Fundsmith股票基金——所有者手册（2025）

Owner’s Manual Fundsmith Equity Fund Owner’s Manual Contents Fundsmith Equity Fund Owner’s Manual

Introduction 1 Why is an Owner’s Manual necessary?

Section 1 3 The investment management industry

Section 2 6 How we invest at Fundsmith We aim to buy and hold We aim to invest in high quality businesses We seek to invest in businesses whose assets are intangible and difficult to replicate We never engage in “Greater Fool Theory” We avoid companies that need leverage The businesses we seek must have growth potential We seek to invest in resilient businesses We only invest when we believe the valuation is attractive We do not attempt market timing We’re not fixated on benchmarks – other than long-term We’re global investors We don’t over diversify Currency hedging, or the lack of it Management versus numbers Our investments are liquid and the Fundsmith Equity Fund is open-ended

Section 3 13 The fund manager

Section 4 15 What do we charge you?

Note: No investment is suitable in all cases and investors should consult the Key Investor Information Document and prospectus for the Fundsmith Equity Fund both of which are available on request and via the Fundsmith website, before purchasing shares in the fund. Fundsmith LLP does not offer investment advice or make any recommendations regarding the suitability of its product and if you are unsure about the suitability for you, please take professional advice. Past performance is not necessarily a guide to future performance. The value of investments and the income from them may fall as well as rise and be affected by changes in exchange rates, and you may not get back the amount of your original investment. This financial promotion is intended for UK residents only and is communicated by Fundsmith LLP which is authorised and regulated by the Financial Conduct Authority. Introduction Fundsmith Equity Fund Owner’s Manual

We aim to run the best fund ever. Why is an Owner’s By best fund, we mean the one with the highest return over the long Manual necessary? term, adjusted for risk. Most fund managers will send you a glossy brochure. At Fundsmith we want you to have an Owner’s Manual. Why? Because your understanding of what we are trying to achieve and how we approach it is a critical element in enabling us to attain our goal.

What is our goal? Captain Cook, the navigator and explorer who discovered Australia, once said that he didn’t want to go further than any man had gone before: he wanted to go as far as a man could go. Such ambition led him to discover a new continent. We aim to run the best fund there has ever been, and certainly aim to provide the best fund you have ever owned.

This is an ambitious goal and we need to clarify what we mean by best and where you come in. By best fund, we mean the one with the highest return over a long period of time, adjusted for risk.

You may think it’s odd that by best we don’t necessarily mean the fund with the highest return, certainly not over any short period of time or irrespective of how the returns are achieved. Investment is subject to a lot of fads and cycles. A good example was the Dotcom mania when Technology, Media and Telecommunications stocks rose to valuations which could not be supported by any rational analysis. If you weren’t invested in technology stocks in that period (and we wouldn’t have been) then you would have underperformed the market. We would be happy to have done so, as we would never own a share in a company which we did not think was both good and at worst fairly valued. We would not own something because it is fashionable and might go up. Because eventually it goes down. Usually by a lot.

1 Introduction

There are also funds which deliver high returns but which The greatest threat you face to are running what we would regard as unacceptable risks. They may be following fads, like the Dotcoms, and hoping your investment performance to sell out and realise the gains before the bubble bursts; is from you. or using leverage or borrowed money to enhance returns, which is OK until things go wrong and the leverage magnifies the losses, or worse.

Your understanding is important because whilst you own In general, investors are also too active or they buy funds the Fundsmith Equity Fund there may be investment fads run by managers who are too active. Active is one of which other fund managers are following but we won’t. those bits of investment jargon which has more than We need you to understand this, since we wish to one meaning and is often misunderstood as a result. concentrate all our efforts on making the fund work Fundsmith does not intend to run a passive or index for you, and don’t want to deal with endless queries fund, far from it. But investment activity in the form of about why we are not following a particular investment buying and selling shares has a frictional cost in terms fad. Just as vitally, we don’t want you to withdraw your of the commissions and the difference between the money from our fund in order to follow the investment bid-offer spread which dealers charge. The more we can fad of the moment. Leaving aside the obvious facts that minimise these costs, the better. we earn fees on your funds and that in and outflows can be disruptive to our investment strategy, there As Warren Buffett, probably the greatest contemporary is also the fact that not being invested continuously investor once said: “Long ago, Sir Isaac Newton gave us for the long haul is likely to significantly reduce three laws of motion, which were the work of genius. But Sir your returns. Isaac’s talents didn’t extend to investing: he lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate Michael Johnson once said that he was such a good sprinter the movement of the stars, but not the madness of men.’ that the only person who could defeat him was himself; If he had not been traumatized by this loss, Sir Isaac might i.e. that he could only be beaten by his own temperament. well have gone on to discover the Fourth Law of Motion: The greatest threat you face to your investment For investors as a whole, returns decrease as motion performance is from you. increases.” Most investors make some classic mistakes which prevent This low level of activity requires the deceptively simple them from capturing the best investment performance task of buying the right shares in the first place and holding they could obtain. They buy at the top and sell at the onto them for a long time, both of which are easier said than bottom of markets or share price cycles, motivated by greed done. and fear. It takes considerable emotional discipline to buy when others are fearful and sell when others are greedy. Investors also buy the wrong type of funds. Perhaps the Not that we intend to indulge in market timing, but just best way to illustrate this is to tell you how we run the doing nothing takes iron discipline when faced with the Fundsmith Equity Fund and how this contrasts with the way fears and temptations of the markets. most of the fund management industry operates.

2 Section 1 Fundsmith Equity Fund Owner’s Manual

The investment management industry The Fundsmith Equity Fund is an FCA authorised fund founded in 2010 by Terry Smith to offer a method of investment different to the vast majority of funds.

98% of active global equity funds in the USA underperformed their benchmarks over the 20 years to 31.12.24*. This is hardly surprising as the average equity fund manager owns far too many stocks and in effect tracks the index. So the result you are getting is in fact an index fund less the manager’s fees and costs of dealing, which are also expensive. This structure makes underperformance against the index inevitable. Why do fund managers do this? Because for them the greatest risk is not underperforming the index with your money. It is stepping out of line with their peers. Especially if they fail. Warren Buffett also said, ‘Failing conventionally is the route to go; as a group lemmings may have a rotten image, but no individual lemming has ever received bad press.’ But it is not clear that doing something different to the crowd is career enhancing even if you are right. The gatekeepers of the investment world – the consultants who advise institutional investors and the advisers who advise many private investors – are not generally supporters of divergent thinking or action. This is ironic, because the only way to succeed in investment is to break out from the crowd.

*S&P Indices versus Active (SPIVA) scorecard 2024. 3 Section 1

The greatest risk to most fund Nor is this problem limited to the UK. A recent study by academics at Yale School of Management, using the Active managers’ careers is not losing Share methodology, showed that ‘active’ mutual funds in money for you or underperforming the US with a low Active Share (“index huggers” or “closet indexers”) had about 30% of all assets in 2003, compared the index. It is in doing something to almost zero in the 1980s, and that low Active Share funds different to their peers. have poor benchmark adjusted returns and do even worse after expenses.

At Fundsmith we are never going to discuss tracking error. Tracking error is the measure of how closely a portfolio tracks the index against which it is benchmarked. In fact, we embrace tracking error. We want to diverge from the benchmarks. In a positive way, of course. So we don’t want our owners to be confused into believing that tracking error is a problem or even a legitimate subject for thought or discussion or to waste any time on it.

Most fund managers own too many stocks. Apart from making their performance track the indices, which you can achieve much more cheaply with an index fund, this also makes it difficult for them to invest in the companies they own with conviction. How much can you know about the 80th company in your portfolio?

Most fund management groups also manage a proliferation of funds. There are over 2,300 UK domiciled active mutual funds which can invest in UK companies and only some 1,660 companies listed on the London Stock Exchange. This presents a fairly obvious problem. Most fund management groups have a myriad of funds covering growth and income, large companies and small companies, international and domestic equities, emerging markets funds, long only funds and long/short funds, funds covering particular sectors, and that’s just in equities.

We want to diverge from the benchmarks. Positively, of course. We don’t believe in tracking error. In fact, we regard it as a waste of time.

4 Fundsmith Equity Fund Owner’s Manual

We could be forgiven for thinking that the strategy of many fund management groups is to raise a new fund for every possible investment technique and for every new fad and to hope that at least some of them succeed in a random process and that you don’t notice the ones which don’t.

You may notice that our fund’s name is simple: the Fundsmith Equity Fund. It doesn’t say it’s a Growth Fund or an Income Fund. Our marketing advisers were very keen for us to get the word Income or Dividend into the title because apparently income funds outsell growth funds. We haven’t followed that advice because we regard the distinction between income and growth as artificial. Good businesses of the sort we seek to invest in produce cash flow returns on their capital invested which are better than the average, and they can sustain those returns, and even replicate them on newly invested capital. When they find opportunities to invest at these superior rates of return we want them to do so rather than pay a dividend. However, most of the companies of the sort we seek pay a dividend as they generate cash flows which compare favourably with their profits, and opportunities to invest at superior returns are limited even for good companies. Whether you choose to receive that income or seek to compound it is simply a matter of which share class you choose on the fund application form. The idea that there is one set of investible companies which are “growth” companies and which do not pay dividends and a different set that pay most of their earnings out and so are “income” stocks is simply a marketing man’s invention, not an investment reality.

Anyway, enough of what’s wrong with the fund management industry. How do we run the Fundsmith Equity Fund?

The name is simple: the Fundsmith Equity Fund. It doesn’t say it’s a Growth or an Income Fund. We regard this distinction as artificial.

5 Section 2

How we invest at Fundsmith 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 have to be very careful about the stocks we pick. We believe, as does Warren Buffett, that we do not have a good investment idea every day, or indeed, not even every year. Consequently, we should treat our investment career like one of those tickets you get for a tram which is spent once it’s been punched 20 times, as that’s the number of great investment ideas we’re likely to be able to find at a price we can justify investing in them. This also minimises the frictional cost of trading.

We aim to invest in high quality businesses This may sound blindingly obvious, but you might be surprised how many investors either don’t do this or do not have a good definition of a high quality business.

In our view, a high quality business is one which can sustain a high return on operating capital employed. In cash. It’s funny how investors who are not at all confused about this concept when they are seeking the bank deposit with the highest rate of interest (necessarily balanced by risk, as depositors in Icelandic banks discovered) or even the return on a fund such as ours, lose their marbles when it comes to evaluating companies. They start talking about growth in earnings per share and other gibberish. Earnings per share is not the same as cash, but more importantly it takes no account of the capital employed to generate those earnings or the return which is earned on it. If all you want from your investments is earnings per share growth, we can provide as much as you need providing you supply us with unlimited capital and turn a blind eye to the returns we are able to generate. Frankly we wouldn’t recommend it as a way of investing, although that’s precisely the way many investors do invest, especially in acquisitive companies.

6 Fundsmith Equity Fund Owner’s Manual

We aim to be long-term, buy-and-hold Note that we are not just looking for a high rate of return. We are seeking a sustainably high rate of return. An investors. We seek to own only stocks important contributor to this is repeat business, usually that will compound in value over from consumers. A company that sells many small items each day is better able to earn more consistent returns over the years. the years than a company whose business is cyclical, like a steel manufacturer, or “lumpy”, like a property developer.

This approach rules out most businesses that do not sell direct to consumers or which make goods which are not consumed at short and regular intervals. Capital goods companies 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. 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 and toiletries. However, not all companies which sell capital goods or which sell to businesses are outside our investible universe. A business service company may have a source of consistent repeat business, and some capital goods companies earn much of their revenue, and sometimes more than all their profits, from the provision of servicing and spare parts to their installed base of equipment. These can satisfy our criteria.

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, but bear with us. 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 super-normal returns.

7 Section 2

They can do this because their most important assets are We are more interested in not physical assets, which can be replicated by anyone with access to capital, but intangible assets, which can companies which have physical be very difficult to replicate, no matter how much capital growth in the merchandise or a competitor is willing to spend. Moreover, it’s hard for companies to replicate these intangible assets using service sold than simple pricing borrowed funds, as banks tend to favour the (often illusory) power, although that’s nice too. 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 competition can be funded by equity which seems to require on their shareholders’ equity. Even worse, some sectors, no foreseeable return, but Dotcom style phenomena are such as real estate, can only earn an adequate return mercifully rare, and like every cloud they have a silver lining: on equity by employing leverage. This means that not the Dotcom boom led to depressed valuations for the “old only are their unlevered equity returns inadequate, but economy” stocks of precisely the sort we seek. periodically the supply of credit is withdrawn, often with disastrous consequences given the illiquidity of their asset The kinds of intangible assets we seek are brand names, base. In assessing leverage, we include off-balance sheet dominant market share, patents, distribution networks, finance in the form of operating leases, which are common installed bases and client relationships. Some combination in some sectors such as retailing. of such intangibles defines a company’s franchise. The businesses we seek must have growth potential Since stock markets typically value companies on the not It is not enough for companies to earn a high unlevered rate unreasonable assumption that their returns will regress of return. Our definition of growth is that they must also to the mean, businesses whose returns do not do this be able to reinvest at least a portion of their excess cash can become undervalued. Therein lies our opportunity as flow back into the business to grow while generating a high investors. return on the cash thus reinvested. Over time, this should We never engage in “Greater Fool Theory” compound shareholders’ wealth by generating more than We really want to own all of the companies in the Fundsmith a pound of stock market value for each pound reinvested. Equity Fund. We do not own them knowing that they are In our view, growth cannot be thought about sensibly in not good businesses or are over-valued in the hope that isolation from returns. Rapid growth may be good news or someone more gullible will come along and pay an even it may be bad news. It depends on how much capital you higher price for them. We wisely assume that there is no have to invest to generate that growth. The “earnings” of greater fool than us. a bank savings account will grow faster, the more money We avoid companies that need leverage you deposit into the account. But it is unlikely to be a good We only invest in companies that earn a high return on investment strategy to put most of your assets into such an their capital on an unleveraged basis. The companies may account, and you certainly shouldn’t rejoice at the fact that if well have leverage, but they don’t require borrowed money you double your capital invested you will get twice as much to function. For example, financial companies (such as interest. That is not growth. The source of growth is also a banks, investment banks, credit card lenders, or leasing factor to consider. Growth in profits from increasing prices companies) typically earn a low unleveraged return on can simply build an umbrella beneath which competitors their capital. They then have to lever up that capital several can flourish. We are more interested in companies which times over with money from lenders and depositors in have physical growth in the merchandise or service sold order to earn what they deem to be an acceptable return than simple pricing power, although that’s nice too.

8 Fundsmith Equity Fund Owner’s Manual

We seek to invest in resilient businesses Big, exciting new developments, An important contributor to resilience is a resistance to product obsolescence. This means that we do not invest even those that change the world, in industries which are subject to rapid technological are not necessarily good long-term innovation. Innovation is often sought by investors but does not always produce lasting value for them. investments. 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 capital expenditure which is not needed to maintain the traditional media industries. business. Otherwise we would penalise companies which invest in order to grow. We are at one with Warren Buffett who suggested that the most sensible course of action for an investor who Our aim is to invest only when free cash flow per witnessed the Wright brothers’ inaugural controlled share as a percentage of a company’s share price powered flight at Kitty Hawk in 1903 would have been to (the free cash flow yield) is high relative to long- shoot them down. Anyone who doubts the wisdom of this term interest rates and when compared with the free should take a look at the financial performance of airlines cash flow yields of other investment candidates both over time. within and outside our portfolio.

Big, exciting new developments, even those that change Our goal is to buy securities that we believe will grow and the world, are not necessarily good long-term investments. compound in value, which bonds cannot, at yields that are We do not have the skills or the appetite to spot a new similar to or better than what we would pay for a bond. innovation and ride the wave of initial enthusiasm for the short term with the (often unspoken) aim of selling We do not attempt market timing out before the truth about its potential to destroy value We do not attempt to manage the percentage invested in is apparent. As investors, we only seek to benefit from equities in our portfolio to reflect any view of market levels, product development in long established products and timing or developments. Getting market timing right is a industries. skill we do not claim to possess. Looking at their results, neither do many other fund managers, but that does not We only invest when we believe the valuation is attractive seem to stop them trying. Studies clearly show that most Again this one may seem obvious but we have seen successful fund managers avoid market timing decisions. many investors who invest in quality companies, yet still Apart from an inability to do it well are the potential underperform because they consistently overpay for those consequences of even trying it. This is illustrated by the investments. We estimate the free cash flow of every fact that if, for example, you had invested in a UK index company after tax and interest, but before dividends and fund from 1980-2009 you should have achieved a return other distributions,and after adding back any discretionary of some 700% on your investment. However, if you missed the best 20 days of stock market performance during that period, that return would have been reduced to just 240%. We do not claim to be able to time buy and sell decisions so as to capture 20 days out of some 7,000 working days. Bonds do not grow or compound in In addition, the Fundsmith Equity Fund is not meant to provide an asset allocation tool. We assume that if you value. Our goal is to buy securities own the Fundsmith Equity Fund you have already taken that can do both, and provide yields the decision to invest that part of your portfolio in equities, managed in the manner we describe. that are similar or better than bonds, at a cheaper price.

9 Section 2

A subset of our inability and unwillingness to try to make A year is the time it takes for market timing calls is that we do not invest in sectors which are highly cyclical. It is possible to deliver performance from the earth to revolve around the such investments, but it requires a good sense of timing for sun. It has no foundation in the economic cycle and how the market cycle relates to it. It also requires strong nerves, because such investments are the investment cycle. 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, they are at or close to the bottom of the cycle. The converse applies; to sell them when they look cheap, as they are then at peak believe that the intrinsic value of our portfolio of companies earnings. has declined, and we will tell you so. Conversely, we will not be rejoicing if or when we get a short term performance We are not sure we have either the skill set or the boost from a takeover. The problem is that we will need to constitution for such investing. In any event, investing in find a replacement investment which can deliver high and cyclical businesses has one big disadvantage even if you sustainable returns on capital in cash and grow its business get this worrisome timing process roughly right; they are to deploy at least some of the cash that it generates at those mostly poor quality businesses which struggle to make sorts of returns. As you may gather, such investments are adequate returns on their capital. There are few barriers to few and far between. entry into their business sectors. If you want to become a major airline investor, I am sure you will be welcomed with We’re global investors open arms. But whilst you wait to see whether you have got We are a bit suspicious of the term “Global”. When someone your timing right, the underlying value of your investment presents a card which states that they are the “Head of is more likely to erode than compound, and of course Global Sales”, it is tempting to ask them how many globes occasionally airlines do not survive a cycle at all. they have sold. It usually just means Head of Sales, but some organisations proliferate Heads and Managing We’re not fixated on benchmarks Directors quicker than rabbits breed, so it’s probably just a Over a sufficient period of time, you will no doubt want to grandiose way of attempting to make a distinction. assess our performance against a range of benchmarks – the performance of cash, bonds, equities and other funds, Notwithstanding the hyperbole with which the term is and we assist you in that process by providing comparisons. often used, the Fundsmith Equity Fund seeks to be a global investor. Fund management groups have tended to However, we do not think it is helpful to make comparisons proliferate national or regional investment funds that are with movements in other asset prices or indices over the an anachronism. Investors based in developed economies, short term, as we are not trying to provide short term such as the UK, who are overweight in their local market as performance. Be warned: in our view, even a year is a short a consequence of buying these funds may find themselves period to measure things by. Moreover, a year does not underweight in companies with high growth prospects have its foundations in the business or investment cycle. It more typically found in developing markets, and may is, in fact, the time it takes the earth to go around the sun exclude from their portfolios suitable investments listed and is therefore of more use in studying astronomy than outside the UK. investment. The idea of having an investment fund restricted to UK For this reason, you should only invest in the Fundsmith equities strikes us as bizarre. Why should the best growth Equity Fund if it is with money that you will not need for companies in the world be listed in a stock market based a long period of time, and you are capable of remaining in a country which only ranks fifth in the world by size relatively sanguine about mark-to-market adjustments. of its economy and is located on a smallish island off Falls in market prices may make the market value of our the coast of Europe? Another advantage of investing portfolio go down, but we will only be concerned if we with a global perspective is the ability to contrast and

10 compare growth rates and valuations of companies from all geographies. Fundsmith Equity Fund Owner’s Manual

Some of the companies we seek to invest in derive a We take no notice of sector, industry significant portion of their revenues from developing markets. This can enable us to obtain some of the benefits or country weightings. The country of developing markets’ exposure (mostly growth), whilst or domicile of a company is a very benefiting from the governance structure of a large, international company, typically but not always, listed on imperfect guide to where it derives one of the world’s major stock markets. its revenues, and profits. We don’t over diversify We do seek portfolio diversification, but the strictness of our investment criteria will inevitably leave us with a concentrated portfolio of 20 – 30 companies. We do not fear the concentration risk which this brings for two reasons. often rather more than it appears when you are being One is that research has shown that you can achieve close sold the hedge. In addition, you cannot know what any to optimal diversity with 20 stocks. But this may not be individual company’s currency exposure is without true in our case, as our investment criteria typically lead knowing what hedging, if any, it has conducted in its own to a concentration in certain sectors. We then fall back treasury operations. Experience would suggest that not on our other reason for not fearing concentration risk. As even the treasurer is sure of that on occasions. In any event, Mr Buffett said ‘Wide diversification is only required when you cannot permanently hedge a portfolio or a company investors do not understand what they are doing.’ against movements in any commodity with a price which fluctuates. Many of the companies we invest in generate As a result, we take no notice of sector, industry or country revenues in the same currencies as they incur most of their weightings. In any event, the location of a company’s costs. Therefore, their exposure to currency fluctuations is headquarters or stock market listing is a very imperfect largely a matter of translation of their profits. guide to where a company derives its revenues, profits and cash flows, which is what really interests us. It is also a fact that if a fund is denominated in a soft currency, its performance will look better than it will if it is Currency hedging, or the lack of it in a hard currency. Again, we don’t intend to do anything Our policy is not to hedge our currency exposure. There to mask or alter that by hedging, as we don’t think it has are several reasons for this. One is that we do not purport any bearing on the real performance the fund delivers and to be any good at currency trading. It has a cost which is we don’t know which currencies will depreciate and which will appreciate. However, if you think you do, you can always hedge your position.

Management versus numbers Our policy is not to hedge our We are rather more comfortable analysing numbers currency exposure. We do not than we are trying to gain insights into companies by meeting the management. We intend to find companies pretend to be any good at it. which are potential investments by a screening process of their financial results to identify high return, cash generative, consistently performing businesses. In fact, most companies can be excluded from consideration simply from a description of what they do or the sector they occupy, as most are cyclical, require leverage to get adequate returns, sell to other businesses, make capital goods or durable items, or some combination of these factors.

11 Section 2

Many companies can be excluded We are also believers in the adage that you should only buy shares in businesses which could be run by an idiot from consideration simply from a because sooner or later, they all are. description of what they do or the It’s important to remember we are a minority investor sector they occupy, and the most in large quoted companies rather than a private equity investor with a controlling stake in a company who can impressive management team in control management. We do engage with management in the world will not induce us to an effort to ensure that their decisions are in the long term interests of the company and in particular in relation to invest in them. capital allocation and management remuneration which we regard as vital. But ultimately, our main sanction in the event that management is behaving badly or illogically is to not own the shares.

That is not to say that we don’t meet management. It Our investments are liquid and the Fundsmith Equity Fund is important to assess whether management provides is open-ended honest stewardship, acting in the interests of the owners The companies we invest in have large market capitalisations and telling it how it is rather than PR spin to try to enhance without major blocks being held by controlling shareholders. investors’ perceptions. This does not mean we seek Therefore their shares are easily tradeable. In addition, the management with a narrow focus on what has become Fundsmith Equity Fund is an OEIC, i.e. an open-ended fund. labelled “shareholder value”. Too often a reliance upon the Other fund managers may tend to have lock-up periods simplistic targets required by shareholder activists, such during which you have to give notice and wait to redeem your as growth in earnings per share and returning capital to investment. Closed-ended funds mean the performance of make the balance sheet “efficient”, (sometimes so efficient your investment is dependent upon the relationship between that it busts the company) has been to the long term the share price of the fund and the underlying net asset value detriment of shareholders. We would prefer management of the investments. The liquidity in the shares of the fund to invest adequately to maintain a company’s brands and itself, or the lack of it, can become an issue for investors franchise value and grow it, albeit with good returns, and seeking to redeem their investment. Investors suffer no such be honest about the impact of this on earnings and capital handicap with the Fundsmith Equity Fund. requirements. Companies which under-invest in their franchise in order to meet short term targets are not good candidates for compounding wealth.

However, we are aware of the limitations of our insights into human nature and we therefore expect management words to be borne out by figures in the report and accounts.

12 Section 3 Fundsmith Equity Fund Owner’s Manual

Fundsmith will always be The fund manager Terry Smith’s main vehicle for his own investments. The fund is managed by Terry Smith, assisted by Julian Robins, Head of Research, and a team of analysts.

Fundsmith is focused on delivering superior investment performance at a reasonable cost. It was established to be different from its peers so as to achieve a different result in line with Sir John Templeton’s axiom that “If you want to have a better performance than the crowd, you must do things differently from the crowd.” The rigorous research process of Fundsmith is central to what we do. We apply exacting standards to potential investments to produce a portfolio of resilient businesses with excellent performance. Minimising the costs we incur on behalf of our customers in implementing our strategy also sits at the heart of our philosophy.

Fundsmith was established in 2010 by Terry Smith. The business is owned and controlled by its partners, who have worked closely together over many years, and is headquartered in London with offices in Connecticut, USA and Mauritius. It is structured to survive Terry Smith’s demise and continue with the same investment philosophy. All partners of the firm have a significant co-investment in our Funds delivering a clear alignment of interest. Ancillary activities are outsourced to some of the world’s leading providers in order to deliver high-quality operations whilst allowing the Fundsmith team to focus on investment analysis, portfolio management and customer care. As at 31st December 2024 we managed £34bn on behalf of some of the world’s largest and most sophisticated wealth managers and private banks as well as for prominent families, charities, endowments and individuals invested in our fund range; Fundsmith Equity Fund and Fundsmith Stewardship Equity Fund (UK OEICs), Fundsmith SICAV - Fundsmith Equity Fund and Fundsmith SICAV - Fundsmith Sustainable Fund (Luxembourg SICAVs), Fundsmith Equity Fund L.P. and Fundsmith Sustainable Equity Fund, L.P. (Delaware L.P.s), and the Smithson Investment Trust (London Stock Exchange Listed Investment Trust).

13 Section 3

Terry Smith Terry Smith graduated in History from University College Cardiff in 1974. He worked for Barclays Bank from 1974-83 and became an Associate of the Chartered Institute of Bankers in 1976. He obtained an MBA at The Management College, Henley in 1979. He became a stockbroker with W Greenwell & Co in 1984 and was the top-rated bank analyst in London from 1984-89. In 1990 he became head of UK Company Research at UBS Phillips & Drew, a position from which he was dismissed in 1992 following the publication of his best selling book Accounting for Growth. He joined Collins Stewart shortly after, and became a director in 1996. In 2000 he became Chief Executive and led the management buy-out of Collins Stewart, which was floated on the London Stock Exchange five months later. In 2003 Collins Stewart acquired Tullett Liberty and followed this in 2004 with the acquisition of Prebon Group, creating the world’s second largest inter-dealer broker. Collins Stewart and Tullett Prebon were demerged in 2006 with Terry remaining CEO of Tullett Prebon until September 2014. In 2010 he founded Fundsmith where he is CEO and CIO. In 2012 he was appointed a Member of the New Zealand Order of Merit for services to New Zealand-UK relations following the success of his campaign to commemorate the New Zealander, Air Marshal Sir Keith Park.

Julian Robins Julian Robins started his career with the stockbroking firm EB Savory Milln in 1984. From 1987 until 1999, he worked for BZW and after their takeover of BZW’s equity business in 1998, CSFB. Between 1988 and 1993 he was BZW’s senior bank analyst in London, from 1993 until 1999, he worked as an institutional salesman in New York. In 1999 he was one of the founders of Collins Stewart’s New York office. He has first class degree in Modern History from Christ Church, Oxford.

14 Section 4 Fundsmith Equity Fund Owner’s Manual

What do we charge you? To begin with we do not charge initial fees. We welcome direct investors with whom we can have a direct dialogue and in our view initial fees are an unreasonable handicap to your investment performance, especially once it is allied with the usual problems of the fund manager incurring costs through over trading. You can imagine what it does to your returns when an upfront fee and the costs of over-active dealing are applied to the sort of closet index fund which some managers offer.

You will note that we did not set Fundsmith Equity Fund up as a hedge fund charging the traditional “two and twenty” i.e. 2% of funds under management plus 20% of gains. Why? Fundsmith Equity Fund will not short stocks, as a hedge fund does, since we regard this as superfluous in respect of the long-term performance we aim to deliver. In addition, we regard it as a positively dangerous distraction from our main task of finding and holding shares in exceptional companies. Moreover, it adds leverage to the fund which we avoid, in the same way we avoid investment in companies which require leverage to deliver adequate returns. Shorting also substantially increases activity in a fund, the cost of which is detrimental to performance. Investors often fail to realise that the more successful a short position is, the quicker it declines as a portion of the portfolio and needs to be replaced by a new short position. That is the reverse of a good long idea. You can run good long ideas forever.

In recent years the term “hedge fund” has come to represent just a charging structure, as hedge funds have developed in every asset class, including equities, bonds, currencies, commodities, derivatives and even collectibles such as art and fine wine. It is not always possible to short some of these assets, and even when it is possible, it is clear from the results of many hedge funds during the credit crunch that they either weren’t hedging or weren’t doing so effectively. This leaves hedge funds defined by the two and twenty charging structure alone.

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1% p.a. for direct investors We place a great deal of emphasis on minimising the total cost of investment in our fund as this is a vital contribution to No performance fees achieving a satisfactory outcome as an investor. Minimising No initial fees portfolio turnover is key to fulfilling this objective. Too often investors, commentators and advisers focus on the Annual No redemption fees Management Charge (‘AMC’) or the Ongoing Charges No overtrading Figure (‘OCF’), which includes some costs over and above the AMC which are charged to the fund. The OCF for 2024 for the T Class Shares was 1.04%. The trouble is that the OCF does not include an important element of costs – the costs of dealing. When a fund manager deals by buying or selling investments for a fund, the fund typically incurs There are two problems with that structure. Firstly, commission paid to a broker, the bid-offer spread on the human nature being what it is, it provides temptation for stocks dealt in and, in some cases, stamp duty. This can the hedge fund manager to make an extreme and often add significantly to the costs of a fund yet it is not included highly leveraged bet with the fund. If it comes off, he or in the OCF. she walks away with 20% of the gains. If not, it’s not their money which is lost. Using this methodology, many hedge We find that investors are often confused by this and do not fund managers have been able to retire after a short period pay enough attention to it. The fact is that as an investor of good performance. Even if it does not fail and lose the you can only benefit from the price appreciation of shares investors’ money, this “strategy” does not lead to long-term in your fund and dividends paid. Costs of dealing detract compounding of returns, because, by definition, the fund from those returns and therefore need to be taken into manager takes to the hills (or his yacht) after a short period account when you are comparing funds. of spectacular performance. We have published our own version of this total cost The second issue is more pernicious; the two and twenty including dealing costs, which we have termed the Total charging structure cannot work for investors even if the Cost of Investment, or TCI. For the T Class Shares in hedge fund manager is capable of generating superior 2024 this amounted to a TCI of 1.05%, including all costs returns indefinitely. This was illustrated in a study of of dealing for flows into and out of the Fund, not just our Warren Buffett’s performance. By 2008, Buffett’s Berkshire voluntary dealing. This compares favourably with other Hathaway had created net worth of some $62bn. But if, global equity funds in the UK. instead of Buffett controlling a company in which he was a co-investor with other shareholders and from which he takes no fees, he had invested the money with an outside hedge fund manager who delivered exactly the same performance from the same investments, 90% of the value created would have accrued to the hedge fund manager.

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And finally… We don’t guarantee to make you happy to pay tax, only to try to what about tax? ensure that the amount you are paying it on is as large as possible. Frequent activity is an investor’s worst enemy. It also deprives investors of an unusual advantage; an interest free loan from the government. In the UK, gains which are realised within a mutual fund such as the Fundsmith Equity Fund are not taxable. However, disposals of holdings by investors in mutual funds are chargeable to Capital Gains Tax (CGT). An investor who keeps realising holdings will therefore pay CGT. Once this has been subtracted, the amount which can be reinvested is significantly reduced. Over time this will have a serious effect on the amount an investor can obtain by compounding his or her investment.

Now you might say that an investor can escape this handicap by adopting the same long-term, buy-and-hold strategy that Fundsmith pursues. However, it is hard to pursue perfectly with individual shareholdings. Sometimes it is necessary to buy and sell shares to reflect changes in relative valuations. We are constantly evaluating our investments against each other and other shares in our investible universe for this reason, and from time to time there is involuntary turnover caused by takeovers. In fact, this can happen frequently when you own shares in good businesses. For the investor who owns individual shares, this creates taxable events, whereas it does not create a Note: No investment is suitable in all cases and investors taxable event in a mutual fund like the Fundsmith Equity should consult the Key Investor Information Document and Fund. Therefore, by holding such a fund, an investor’s gains prospectus for the Fundsmith Equity Fund both of which are compounded on what is in effect an interest free loan are available on request and via the Fundsmith website, from the government, i.e. gains realised within the fund are before purchasing shares in the fund. Fundsmith LLP does not taxed and we can earn returns on the tax which would not offer investment advice or make any recommendations have been paid until such time as the investor withdraws regarding the suitability of its product and if you are unsure from the fund. This produces the ironic result that an about the suitability for you, please take professional advice. investor who pursues this approach will generate a greater Past performance is not necessarily a guide to future absolute amount of money and of course will owe more performance. The value of investments and the income from tax, but the net amount retained will still be greater than them may fall as well as rise and be affected by changes in if tax had been paid on gains along the way. Therefore the exchange rates, and you may not get back the amount of your investor should be happy. Please note we said “should be”. original investment. This financial promotion is intended We don’t guarantee to make you happy to pay tax, only to for UK residents only and is communicated by Fundsmith try to ensure that the amount you are paying it on is as large LLP which is authorised and regulated by the Financial as possible. Conduct Authority.

17 Fundsmith Equity Fund Owner’s Manual

19 33 Cavendish Square London W1G 0PW UK 46 Southfield Avenue, Suite 205 Stamford CT 06902 USA ©2025 Fundsmith LLP. All rights reserved. This financial promotion is communicated by Fundsmith LLP.Fundsmith LLP is authorised and regulated by the Financial Conduct Authority. T +44 (0)330 123 1815 It is entered on the Financial Services Register under registered number 523102. Fundsmith LLP E [email protected] is a limited liability partnership registered in England and Wales with number OC354233. Its W www.fundsmith.co.uk registered office address is 33 Cavendish Square, London, W1G 0PW.