
Financial Position on page 72. The Directors regard the Company’s
NAV 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 net total return, sterling adjusted
basis. Fundsmith’s investment style, however, is such that
performance is likely to deviate from that of the Index.
During the year under review the Company’s NAV per share total
return was +3.8%, outperforming the benchmark by 5.2%
(2020: +20.7%, outperforming the benchmark by 6.3%).
A full description of performance during the year under review is
contained in the Investment Manager’s Review beginning 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.
During the year under review the Company’s share price total return
was -3.4%, underperforming the benchmark by 2.0% (2020: +29.1%,
outperforming the benchmark by 14.7%).
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 2021, the discount of the Company’s share
price to the NAV per share was 9.8% (2020: 3.1%). The Chairman’s
Statement, beginning on page 5, 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 2021, the ongoing charges ratio was 1.3%
(2020: 1.3%). Please see page 4 for further information.
34
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Business Review
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.
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 NAV 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 (see the Chairman’s Statement on pages 5 and 6 for further
action taken by the Board during the year).
The Board receives regular reports on shareholder activity and is kept
informed of shareholder sentiment. Regular contact is maintained with major
shareholders.
Investment Strategy and Activity
The investment strategy adopted by Fundsmith
may
be
unsuccessful
and
result
in
underperformance
against
the
Company’s
principal performance comparator and peer
companies.
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 departure of a key member of Fundsmith’s
investment team may affect the Company’s
performance.
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 Investment Manager reports to the Board on developments at Fundsmith
at each Board meeting. Portfolio management arrangements have been put
in place which reduce reliance on any single individual.
Principal Risks and Uncertainties
Mitigation
35
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Operational (Service Providers)
As an externally-managed investment trust, the
Company is reliant on the systems of its service
providers
for
dealing,
trade
processing,
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 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 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 55.
The operational and regulatory risks that arose from the Covid-19 pandemic,
and measures introduced to combat its spread continued to be 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.
Also, the potential impact of the remaining Brexit
uncertainties.
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 88.
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.
The Board continues to monitor whether Brexit poses a discrete risk to the
Company. 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 88 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 (See below for further information).
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 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.
Principal Risks and Uncertainties
Mitigation
36
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Strategic Report
Business Review
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 above. 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.
Impact of Covid-19
Coronavirus (Covid-19) continues to represent an additional area of
risk, both to the Company’s investment performance and to its
operations. The Investment Manager has continued its dialogue with
investee companies and the Board has stayed in close contact with
the Investment Manager and has been regularly monitoring portfolio
and share price developments. The Board also continues to receive
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 continued development of vaccines, the outlook is becoming
more positive, but the Board will continue to monitor developments
as they occur.
Longer Term Viability Statement
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 stated on pages 34 and 35 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
94.8% of the current portfolio could be liquidated within
30 trading days with 87.9% 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 look to 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 continued to be 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
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.
Furthermore, the Audit Committee again considered the operational
resilience of the Company’s principal service providers, and thereby the
operational viability of the Company. The Company’s principal service
providers were contacted with regard to their business continuity
systems in place due to the pandemic as well as their IT and cyber
security systems to prevent fraudulent activity. No issues were raised
and the Audit Committee was reassured that all of the Company’s
principal service providers were operating well while ensuring the safety
of their employees by enabling them to work remotely.
37
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 five 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.
It is the Board’s view that, in order to achieve long-term success,
companies need to maintain high standards of corporate governance
and corporate responsibility. Further information can be found in the
Investment Manager’s Review beginning on page 12. 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 29. Also see the Investment
Manager’s Review on pages 26 and 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
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.
Climate Change
The risks associated with climate change represent an increasingly
important issue and the Board and the Investment Manager are aware
the transition to a low-carbon economy will affect all businesses,
irrespective of their size, sector or geographic location. Therefore, no
company’s revenues are immune and the assessment of such risks
must be considered within any effective investment approach. (See
the Investment Manager’s Review on pages 26 and 27 for
further information).
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
Environmental, Social and Governance (ESG) Standards 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 37 has been signed for and
on behalf of the Board.
Martin Bralsford
Chairman
16 March 2022
38
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Governance
Board of Directors
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 Illustrated London News Limited, Coeus Software and Chairman of
the Bryanston Foundation.
39
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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.
Professor Heather McGregor, CBE, FRSE, CGMA
Appointed to the Board of Directors on 26 May 2021, Professor McGregor is a chartered management
accountant and a financial communications specialist, and has been Executive Dean of Edinburgh Business
School, Heriot Watt University since 2016. Professor McGregor is a Director of Edinburgh Business School,
Heriot-Watt University Malaysia, Lowell Financial Services and International Game Technology Plc.
All Directors are members of the Audit and Management Engagement Committees.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Meeting Attendance
The number of Board and Committee meetings held during the year ended 31 December 2021, and each Director’s attendance, is
shown below:
Management
Engagement
Type and number of meetings
Board
Audit Committee
Committee
held during the year ended 31 December 2021
(5)
(2)
(1)
Martin Bralsford
5
2
1
Rachel de Gruchy
5
2
1
David Potter
5
2
1
John Spencer
5
2
1
Professor Heather McGregor*
2
1
1
* Joined the Board on 26 May 2021.
Directors’ Interests
The beneficial interests of the Directors and their families in the Company were as set out below:
Ordinary Shares of 1p each
31 December 2021
Martin Bralsford
100,000
Rachel de Gruchy
2,000
David Potter
12,432
John Spencer
5,000
Professor Heather McGregor
5,250
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 shares
(2020: 847,000) in the Company. Michael O’Brien, the Company’s Portfolio Manager at Fundsmith LLP, held interests in 30,000 shares
(2020: 27,425) in the Company.
Governance
Board of Directors
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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.
Corporate Governance Report
The Board
Chairman – Martin Bralsford
Four additional non-executive Directors, all considered independent.
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
Chairman – David Potter
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.
Audit Committee
Chairman – John Spencer
All Directors
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 51 and 55 to 59
respectively.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Corporate Governance Report
Governance
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 32.
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 and for the Company to
conduct itself respectfully, ethically and fairly in its relationships with
service providers.
The Board regularly meets members of the wider team at Fundsmith
LLP, the Company’s Investment Manager and AIFM. Through these
meetings the Board is able to observe and monitor the culture that
exists there.
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 broker) 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 met with investors on request. Topics discussed included
investment performance and also the Board’s approach to
addressing the share price discount (see Chairman’s Statement on
page 5 and also details of how the Directors have discharged their
duty under s172 of the Companies Act, beginning on page 43 for
further information).
Shareholder Communications
The Directors welcome the views of all shareholders and place
considerable importance on communications with 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 Senior Independent Director are
also contactable by email (see page 110 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 50 to 53.
Stakeholder Interests and Board Decision-making
Under the AIC Code, the Directors must 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
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Corporate Governance Report. The Chairman’s Statement beginning
on page 5 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:
The Investment Manager 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.
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.
Both new and treasury 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 the 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 at a premium to the prevailing net
asset value per share if conditions permit.
The Company currently holds 351,773
shares in treasury.
Investors
Who?
Stakeholder Group
Why?
The Benefits of Engaging with
the Company’s Stakeholders
How?
How the Board, the Investment Manager
and Administrator have Engaged with the
Company’s Stakeholders
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Corporate Governance Report
Governance
Who?
Stakeholder Group
Why?
The Benefits of Engaging with
the Company’s Stakeholders
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.
Engagement
with
the
Company’s
Investment Manager, both formally at
Board meetings and also informally outside
of these meetings, 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.
Investment Manager
The Board and Fundsmith continued to 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.
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 meant that it was
vital to continue 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.
Service Providers
Engagement on ESG and climate change 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.
Gaining a deeper understanding of the
portfolio companies and their strategies as
well as incorporating consideration of ESG
and climate change factors into the
investment
process
assists
in
understanding and mitigating risks of an
investment as well as identifying future
potential opportunities.
Portfolio Companies
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
What?
What were the Key Topics of Engagement?
Outcomes and Actions
What Actions were Taken, Including Principal
Decisions?
• 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 investors
• Ongoing dialogue with shareholders concerning the strategy of
the Company, performance, the portfolio, the level of the
discount of the share price to the net asset value per share and
ESG and climate change issues.
• Updates are received by the Board at every Board meeting and
on an ad hoc basis where appropriate.
• 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.
Key topics of engagement with the Investment Manager on
an ongoing basis
• Portfolio composition, performance, outlook and business
updates, including ESG and climate change engagement with
portfolio companies. Also, the level of the discount of the share
price to the net asset value per share.
• The impact of Covid on their business and the portfolio.
• 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.
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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Corporate Governance Report
Governance
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.
Division of Responsibilities
Responsibilities of the Chairman and The Senior Independent
Director (“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
• 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)
Induction/Development
New appointees to the Board are provided with a full induction
programme. The programme covers the Company’s investment
strategy, policies and practices. Directors are also given key
information on the Company’s regulatory and statutory
requirements as they arise including information on the role of the
Board, matters reserved for its decision, the terms of reference for
the Board committees, the Company’s corporate governance
practices and procedures and the latest financial information.
Directors are encouraged to participate in training courses
where appropriate.
Director Independence
The Board consists of five 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
addressing share price performance during the year is described in
the Chairman’s Statement beginning on page 5.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
The Board is responsible for setting the Company’s corporate
strategy and reviews the continued appropriateness of the
Company’s investment objective, investment strategy and
investment restrictions at each meeting.
The number of meetings and the individual attendance by Directors
is set out on page 40.
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
Company’s
corporate
governance
structure,
policy
and procedures.
• 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
the Board and the Investment Manager, and the two parties worked
closely together throughout the year.
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 51.
Relationship with Other Service Providers
The Management Engagement Committee also 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 2021, 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. Fundsmith are signatories of the UN PRI*.
During the year, the Board reviewed Fundsmith’s stewardship policy
and a summary of their voting and engagement record.
*See Glossary on page 98.
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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Corporate Governance Report
Governance
Composition, Succession and Evaluation
Board Evaluation
In early 2022, 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.
During the year, Mr Potter led the appraisal of the Chairman’s
performance, in line with the AIC Code.
With the exception of any Directors retiring from the Board, all
Directors submit themselves for annual election or 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 107. Following the evaluation
process, the Board recommends that shareholders vote in favour of
the Directors’ seeking election or 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 five Directors have been appointed since the launch
of the Company, a review process, initiated by the Chairman and
carried out by Rachel de Gruchy and Professor Heather McGregor
was undertaken 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 6 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.
Professor Heather McGregor, CBE, joined the Board at the
conclusion of the 2021 AGM held on 26 May 2021. 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.
Board Diversity
The Board supports the principle of Boardroom diversity, of which
gender and ethnicity are two important aspects. 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.
The objective of the policy is to have a broad range of approaches,
backgrounds, skills, knowledge and experience represented on the
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 two women exceeds the
original recommendation of Lord Davies’ report on Women on
Boards. The Board is aware that gender representation objectives
have been set for FTSE 350 companies and that targets concerning
ethnic diversity have been recommended. The Parker Review, which
includes research undertaken by the FRC, set a target for each FTSE
100 board to have at least one director of colour by 2021 and for
each FTSE 250 board to have the same by 2024. When appointing
new Board members, the Directors will consider gender and ethnic
diversity in addition to knowledge, skills and experience.
Audit, Risk and Internal Control
The Statement of Directors’ Responsibilities on page 54 describes
the Directors’ responsibility for preparing this report.
The Audit Committee Report, beginning on page 55, 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 37.
The Board’s assessment of the Company’s longer-term viability is
set out in the Strategic Report on page 36 and 37.
Remuneration
The Directors’ Remuneration Report beginning on page 60 and the
Directors’ Remuneration Policy Report on page 62 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 8 Authority to allot shares
Resolution 9 Authority to disapply pre-emption rights
Resolution 10 Authority to sell shares held in Treasury on a non
pre-emptive basis
Resolution 11 Authority to buy back shares
Resolution 12 Authority to hold General Meetings (other than the
Annual General Meeting) on at least 14 clear days’
notice
The full text of the resolutions can be found in the Notice of Annual
General Meeting on pages 101 to 106.
By order of the Board
Frostrow Capital LLP
Company Secretary
16 March 2022
50
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Report of the Directors
Governance
The Directors present their annual report on the affairs of the
Company together with the audited financial statements and the
Independent
Auditor’s
Report
for
the
year
ended
31 December 2021.
The Corporate Governance Report on pages 41 to 49 forms part of
this report. Disclosures relating to performance, future
developments and risk management can be found in the Strategic
Report on pages 2 to 37.
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 29.
Results and Dividend
The results attributable to shareholders for the year are shown on
page 71.
In 2021, the Company made a small revenue profit. However, due to
a reduction in the portfolio’s yield, it is below the threshold that
requires the Company to pay a dividend. The Board has therefore
has not recommended the payment of a final dividend to
shareholders this year (2020: a final dividend of 2.0p per share was
paid). 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.
Information on the Company’s dividend policy is also detailed in the
Chairman’s Statement on pages 5 and 8.
Alternative Performance Measures
The Financial Statements (on pages 71 to 91) set out the required
statutory reporting measures of the Company’s 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 33. 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 beginning on page 96.
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
Directive (“AIFMD”), 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 96 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
AIFMD Disclosures beginning on page 93.
51
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Continuing Appointment of the Investment
Manager and AIFM
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 2021,
with a recommendation being made to the Board.
The Board believes the continuing appointment of Fundsmith, under
the terms summarised on page 32, 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 net asset value, 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 page 36 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
and those in the Longer-Term Viability Statement, the stress testing
conducted also featured consideration of the effects of Covid-19.
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. The Company’s shares
traded at an average discount of 6.6% during the year ended
31 December 2021 and so 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 5 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
pages 38 and 39.
Martin Bralsford (Chairman)
Rachel de Gruchy
David Potter
John Spencer
Professor Heather McGregor*
* Joined the Board on 26 May 2021.
All Directors, with the exception of Mr Potter, are seeking election or
re-election by shareholders at this year’s Annual General Meeting.
Directors’ & Officers’ Liability Insurance
Directors’ & officers’ liability insurance cover was maintained during
the year ended 31 December 2021. It is intended that this cover
will continue for the year ending 31 December 2022 and
subsequent years.
52
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Report of the Directors
Governance
Directors’ Indemnities
As at the date of this report, indemnities are in force between the
Company and each of its Directors under which the Company has
agreed to indemnify each Director, to the extent permitted by law,
in respect of certain liabilities incurred as a result of carrying out
his or her role as a Director of the Company. The Directors are also
indemnified against the costs of defending any criminal or civil
proceedings or any claim by the Company or a regulator as they are
incurred provided that where the defence is unsuccessful the
Director must repay those defence costs to the Company. The
indemnities are qualifying third party indemnity provisions for the
purposes of the Companies Act 2006.
A copy of each deed of indemnity is available for inspection at the
Company’s registered office during normal business hours and will
be available for inspection at the Annual General Meeting.
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 87.
Share Capital
At the start of the year under review, the Directors had shareholder
authority to issue up to 2,662,437 ordinary shares of 1 penny each
on a non-pre-emptive basis. At the Company’s Annual General
Meeting held on Wednesday, 26 May 2021, this authority expired
and a new authority to allot up to 2,659,937 ordinary shares
(representing 10% of the Company’s issued share capital) on a
non-pre-emptive basis was granted. Authority to repurchase up to
3,987,245 ordinary shares was also granted.
316,089 shares were repurchased during the year, these shares
are held in treasury. As at 31 December 2021, there were
26,288,283 shares in issue excluding 351,773 shares held in
treasury (2020: 26,604,372 shares in issue excluding 35,684
shares held in treasury).
The giving of powers to issue or buy-back the Company’s shares
requires the relevant resolutions to be passed by shareholders.
Proposals for the renewal of the Board’s powers to issue and
repurchase shares are set out in the Notice of Annual General
Meeting beginning on page 101.
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 104.
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
Substantial Share Interests
The Company was aware of the following substantial interests in the voting rights of the Company:
28 February 2022
31 December 2021
Number of
% of issued
Number of
% of issued
Shareholder
shares
share capital
shares
share capital
Hargreaves Lansdown
2,713,909
10.3
2,750,131
10.5
Interactive Investor
1,998,984
7.6
1,999,672
7.6
1607 Capital LCC
2,427,051
9.2
1,969,842
7.5
Allspring Global Investments
1,931,255
7.4
1,798,378
6.8
AJ Bell Securities
1,344,316
5.1
1,300,491
5.0
City of London Investment Group
1,011,606
3.9
1,011,606
3.9
Mr Simon Justin Nixon
548,599
2.1
1,000,000
3.8
Mr Terry Smith
8,47,000
3.2
847,000
3.2
As at 31 December 2021 and the date of this report, the Company had 26,288,283 shares in issue (excluding 351,773 shares held in treasury).
53
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
holders of securities regarding their transfer which are known to the
Company; and no agreements which the Company is party to that
might affect its control following a successful takeover bid.
Political Donations
The Company has not made, and does not intend to make, any
political donations.
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
within
the
Company’s
underlying
investment
portfolio.
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.
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 Group, has been
engaged to collate such information and file the reports with HMRC
on behalf of the Company.
Key Information Document (“KID”)
The Packaged Retail Investment and Insurance-based Products
(“PRIIPs”) Regulations cover investment trusts and require Boards
or AIFMs to prepare a 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 and the Company has no discretion over
the format or content of the document. The illustrated performance
returns in the KID cannot be guaranteed and, together with the
prescribed cost calculation and risk categorisation, may not reflect
figures for the Company derived using other methods. Accordingly,
the Board recommends that investors also take account of
information from other sources, including this Annual Report.
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, 25 May 2022 at 12.30 pm at Barber-Surgeons’ Hall,
Monkwell Square, London EC2Y 5BL.
The Notice of the AGM and the explanatory notes to the proposed
resolutions can be found on pages 101 to 109.
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
16 March 2022
54
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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.
Disclosure of Information to the Auditor
The Directors at the time of approving the Report of the Directors
are listed on pages 38 and 39. Each Director in office at the date
of this report confirms that:
• to the best of each Director’s knowledge and belief, there is no
information relevant to the preparation of their report of which
the Company’s Auditor is unaware; and
• each Director has taken all the steps a director might
reasonably be expected to have taken to be aware of relevant
audit information and to establish that the Company’s Auditor
is aware of that information.
Statement of Directors’ Responsibilities:
The Financial Statements are published on the Company’s website
(www.feetplc.co.uk). The maintenance and integrity of the website
is the responsibility of the AIFM. The work carried out by the 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 pages 38 and 39 confirms
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 2021;
and
• the Strategic Report includes a fair review of the development
and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that it faces.
On behalf of the Board
Martin Bralsford
Chairman
16 March 2022
Statement of Directors’ Responsibilities
Governance
55
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Statement from the Chairman
I am pleased to present the Audit Committee report for the year
ended 31 December 2021. The Committee met twice during the
year. Attendance by each Director is shown in the table on page 40.
The Committee also met on 8 March 2022 to consider this report.
Role and Responsibilities
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).
Composition
The Committee comprises all of the Directors. 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 myself and Martin Bralsford are
chartered accountants. The experience of the Committee members
can be assessed from the Directors’ biographies set out on pages 38
and 39.
Meetings and Business
The following matters were dealt with at the Committee’s meetings:
March 2021
– Review of the Company’s annual results;
– Approval of the 2020 annual report and financial statements;
– Review of risk management, internal controls and compliance;
– Review of Fundsmith’s Valuation Policy;
– Held a meeting with and received a report from the Company’s
Depositary; and
– Review of the outcome of the audit.
July 2021
– Review of the Committee’s terms of reference and non-audit
services policy;
– 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 whistleblowing arrangements put in place by the
Company’s service provider;
– Review of the Company’s Audit Tender Guidelines;
– Review of the assessment of the external audit;
– Review of the Company’s half-year results; and
– Approval of the half-year report.
Audit Committee Report
Audit Regulation
Over the past few years there have been a number of initiatives to consider the
roles, responsibilities and accountability of Directors, Audit Committees, Auditors
and the Regulator itself, with reports published by Kingman, Brydon and the
CMA. The Business, Enterprise, Industry and Skills (BEIS) Select Committee has
also published a report containing its views on the future of audit.
The Audit Committee has considered the various recommendations and how
they may potentially affect the Company should they be implemented.
The Committee has updated the non audit services policy in-line with the
ethical standards and does not at this time recommend any change to the
current practices employed in the external audit process in response to these
reviews, but will continue to monitor developments as they unfold.
In addition to this, the Committee also reviews the outcomes of the FRC’s
annual Audit Quality Reviews and discusses the findings with our Auditor.
Significant Reporting Matters Considered
How the issue was addressed
Significant Issues Considered by the Audit Committee During the Year
56
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Audit Committee Report
Governance
Annual Report and Financial Statements
The Board asked the Audit Committee once again to confirm that, in its
opinion, 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. In doing so, the Committee considered:
• the comprehensive control framework around the production of the
Annual Report, including the verification process in place to deal with the
factual content;
• the detailed levels of review that were undertaken in the production
process, by Frostrow, Fundsmith, Northern Trust and by the Committee; and
• the internal control environment as operated by Fundsmith LLP (the
Investment Manager), Frostrow Capital LLP (Frostrow, the Company
Secretary), Northern Trust (the Custodian, Administrator and Depositary)
and other service providers.
Valuation of Investments
During the year the Committee reconfirmed the robustness of the Investment
Manager’s processes in place for recording investment transactions as well
as ensuring the valuation of assets is carried out in accordance with the
adopted accounting polices set out in note 1 beginning on page 75.
Existence and Ownership of Investments
Once again the Committee received assurance that all investment holdings
and cash/deposit balances had been agreed by Fundsmith to an independent
confirmation from the Custodian or relevant bank. The Committee reviewed
the internal controls reports of Fundsmith, Frostrow and Northern Trust,
the Custodian.
Significant Reporting Matters Considered
How the issue was addressed
Other Reporting Matters
Covid-19
The long-term effects of the pandemic on the global economy and,
in particular, emerging markets will continue to become clearer and
the Committee will continue to monitor its impact; this 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.
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.
Accounting Policies
The current accounting policies, as set out on pages 75 to 78, have
been applied consistently throughout the year and the prior period
where applicable.
57
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 51.
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 36
and 37 of the Strategic Report.
Risk Management and Internal Controls
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 Directors
have identified main areas of risk as described in the Strategic
Report on pages 2 to 37. 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 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;
• the threat of such risks becoming a reality; and
• the Company’s ability to reduce the incidence and impact of
risk on its performance.
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.
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.
External Auditor
Meetings:
The nature and scope of the audit together with Deloitte LLP’s audit
plan were considered during the year.
The Committee met Deloitte LLP (the “Auditor”) on 8 March 2022 to
review the outcome of the audit and the draft 2021 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 senior audit personnel in the audit plan for the year;
– the Auditor’s arrangements concerning any potential conflicts
of interest;
– the extent of any non-audit services;
– the statement by the Auditor that they remain independent
within the meaning of the regulations and their professional
standards; and
– the Auditor’s independence.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Audit Committee Report
Governance
In order to consider the effectiveness of the audit process, the
Committee reviewed:
– the Auditor’s fulfilment of the agreed audit plan;
– the report arising from the audit itself; and
– feedback from Frostrow Capital LLP (as Company Secretary)
and Fundsmith LLP (as AIFM) on the conduct of the audit.
The Committee is satisfied with the Auditor’s independence and the
effectiveness of the audit process, together with the degree of
diligence and professional scepticism brought to bear.
Non-Audit Services
The Company operates on the basis whereby the provision of all
non-audit services by the Auditor has to be pre-approved 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 Auditor is not likely
to be impinged by undertaking the work and the quality and the
objectivity of both the non-audit work and audit work will not be
compromised. In particular, non-audit services may be provided by
the Auditor if they are inconsequential or would have no direct effect
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 has carried out no
non-audit work.
Audit Tendering
Deloitte LLP has been the appointed Auditor since the Company’s
launch in 2014. Deloitte has carried out the audit for the years
ended 31 December 2014-2021 and is 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, in order that the
successful candidate’s appointment or re-appointment can be
approved by shareholders at the Annual General Meeting to be held
in 2024. A range of audit firms will be considered not just those who
are considered to be part of the “Big Four” group of audit firms.
The Committee will be mindful of any potential conflicts of interest.
Any firms providing services to the Company within a two-year period
of the date of the audit tender will be unable to participate.
The Committee has adopted formal audit tender guidelines to
govern the audit tender process.
Auditor Reappointment
The Committee conducted a review of the performance of the
Auditor during the year and concluded that performance was
satisfactory and there were no grounds for change.
Deloitte LLP have indicated their willingness to continue to act as
Auditor to the Company for the forthcoming year and a resolution
for their re-appointment will be proposed at the next Annual
General Meeting.
59
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Performance Evaluation
The Committee reviewed the results of the annual evaluation of its
performance in March 2022. 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
the
independence,
competence and effectiveness of the Company’s external
auditor.
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
16 March 2022
60
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Directors’ Remuneration Report
Governance
Statement from the Chairman
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 AGM. 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 63 to 70.
The Board considers the framework for the remuneration of the
Directors on an annual basis. It reviews 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.
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
10 November 2021, it was decided that Directors fees would again
remain unchanged for the year ending 31 December 2022. The
projected fees for 2022 are set out on page 62. No remuneration
consultants were appointed during the year (2021: 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 32 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 (2020: nil).
Single Total Figure of Remuneration (audited)
Date of
Percentage
Appointment
Fees
Fees change
Director
to the Board 2021 (£) 2020 (£) (%)
Martin Bralsford
23 May 2014
30,000
30,000 –
Rachel de Gruchy 1 June 2018
25,000
25,000 –
David Potter
23 May 2014
27,000
27,000 –
John Spencer
23 May 2014
27,000
27,000 –
Professor
Heather McGregor 26 May 2021
14,583
– –
Total
123,583 109,000
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 2021 using the MSCI Emerging and Frontier
Markets Index (measured on a net total return, 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.
61
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Total Shareholder Return for the period 25 June 2014 to
31 December 2021
Source: MSCI/Bloomberg
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 2020 and
2021.
Statement of Voting at the Annual General Meeting
At the AGM held on 26 May 2021, 7,850,899 votes (99.94%) were
received in favour of the resolution seeking approval of the
Directors’ Remuneration Report, 14,585 (0.19%) were against, and
1,071 votes were withheld; the percentage of votes excludes votes
withheld.
Directors’ Interests in the Company’s Shares as at
31 December 2021 (audited)
Ordinary shares
of 1p each
2021
2020
Martin Bralsford (Chairman)
100,000
100,000
Rachel de Gruchy
2,000
2,000
David Potter
12,432
19,996
John Spencer
5,000
5,000
Professor Heather McGregor
5,250
–
Total
124,682
126,996
Directors are not required to hold shares in the Company.
No changes have been notified to the date of this report.
Approved by the Board and signed on its behalf by:
Martin Bralsford
Chairman
16 March 2022
£’000
0
1100
2200
3300
4400
5500
2021
2020
Directors’
Fees
Company
Expenses
Dividends
109
124
4,334
5,204
0
532
FEET Share Price
MSCI EM + FM
-25%
0%
25%
50%
75%
100%
Launch
Dec-15
Dec-16
Dec-14
Dec-17
Dec-18
Dec-19
Dec-20
62
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 2021 (2020: none) and so no additional fees were paid
to any of the Directors. The projected Directors’ fees for 2022 are
shown in the table below. The Company does not have any
employees.
Directors’ Fees Projected and Current
Fees
Fees
2022 (£)
2021 (£)
Martin Bralsford
30,000
30,000
Rachel de Gruchy†
26,205
25,000
David Potter*
10,726
27,000
John Spencer
27,000
27,000
Professor Heather McGregor**
25,000
14,583
Total
118,931
123,583
†Rachel de Gruchy will take over as Chair of the Management
Engagement Committee on 25 May 2022.
*David Potter will retire from the Board on 25 May 2022.
**Professor Heather McGregor joined the Board on 26 May 2021.
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 26 May 2021. 7,837,246 votes
(99.78%) were received in favour, 16,913 (0.22%) were against, and
1,071 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 Annual General Meeting to be held in 2024.
Directors’ Remuneration Policy Report
Governance
63
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Independent Auditor’s Report
Report on the audit of the financial statements
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 2021
and of its profit for the year then ended;
l have been properly prepared in accordance with United Kingdom adopted international
accounting standards and International Financial Reporting Standards (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, United Kingdom adopted international
accounting standards and IFRSs 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 we have not provided any non-
audit services prohibited by the FRC’s Ethical Standard 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 matter that we identified in the current year was:
l Valuation 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
Materiality
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 2021.
Scoping
Audit work to respond to the risks of material misstatement are performed directly by the
audit engagement team.
Significant changes in our approach
There were no significant changes in our approach in the current year.
1. Opinion
#
#
#
#
Financial Statements
64
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 the date of signing the financial
statements (from March 2022) for reasonableness;
l Assessing any other market altering factors such as COVID-19 by looking at the operational impact and business continuity plans;
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
As an investment entity, the Company holds investments of £401m as at 31 December
2021 (2020: £382m) which has increased by 5% from the prior year. 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.
There is a risk that investments may not be valued correctly or may not represent the
property of the company. This may result in a material misstatement within the investments
held at fair value through profit or loss. 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.
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.
Investments are valued by the 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 9 to the financial statements. The valuation
of investment is included within the Audit Committee report as a significant reporting matter
on page 58.
#
65
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
How the scope of our audit responded
We performed the following procedures to address the valuation and ownership of
to the key audit matter
investments key audit matter:
l We assessed the service auditor report of the administrator to obtain an understanding
of the relevant controls over the valuation and ownership of investments and adopt a
controls reliance approach over investment valuation;
l We independently valued 100% of the investment portfolio to the closing bid prices
published by an independent pricing source; and
l We confirmed the ownership of 100% of investments at the year-end date by obtaining
independent third party confirmations directly from the custodian.
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 assessed the post year-end volume of trade data, the number of days where no trades
occurred 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 assessed the completeness and accuracy of disclosures in relation to fair value
measurements and liquidity risk.
Key observations
Based on the work perform we concluded that the valuation and ownership of investments
is appropriate.
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 (2020: £3.9 million)
Basis for determining materiality
1% (2020: 1%) of net assets.
Rationale for the benchmark applied
Net asset value has been chosen as a benchmark as it is the most relevant benchmark for
investors and is a key driver of shareholder value.
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66
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Independent Auditor’s Report
Financial Statements
6.2. Performance materiality
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 2021 audit (2020: 60%). 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 risk in the Company’s operating environment caused by the uncertainty and volatility brought about by the Covid-19
pandemic.
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 (2020: £0.19m),
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.
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. As part of this we relied upon the controls report of the administrator and adopted a controls reliance approach with respect to
investments (valuation).
7.3. Our consideration of climate related risks
In planning our audit, we have considered the potential impact of climate change on the Company’s business and its financial statements.
The Company continues to develop its assessment of the potential impacts of environmental, social and governance (“ESG”) related
risks, including climate change, as outlined on page 37. As a part of our audit, we held discussions to understand the process of identifying
climate-related risks, the determination of mitigating actions and the impact on the Company’s financial statements. We performed our
own qualitative risk assessment of the potential impact of climate change on the Company’s account balances and classes of transactions
and did not identify any additional risks of material misstatement.
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.
67
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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.
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 valuation 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 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 and tax legislation given the
company’s qualification as an Investment Trust.
In addition, we considered provisions of other laws and regulations that 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.
68
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Independent Auditor’s Report
Financial Statements
11.2. Audit response to risks identified
As a result of performing the above, we identified the valuation and ownership of investments as a key audit matter related to the potential
risk of fraud. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures
we performed in response to the key audit matter.
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, the audit committee and external legal counsel 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.
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.
69
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 51;
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 page 36;
l the directors' statement on fair, balanced and understandable set out on page 54;
l the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on pages 34 to 36;
l the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
pages 34 and 36; and
l the section describing the work of the audit committee set out on pages 56 to 59.
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.
15. Other matters which we are required to address
15.1. Auditor tenure
Following the recommendation of the audit committee, we were re-appointed by the Board on 23 November 2021 to audit the financial
statements for the year ending 31 December 2021 and subsequent financial periods. The period of total uninterrupted engagement including
previous renewals and reappointments of the firm is 8 years, covering the years ending 31 December 2014 to 31 December 2021.
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).
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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
16 March 2022
Independent Auditor’s Report
Financial Statements
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Statement of Comprehensive Income
For the year ended
For the year ended
31 December 2021
31 December 2020
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Income from investments held at
fair value through profit or loss 2 5,634 – 5,634 5,987 – 5,987
Gains on investments held at
fair value through profit or loss 9 – 19,800 19,800 – 70,010 70,010
Foreign exchange losses – (60) (60) – (135) (135)
Investment management fees 4 (3,941) – (3,941) (3,374) – (3,374)
Other expenses including transaction costs 5 (1,012) (251) (1,263) (857) (103) (960)
Profit before taxation 681 19,489 20,170 1,756 69,772 71,528
Taxation 6 (533) (5,400) (5,933) (568) (4,328) (4,896)
Profit for the year 148 14,089 14,237 1,188 65,444 66,632
Return per share (basic) (p) 7 0.56 53.22 53.78 4.46 245.69 250.15
Return per share (diluted) (p) 7 0.56 52.88 53.44 4.46 245.66 250.12
The Company does not have any income or expenses which are not included in the profit for the year.
All of the profit and other 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 75 to 91 are an integral part of these financial statements.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Statement of Financial Position
Financial Statements
As at As at
31 December 31 December
2021 2020
Notes £’000 £’000
Non-Current Assets
Investments held at fair value through profit or loss 9 401,935 382,535
401,935 382,535
Current Assets
Receivables 10 705 738
Cash and cash equivalents 6,737 13,410
7,442 14,148
Total assets 409,377 396,683
Current Liabilities
Trade and other payables 11 (1,558) (2,234)
(1,558) (2,234)
Total assets less current liabilities 407,819 394,449
Non-current liabilities
Deferred tax liability 12 (10,099) (5,981)
Net assets 397,720 388,468
Equity Attributable to Equity Shareholders
Ordinary share capital 13 266 266
Share premium 14 81,595 81,595
Capital reserve 313,357 303,721
Revenue reserve 2,502 2,886
Total equity 397,720 388,468
Net asset value per share (p) – basic 15 1,512.9 1,460.2
Net asset value per share (p) – diluted 15 1,510.9 1,460.1
The financial statements on pages 71 to 91 were approved by the Board on 16 March 2022 and were signed on its behalf by:
Martin Bralsford
Chairman
The accompanying notes on pages 75 to 91 are an integral part of these financial statements.
Fundsmith Emerging Equities Trust plc – Company Registration Number 08756681 (Registered in England and Wales)
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Statement of Changes in Equity
For the year ended 31 December 2021
Share Share Capital Revenue
Capital Premium Reserves Reserve Total
Notes £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2021 266 81,595 303,721 2,886 388,468
Profit for the year – – 14,089 148 14,237
266 81,595 317,810 3,034 402,705
Ordinary shares bought back and held in treasury – – (4,453) – (4,453)
Dividends paid 8 – – – (532) (532)
Balance at 31 December 2021 15 266 81,595 313,357 2,502 397,720
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 8 – – – (852) (852)
Balance at 31 December 2020 15 266 81,595 303,721 2,886 388,468
The accompanying notes on pages 75 to 91 are an integral part of these financial statements.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Statement of Cash Flows
Financial Statements
For the year ended For the year ended
31 December 2021 31 December 2020
Notes £’000 £’000
Operating activities
Profit before taxation 20,170 71,528
Adjustments for:
Net gain on investments held at fair value through profit or loss 9 (19,549) (69,907)
Decrease in receivables 33 54
(Decrease)/increase in payables (728) 1,173
Overseas taxation paid 6 (1,763) (568)
Net cash from operating activities (1,837) 2,280
Investing activities
Sales of investments held at fair value through profit or loss 9 75,387 35,731
Purchases of investments held at fair value through profit or loss 9 (75,238) (36,092)
Net cash from investing activities 149 (361)
Financing activities
Dividends paid (532) (852)
Purchase of Treasury shares (4,453) (455)
Net cash from financing activities (4,985) (1,307)
Net (decrease)/increase in cash and cash equivalents (6,673) 612
Cash and cash equivalents at start of the year 13,410 12,798
Cash and cash equivalents at end of the year 16 6,737 13,410
Comprised of:
Cash at bank 6,737 13,410
Cash flows from operating activities
Dividends received 5,694 6,016
The accompanying notes on pages 75 to 91 are an integral part of these financial statements.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
1. Accounting Policies
The financial statements of the Company have been prepared in accordance with UK-adopted 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 UK-adopted international accounting standards in conformity
with the requirements of the Companies Act 2006 and IFRSs as issued by the IASB and with the Statement of Recommended
Practice (“SORP”) ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ issued by the Association of
Investment Companies (“AIC”) in November 2014 (and updated in April 2021).
(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.
(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.
Interest receivable and payable, management fees, and other expenses are recognised 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. Expenses which are incidental to the purchase and sale of an
investment are recognised in the capital column and allocated to capital reserves.
(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 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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
1. Accounting Policies continued
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.
(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 in accordance with IFRS 9 ‘Financial Instruments’. 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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
1. Accounting Policies continued
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 account
•
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 account and is distributable by way of dividend.
(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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
1. Accounting Policies continued
(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).
•
Amendments to IAS1 ‘Classification of liabilities as current or non-current’ (effective for accounting periods beginning on or
after 1 January 2023).
•
Amendments to IAS 8 ‘Definition of Accounting Estimates’ (effective for accounting periods on or after 1 January 2023).
•
Amendments to IAS 1 and IFRS Practice Statement 2 ‘Disclosure of Accounting Policies’ (effective for accounting periods on
or after 1 January 2023).
•
Amendments to IAS 12 ‘Deferred Tax related to Assets and Liabilities arising from a Single Transaction’ (effective for accounting
periods 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 amendment to standards:
•
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).
There is no material impact on the financial statements or the amounts reported from the adoption of these amendment to the
standards.
2. Dividend Income
2021 2020
£’000 £’000
Overseas Dividends 5,136 5,987
Overseas Dividends – Special 497 –
Fixed Interest Income 1 –
Total 5,634 5,987
3. Segmental Reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being the investment business. The Company’s
objective is to be a core investment for investors seeking increasing capital growth and income over the long term. The accounting policies of the
operating segment, which operates in the UK, are the same as those described in the summary of significant accounting policies. The Company
evaluates performance based on total profit before tax, which is shown in the Statement of Comprehensive Income on page 71. A geographical
split of the portfolio can be seen on page 11.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
4. Investment Management Fee
2021 2020
£’000 £’000
Investment Management Fee 3,941 3,374
As at 31 December 2021, an amount of £1,016,000 (2020: £1,785,000) was payable to the Investment Manager.
Details of the terms of the Investment Management Agreement are provided on page 32.
5. Other Expenses
2021 2020
Revenue
Capital
Total Revenue Capital Total
£’000
£’000
£’000 £’000 £’000 £’000
Transactions costs on investments at fair value
through profit or loss – 251 251 – 103 103
Directors’ fees 124 – 124 109 – 109
Employers’ National Insurance contributions 3 – 3 2 – 2
Auditor’s remuneration 36 – 34 34 – 34
Registrar fees 32 – 32 28 – 28
Broker fee 40 – 40 37 – 37
Company Secretarial fees 112 – 112 100 – 100
Custody fees 283 – 283 244 – 244
Depositary fees 70 – 70 52 – 52
Postage and printing 28 – 28 20 – 20
Legal fees 25 – 25 11 – 11
Administration fees 132 – 132 111 – 111
Other expenses 127 – 129 109 – 109
Total expenses 1,012 251 1,263 857 103 960
Transaction costs on investments at fair value through profit or loss represent such costs incurred on both purchase and sales of those
investments. Transaction costs on purchases amounted to £92,000 (2020: £36,000) and on sales amounted to £159,000 (2020: £67,000).
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
5. Other Expenses continued
Auditor’s remuneration
The analysis of the Auditor’s remuneration is as follows:
2021 2020
Revenue £’000 £’000
Fees payable to the Company’s Auditor for the audit of the Company’s annual
financial statements 36 34
Total audit fees 36 34
6. Taxation
(a) Analysis of tax charge in the year
2021 2020
Revenue
Capital
Total Revenue Capital Total
£’000
£’000
£’000 £’000 £’000 £’000
Taxation on ordinary activities
Irrecoverable overseas withholding tax 533 – 533 568 – 568
Overseas capital gains tax – 5,400 5,400 – 4,328 4,328
Total tax 533 5,400 5,933 568 4,328 4,896
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
6. Taxation continued
(b) Factors affecting current tax charge for the year
The effective corporation tax rate was 19% (2020: 19%). The tax charge for the year differs from the charge resulting from
applying the standard rate of corporation tax in the UK. The differences are explained below:
2021 2020
Revenue
Capital
Total Revenue Capital Total
£’000
£’000
£’000 £’000 £’000 £’000
Profit before taxation
681
19,489
20,170 1,756 69,772 71,528
Corporation tax at effective rate of
19% (2020: 19%) 129 3,703 3,832 334 13,256 13,590
Effects of non taxable items:
– Overseas dividends (1,070) – (1,070) (1,138) – (1,138)
– Net gains on investments held at fair value
through profit or loss – (3,762) (3,762) – (13,302) (13,302)
– Expenses and foreign exchange losses – 59 59 – 46 46
– Deferred tax asset not recognised 941 – 941 804 – 804
Total corporation tax – – – – – –
Irrecoverable overseas withholding tax 533 – 533 568 – 568
Overseas capital gain tax – 5,400 5,400 – 4,328 4,328
Total tax 533 5,400 5,933 568 4,328 4,896
As at 31 December 2021, the Company has tax losses of £31.8 million (2020: £26.8 million) carried forward. It is unlikely that
the Company will generate sufficient taxable profits in the future to utilise these losses and therefore no deferred tax asset in
respect of these losses has been recognised. Due to the Company’s status as an investment trust and the intention to continue
to meet the conditions required to maintain the Company’s status, 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 and Bangladesh stocks of £9,599,000 and £552,000
(2020: £5,981,000 and £nil), respectively. The Company has recognised a deferred tax liability of £10,099,000 (2020:
£5,981,000) on capital gains which may arise if Indian and Bangladesh investments are sold.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
7. Return per Share
Return per Ordinary Share is as follows:
2021 2020
Revenue Capital Total Revenue Capital Total
Profit for the year (£’000) 148 14,089 14,237 1,188 65,444 66,632
Return per share (basic) (p) 0.56 53.22 53.78 4.46 245.69 250.15
Return per share (diluted) (p) 0.56 52.88 53.44 4.46 245.66 250.12
Return per share is based on returns for the year and the weighted average number of ordinary shares in issue of 26,473,683 excluding
treasury shares (31 December 2020: 26,636,576).
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 2020: 26,640,056).
8. Dividends
Dividends relating to the year ended 31 December 2021 which is the basis on which the requirements of Section 1159 of the Corporation
Tax Act 2010 are considered below:
Dividends proposed:
2021 2021 2020 2020
pence £’000 pence £’000
Final dividend proposed – – 2.0 532
Where a final dividend is proposed it 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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
9. Investments Held at Fair Value Through Profit or Loss
2021 2020
£’000 £’000
Opening cost at 1 January 242,860 236,547
Opening unrealised gains at 1 January 139,675 75,720
Valuation at 1 January 382,535 312,267
Purchases at cost 75,238 36,092
Sales – proceeds (75,387) (35,731)
Investment holding gains 19,549 69,907
Closing Fair Value at 31 December 401,935 382,535
Closing cost at 31 December 261,466 242,860
Closing unrealised gain at 31 December 140,469 139,675
Valuation at 31 December 401,935 382,535
The Company received £75,387,000 from investments sold in the year (2020: £35,731,000). The book cost of the investments when they
were purchased was £56,632,000 (2020: £29,779,000). 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 £19,549,000 (2020: gains of £69,907,000) include the dealing costs of £251,000 (2020: £103,000) 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.
• Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk,
etc).
• Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
During the year to 31 December 2021, Philippine Seven Corp (2020: £9,484,000) and DP Eurasia NV (2020: £2,732,000) were transferred
from level 1 to level 2. This was due to a lower volume of trade.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
9. Investments Held at Fair Value Through Profit or Loss continued
Fair value measurements recognised in the Statement of Financial Position
2021
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Investments held at fair value through profit or loss 371,986 29,949 – 401,935
Total 371,986 29,949 – 401,935
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
10. Receivables
2021 2020
£’000 £’000
Accrued income 646 682
Other receivables 59 56
Total 705 738
The above receivables do not carry any interest and are short term in nature. The Directors consider that the carrying values of these
receivables approximate their fair value.
11. Trade and Other Payables
2021 2020
£’000 £’000
Management fee payable 1,016 1,785
Overseas capital gains tax payable 52 –
Other payables 490 6,430
Total 1,558 8,215
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
12. Deferred Tax Liabilities
2021 2020
£’000 £’000
Deferred tax liability on unrealised capital gains on securities 10,099 5,981
Total 10,099 5,981
Deferred tax liability is recognised on unrealised capital gains on Indian and Bangladeshi securities, as detailed in note 6.
13. Share Capital
2021 2020 2020
Ordinary Treasury Total Nominal Total Nominal
Shares Shares Shares Value Shares Value
Number Number Number £’000 Number £’000
Issued, allotted and fully paid (ordinary)
Ordinary shares in issue at start of year 26,604,372 35,684 26,640,056 266 26,640,056 266
Shares issued – – – – – –
Ordinary shares bought back and held
in treasury (316,089) 316,089 – – – –
Total shares in issue at end of year 26,288,283 351,773 26,640,056 266 26,640,056 266
During the year ended 31 December 2021, the Company repurchased 316,089 shares of £0.01 each (2020: repurchased 35,684) at a
net consideration of £4,453,000 (2020: £455,000). Details of the shareholder authorities granted to Directors to issue and buy back
shares during the year are provided on page 52.
14. Share Premium Account
2021 2020
£’000 £’000
Balance at 1 January 81,595 81,595
Balance at 31 December 81,595 81,595
15. Net Asset Value per Share
2021 2020
pence pence
Net asset value per share – basic 1,512.9 1,460.2
Net asset value per share – diluted 1,510.9 1,460.1
The net asset value per share is based on the net assets attributable to equity shareholders of £397,720,000 (2020: £388,468,000)
and on 26,288,283 excluding treasury shares (2020: 26,604,372) shares in issue at 31 December 2021.
The diluted net asset value per share is based on the net assets attributable to equity shareholders of £402,504,000 (2020:
£388,972,000) and on 26,640,056 (2020: 26,640,056) shares in issue at 31 December 2021.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
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.
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:
2021 2020
£’000 £’000
Cash and cash equivalents 6,737 13,410
Receivables 705 738
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
16. Risk Management and Financial Instruments continued
All the assets of the Company which are traded on a recognised exchange are held by The Northern Trust Company, 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 34 to 36.
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 2021
Investments Cash Receivables Payables Total
£’000 £’000 £’000 £’000 £’000
Bangladeshi Taka 7,093 – – (552) 6,541
Brazilian Real 6,532 – 257 – 6,789
Chinese Yuan 21,874 – – – 21,874
Egyptian Pound 6,452 5 348 – 6,805
Hong Kong Dollar 40,424 – – – 40,424
Indian Rupee 197,036 – – (9,599) 187,437
Mexican Peso 9,546 – – – 9,546
Nigerian Naira 5,693 281 – – 5,974
Philippine Peso 6,832 – – – 6,832
South African Rand 7,705 – – – 7,705
Sri Lankan Rupee 2,037 – – – 2,037
US Dollar 77,178 (14) 41 – 77,205
Vietnam Dong 8,241 – – – 8,241
396,643 272 646 (10,151) 387,410
As at 31 December 2021, the investment portfolio included £5.693 million (2020: £5.318 million) of Nigerian securities out of the total
investment portfolio of £401.9 million (2020: £382.5 million). These Nigerian securities are affected by the repatriation of the Nigerian
Naira into sterling. This may take some time to convert to sterling and may be subject to foreign exchange movements.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
16. Risk Management and Financial Instruments continued
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
Indian Rupee 172,672 – – (5,981) 166,691
Indonesian Rupiah 3,762 – – – 3,762
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
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.
2021 2020 2021 2020
as at 31 December £’000 £’000 £’000 £’000
+5% +5% -5% -5%
Effect on net assets for the year 19,371 18,729 (19,371) (18,729)
Effect on capital return 19,325 18,691 (19,325) (18,691)
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 £6,737,000 (2020: £13,410,000) 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 £34,000 (2020:
£67,000). 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
£34,000 (2020: £67,000). 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 2021, the impact on profit or loss and net assets would have been negative
£40.2 million (2020: £38.3 million). If the investment portfolio valuation rose by 10% at 31 December 2021, the impact on profit or loss and
net assets would have been positive £40.2 million (2020: £38.3 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.
2021
2020
As at 31 December
£’000
£’000
Asset at fair value through profit or loss 401,935 382,535
Cash and cash equivalents 6,737 13,410
Investment income receivable 646 682
Other receivables 59 56
Overseas capital gains tax payable (52) –
Deferred tax liability on unrealised capital gains on securities (10,099) (5,981)
Other payables (1,506) (8,215)
397,720 382,487
Liquidity risk exposure
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
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 2021 held £6,737,000 cash (2020: £13,410,000).
90
16. Risk Management and Financial Instruments continued
The contractual maturities of the Company's financial liabilities at 31 December 2021, based on the earliest date on which payment can
be required, were as follows:
31 December 2021
31 December 2020
3 months Not more Between one 3 months Not more Between one
or less than one year and five years Total or less than one year and five years Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Overseas capital
gains tax payable 52 – – 52 – – – –
Deferred tax liability
on unrealised
capital gains – – 10,099 10,099 – – 5,981 5,981
Other payables 1,506 – – 1,506 2,234 – – 2,234
Capital management policies and procedures
The Company’s capital management objectives are to ensure that it will be able to continue as a going concern, and to provide long-term
growth in revenue and capital. The Company’s capital is its equity share capital and reserves that are shown in the Statement of Financial
Position at a total of £397,720,000 (2020: £388,468,000).
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 2021. there were no contingent liabilities or capital commitments. (2020: nil)
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notes to the Financial Statements
Financial Statements
91
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 60. 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 79.
Terry Smith, the Managing Partner at Fundsmith LLP, the Company’s AIFM and Investment Manager holds interests in 847,000 shares in
the Company (2020: 847,000) amounting to 3.2% (2020: 3.2%) of the Company’s issued share capital as at the date of this report.
19. Events after the reporting period
Since the year-end and up to 15 March 2021, (the latest practicable date before publication of the Report and Accounts), no further shares
were repurchased nor were any shares issued by the Company.
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Financial Calendar
31 December
Financial Year End
March
Final Results Announced
May
Annual General Meeting
30 June
Half Year End
July/August
Half Year End Results Announced
Annual General Meeting
The Annual General Meeting of Fundsmith Emerging Equities Trust plc will be held at Barber-Surgeons‘ Hall, Monkwell Square,
London EC2Y 5BL on Wednesday, 25 May 2022 at 12.30pm.
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
● Retail 59.0%
● Corporate 22.0%
● Banks 8.5%
● Pension Funds 7.1%
● Investment Companies 3.4%
31 December 2021
● Retail 70.4%
● Corporate 21.1%
● Pension Funds 6.2%
● Investment Companies 1.9%
● Banks 0.4%
Shareholder Information
Further Information
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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:
• Capitalised 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:
As a percentage of assets
Gross
Commitment
method
method
Maximum level of leverage
115%
115%
Actual level at 31 December 2021
Nil
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.
Alternative Investment Fund Managers Directive Disclosures (Unaudited)
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Alternative Investment Fund Managers Directive Disclosures (Unaudited)
Further Information
Remuneration Disclosure
Fundsmith LLP (Fundsmith), as the AIFM of the Company, is required to make this remuneration disclosure to the Company’s investors in
accordance with the AIFMD as incorporated into UK law and regulation.
The Company represents approximately 1% of Fundsmith’s total funds under management.
The financial period of the Company runs from 1 January to 31 December, whereas the financial year of Fundsmith runs from 1 April to 31
March. The latest financial year of Fundsmith is the year to 31 March 2021, and the figures disclosed below are taken from the financial
report and accounts for that period. These figures have been independently audited and filed with Companies House.
During the year ending 31 March 2021, Fundsmith employed an average of 26 staff in the year, with total remuneration, excluding pension
contributions, for those staff of £14,220,477 comprising fixed remuneration of £2,895,006 and variable remuneration of £11,325,471.
The profits of the Firm are shared among the Members according to their profit-sharing arrangements. Fundsmith had an average of 9
Members during the year who shared the Firm’s profit of £57,617,498.
The Members are the sole owners of Fundsmith, and the firm’s capital is derived entirely from the Members contributions. Members are
each entitled to a pre-determined, fixed proportion of the business’s net profits, in accordance with their ownership of the Firm. Allocations
of profits to Members are not discretionary and these amounts are due to the Members because of their investment of capital and their
ownership of the business and is regarded as fixed, not variable remuneration.
The information above relates to Fundsmith as a whole, is not broken down by reference to this fund or the other funds managed by
Fundsmith and does not show the proportion of remuneration which relates to the income Fundsmith earns from the management of the
Company, as this would not reflect the way Fundsmith is organised.
The rules require Fundsmith to disclose both the amount of remuneration paid in total, and the amount paid to Remuneration Code Staff.
The Management Committee of Fundsmith has considered carefully which of its staff fall within the definition of Remuneration Code Staff.
The Management Committee has determined that for the AIFM Remuneration Code (SYSC 19B) the Remuneration Code Staff are those
individuals undertaking Senior management Functions that require approval by the FCA and any employee who is the lead investment
manager of a fund.
For the year to 31 March 2021 the only Remuneration Code Staff who are not Members of the Firm are the two portfolio managers of the
investment trusts, and Fundsmith has chosen not to disclose their aggregate remuneration of the basis of confidentiality.
Statement on the Alternative Investment Fund Managers Remuneration Code
The Company is classified as an Alternative Investment Fund (AIF). Fundsmith is duly authorised as an Alternative Investment Fund Manager
(AIFM) for the purpose of managing the Company. As an authorised AIFM, Fundsmith 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).
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Fundsmith’s Remuneration Policy is designed to ensure that it complies with the AIFM Remuneration Code.
A description of how the remuneration and benefits paid to Fundsmith staff and Members is set out in the Remuneration Policy disclosure
which is available on Fundsmith’s website.
Fundsmith LLP
AIFM
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Glossary of Terms and Alternative Performance Measures
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 (*).
Brexit
The advisory public referendum which was held on 23 June 2016 in the United Kingdom to indicate whether voters wished to remain or
withdraw from membership of the European Union (EU). The referendum vote was cast in favour of leaving the EU. The process of actually
leaving is termed Brexit. The United Kingdom officially left the EU on 31 January 2020 and on 31 December 2020, the 11-month transition
period came to an end.
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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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.
* Alternative Performance Measure.
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
31 Dec
2021
2020
Opening NAV 1,460.2p
1,213.0p
Increase in NAV 52.7p
247.2p
Closing NAV 1,512.9p
1,460.2p
% increase in NAV 3.6%
20.4 %
Impact of reinvested dividends 0.2%
0.3 %
NAV Total Return
3.8%
20.7 %
Diluted NAV Total Return*
31 Dec
31 Dec
2021
2020
Opening diluted NAV 1,460.1p
1,213.0p
Increase in diluted NAV 50.8p
247.1p
Closing diluted NAV 1,510.9p
1,460.1p
% Increase in diluted NAV 3.5%
20.4 %
Impact of reinvested dividends 0.2%
0.3 %
Diluted NAV Total Return
3.8%
20.7 %
Neutral Free Cash Flow (“NFCF”)
A company’s free cash flow after adding back capital expenditures in excess of depreciation.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Glossary of Terms and Alternative Performance Measures
Further Information
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.
31 Dec
31 Dec
2021
2020
£’000
£’000
Operating expenses
4,953
4,231
Average net assets during the year
394,408
337,757
Ongoing charges (annualised)
1.3%
1.3%
* Alternative Performance Measure.
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.
31 Dec
31 Dec
2021
2020
Opening share price
1,415.0p
1,100.0p
(Decrease)/increase in share price
(50.0p)
315.0p
Closing share price
1,365.0p
1,415.0p
% (decrease)/increase in share price
(3.5%)
28.6 %
Impact of reinvested dividends
0.1%
0.5%
Share Price Total Return
(3.4%)
29.1 %
* Alternative Performance Measure.
UN Principles for Responsible Investment (“UN PRI”)
The UN PRi is a network of investors (supported by the UN) that works to promote sustainable investment through the incorporation of
environmental, social and governance factors.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
How to Invest
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/
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
The Share Centre https://www.share.com/
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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
How to Invest
Further Information
Risk Warnings
• Past performance is no guarantee of future performance.
• The value of your investment and any income from it may go down as well as up and you may not get back the amount invested. This
is because the share price is determined, in part, by the changing conditions in the relevant stock markets in which the Company
invests and by the supply and demand for the Company’s shares.
• As the shares in an investment trust are traded on a stock market, the share price will fluctuate in accordance with supply and demand
and may not reflect the underlying net asset value of the shares; where the share price is less than the underlying value of the assets,
the difference is known as the ‘discount’. For these reasons, investors may not get back the original amount invested.
• Although the Company’s financial statements are denominated in sterling, most of the holdings in the portfolio are currently
denominated in currencies other than sterling and therefore they may be affected by movements in exchange rates. As a result, the
value of your investment may rise or fall with movements in exchange rates.
• Investors should note that tax rates and reliefs may change at any time in the future.
• The value of ISA and Junior ISA tax advantages will depend on personal circumstances. The favourable tax treatment of ISAs and
Junior ISAs may not be maintained.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notice is hereby given that the Annual General Meeting of Fundsmith Emerging Equities Trust plc will be held at Barber-Surgeons’ Hall,
Monkwell Square, London EC2Y 5BL on Wednesday, 25 May 2022 at 12.30pm 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 2021, including the financial statements and the directors’ and auditors’
reports thereon.
2. To approve the Directors’ Remuneration Report for the year ended 31 December 2021.
3. To re-elect Martin Bralsford as a Director of the Company.
4. To re-elect Rachel de Gruchy as a Director of the Company.
5. To elect Professor Heather McGregor, CBE as a Director of the Company.
6. To re-elect John Spencer as a Director of the Company.
7. 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 9, 10, 11 and 12 will be proposed as special resolutions:
Authority to Issue Shares
8. 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 £26,288 (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
2,628,882 shares of 1 penny each or, if changed, the number representing 10% of the issued share capital of the Company at the
date at which this resolution is passed, 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 2023 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
9. THAT, in substitution of all existing powers, the Directors be and are hereby generally empowered pursuant to sections 570 and 573
of the Companies Act 2006 (the “Act”) to allot equity securities (within the meaning of section 560 of the Act) for cash pursuant to the
authority conferred on them by resolution 9 set out in the notice convening the Annual General Meeting at which this resolution is
proposed or otherwise as if section 561(1) of the Act did not apply to any such allotment and to sell relevant shares (within the meaning
of section 560 of the Act) for cash as if section 561(1) of the Act did not apply to any such sale, provided that this power shall be
limited to the allotment of equity securities pursuant to:
(a) an offer of equity securities open for acceptance for a period fixed by the Directors where the equity securities respectively
attributable to the interests of holders of shares of 1 penny each in the Company (“Shares”) are proportionate (as nearly as may
Notice of the Annual General Meeting
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notice of the Annual General Meeting
Further Information
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 £26,288 (or, if changed, the number representing 10% of the issued share capital of the Company at the date of the meeting at
which this resolution is passed);
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
10. THAT in substitution of all existing powers (but in addition to any power conferred on them by resolution 9 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 this power shall be limited to the sale of relevant shares having an aggregate nominal
value of £26,288, being 10% of the issued share capital of the Company as at the date of this Notice of Annual General Meeting and
representing 2,628,882 Shares or, if changed, the number representing 10% of the issued share capital of the Company at the date
of the meeting at which this resolution is passed, 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 9 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.
Authority to Repurchase Ordinary Shares
11. 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;
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
(c)
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;
(d)
the authority hereby conferred shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2023
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
(e)
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
12. THAT the Directors be authorised to call general meetings (other than annual general meetings) on not less than 14 clear days’ notice,
such authority to expire at the conclusion of the next Annual General Meeting of the Company or, if earlier, until expiry of 15 months
from the date of the passing of this resolution.
By order of the Board
Registered office:
33 Cavendish Square
London W1G 0PW
Frostrow Capital LLP
Company Secretary
16 March 2022
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 12.30 p.m. on
23 May 2022.
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 23 May 2022 (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 15 March 2022 (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, 351,773 shares are held in treasury. Therefore, the total voting rights in the Company as at
15 March 2022 is 26,288,283.
10. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures
described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a
service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
11. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”)
must be properly authenticated in accordance with the specifications of Euroclear UK and Ireland Limited (“CRESTCo”), and must contain the information
required for such instruction, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is
an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s
agent (ID RA10) no later than 48 hours before the time appointed for holding the meeting. For this purpose, the time of receipt will be taken to be the
time (as determined by the timestamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the
message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should
be communicated to the appointee through other means.
12. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that CRESTCo does not make available special
procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored
member, or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be
necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and,
where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning
practical limitations of the CREST system and timings.
13. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities
Regulations 2001.
14. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior
holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Register of Members in respect of
the joint holding (the first named being the most senior).
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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 0371 664 0300† (calls cost 12p per minute plus your phone company’s access charge. Calls outside the United Kingdom will
be charged at the applicable international rate). Lines are open 9.00 a.m. to 5.30 p.m. Monday to Friday excluding public holidays in England and
Wales.
17. If a member submits more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take
precedence.
18. In order to revoke a proxy instruction, members will need to inform the Company. Members should send a signed hard copy notice clearly stating their
intention to revoke a proxy appointment to Link 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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Notice of the Annual General Meeting
Further Information
How To Vote
If you hold your shares directly you can:
• Log on to www.myfeetshares.co.uk and follow instructions; or
• 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)0371 664 0300† 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 12.30 p.m. on 23 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.
LOCATION OF THE ANNUAL GENERAL MEETING
Barber-Surgeons’ Hall, Monkwell Square, Wood Street, London EC2Y 5BL
P
P
Barber-Surgeons’ Hall
Monkwell Square
LONDON WALL
LONDON WAL
CHEAPSIDE
GRESHAM STREET
ALDERSGATE STREET
LOTHBURY
POULTRY
Barbican
Moorgate
Moorgate
St. Pauls
Bank
MOORGATE
MOORFIELDS
ROPEMAKER ST
PRINCESS ST
FORE STREET
WOOD STREET
B
A
SINGHA
L
L ST
107
Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Resolution 1 – To receive the Annual Report and Financial Statements
The Annual Report for the year ended 31 December 2021 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 60 and 61.
Resolutions 3 to 6 – Election and Re-Election of Directors
Resolutions 3 to 6 deal with the re-election or election of the Directors. Biographies of each of the Directors can be found on pages 38 and
39 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.
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.
Professor Heather McGregor, CBE, FRSE, CGMA
Professor McGregor is a chartered management accountant and financial communications specialist. She also has an MBA from the
London Business School and a PhD in Structured Finance.
Resolution 7 – Re-Appointment of Auditor and the determination of their remuneration
Resolution 7 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 8 and 9 – Issue of Shares
Ordinary Resolution 8 in the Notice of Annual General Meeting will renew the authority to allot unissued share capital up to an aggregate
nominal amount of £26,288 (equivalent to 2,628,882 shares, or 10% of the Company’s existing issued share capital on the date of the notice
convening the meeting) or, if changed, the number representing 10% of the issued share capital of the Company at the date of the meeting
at which these resolutions are passed. Such authority will expire on the date of the next Annual General Meeting or after a period of
15 months from the date of the passing of the resolution, whichever is earlier. This means that the authority will have to be renewed at the
next Annual General Meeting unless previously renewed.
Explanatory Notes to the Resolutions
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Explanatory Notes to the Resolutions
Further Information
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 9 will, if passed, give the Directors power to allot for cash equity securities up to 10% of the Company’s existing share
capital on the date of the notice covering the meeting, or, if changed, the number representing 10% of the issued share capital of the Company
at the date of the meeting at which the resolution is passed, 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 8 and 9 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. Any issue of shares would only take place at a premium to the prevailing net asset value
per share.
Resolution 10 – 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 9, Special Resolution 10,
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 premium to the prevailing net asset value per
share. 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 share capital on the date of the notice covering the meeting, or, if changed, the number representing 10% of the
issued share capital of the Company at the date of the meeting at which the resolution is passed (reduced by any equity securities allotted
for cash on a non-pro rata basis pursuant to Resolution 9, 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 11 – 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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Special Resolution 11 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.
Resolution 12 – General Meetings
Special Resolution 12 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.
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 124,682 shares.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
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)
Professor Heather McGregor, CBE, FRSE, CGMA
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 SE, UK Branch
50 Bank Street
Canary Wharf
London E14 5NT
Depositary
Northern Trust Investor Services Limited*
50 Bank Street
Canary Wharf
London E14 5NT
Authorised and regulated by the Financial Conduct Authority.
*Amended with effect from 1 September 2021. Previously Northern Trust
Global Services SE
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.
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Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2021
Broker
Investec Bank plc
2 Gresham Street
London EC2V 7QP
Solicitors
Travers Smith LLP
10 Snow Hill
London EC1A 2AL
Identification Codes
Shares:
SEDOL:
BLSNND1
ISIN:
GB00BLSNND18
BLOOMBERG:
FEET LN
EPIC:
FEET
Foreign Account Tax Companies Act (“FATCA”)
32RSE8.99999.SL.826
Legal Entity Identifier
2138003EL6XV8JYU8V55
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.
A member of the Association of Investment Companies
Perivan 262639
Fundsmith Emerging Equities Trust plc
33 Cavendish Square, London W1G 0PW
www.feetplc.co.uk