THE PURPOSE OF THIS STATEMENT IS TO PROVIDE INFORMATION ON FUNDSMITH’S REMUNERATION POLICY AND PRACTICES
Fundsmith LLP ("Fundsmith”, "F LLP", or “the Firm”) is authorised by the Financial Conduct Authority ("FCA") as a UCITS manager and a full scope UK alternative investment manager ("AIFM"). The Firm also has additional (“MIFID top-up”) permissions to provide advisory and discretionary management services to clients and provides investment management services to four non-UK segregated institutional accounts. With respect to remuneration the Firm is therefore subject to:
1.1.1 SYSC 19E: UCITS Remuneration Code contained in the FCA's Handbook of Rules and Guidance (the "UCITS Remuneration Code");
1.1.2 SYSC 19B: AIFM Remuneration Code contained in the FCA's Handbook of Rules and Guidance and the accompanying FCA Finalised Guidance 14/02 (the "AIFM Remuneration Code"); and
1.1.3 SYSC 19G: MIFIDPRU Remuneration Code contained in the FCA’s Handbook of Rules and Guidance (the “MIFID Remuneration Code”).
In developing its Remuneration Policy, the Firm is required to consider each Remuneration Code and apply the most stringent rules. The Firm also takes into account the ESMA Guidelines on sound remuneration policies under the AIFM and UCITS Directives (2013/232 and 2016/575).
2. FUNDSMITH'S BUSINESS
2.1 Fundsmith was established in 2010 and is structured as a limited liability partnership. The business is wholly owned by its Partners.
2.2 Business Activities
F LLP provides investment management services to collective investment Funds and is regulated by the FCA.
F LLP is the Authorised Corporate Director (“ACD”) of two UK UCITS funds, the Fundsmith Equity Fund and the Fundsmith Sustainable Equity Fund.
F LLP is the Alternative Investment Fund Manager (“AIFM”) of Smithson Investment Trust plc (“SSON”), a UK listed investment trust.
F LLP is the AIFM and the SEC Registered Investment Adviser for three Delaware based limited partnerships, Fundsmith Equity Fund, LP, Fundsmith Sustainable Equity Fund, LP, and Smithson, LP. The Firm’s two US subsidiaries, Fundsmith Partners US, LLC and Fundsmith Equity Fund (GP), LLC are general partners of the three funds.
F LLP is the Global Distributor and Promoter for the Luxembourg based and CSSF registered Fundsmith SICAV, which has two sub-funds, the Fundsmith Equity Fund, and the Fundsmith Sustainable Equity Fund.
F LLP provides investment management services to three institutional clients through separately managed, segregated accounts.
The same fundamental investment strategy applies across all of the Funds. It is a simple buy and hold equity investment strategy. The Funds invest in a small number of high-quality companies, with the intention of holding them for the long term. The rigorous research process of Fundsmith is central to the strategy. For each Fund, Fundsmith applies stringent screening criteria and exacting analysis standards to potential investments before admitting them to an "investible universe" of permitted stocks. None of the portfolios invest in complex instruments or in derivatives, nor are any of the Funds leveraged.
2.3 F LLP focuses on those activities that it can do best and delegates and outsources other activities to leading providers. F LLP has 37 permanent staff staff excluding the 4 independent non-executive members of the Management Committee (as at 1 October 2023).
2.4 F LLP has two US subsidiaries. Fundsmith Partners US LLC provides services to F LLP and has 6 permanent staff (as at 1 October 2023). Fundsmith Equity Fund (GP) LLC has no employees. Both entities are general partners of the three US LPs.
2.5 F LLP delegates certain investment management, fund administration, and introducing and relationship management services to Fundsmith Investment Services Limited (“FISL”). FISL is – for the purposes of MIFIDPRU – a connected undertaking of F LLP through “majority common management”. FISL has 12 staff (as at 1 October 2023).
3. FUNDSMITH’S REMUNERATION GOVERNANCE
3.1 The Management Committee of Fundsmith LLP is the ultimate governing body of the Firm and is responsible for all aspects of the Firm’s business. The purpose of the Management Committee is to ensure that the Firm is being run in compliance with applicable legal and regulatory requirements and regulatory guidance, that it is acting in the best interests of investors in its funds, and that it operates an appropriate risk management framework with an effective control environment so that the Firm operates within its risk appetite.
The independent non-executive members of the Management Committee are responsible for the annual review and approval of the Firm’s Remuneration Policy and Remuneration Policy Statement, and for approval of the annual “independent internal” review of the implementation of the Firm’s Remuneration Policy.
3.2 The firm’s internal audit function will undertake the annual “independent internal” review of the implementation of this Remuneration Policy and will report on this review to the Management Committee.
3.3 Taking into account Fundsmith's size, internal organisation and the nature, scope and complexity of its activities and the size of the Funds which it manages, it has been determined that it would not be proportionate for Fundsmith to establish a remuneration committee.
4. FUNDSMITH'S APPROACH TO REMUNERATION
4.1 Fundsmith seeks to ensure that its remuneration policies and practices:
4.1.1 are consistent with and promote sound and effective risk management;
4.1.2 do not encourage risk taking which is inconsistent with the risk profiles and constitutions of the Funds;
4.1.3 include measures to avoid conflicts of interest;
4.1.4 are gender neutral; and
4.1.5 are in line with the business strategies, objectives, values and long-term interests and with those of the Funds which it manages.
4.2 The Firm recognises that the ultimate objective of the Remuneration Codes is to ensure that remuneration practices, structures and incentives at Fundsmith do not encourage any behaviour or activity which could be detrimental to, or conflict with, the long-term interest of the Funds and the investors in the Funds.
4.3 Fundsmith's structure and business model creates a strong, natural alignment of interests between the Partners, the Firm, the Funds and the investors in the Funds.
4.4 The Partners (the Members of the LLP) are the sole owners of Fundsmith LLP. All of the Partners have invested their own money into the business and the Firm's capital is derived entirely from the Partners’ contributions of capital.
4.5 Under the Firm’s LLP Agreement each Partner is designated as a Founding Member, an Executive Member, or a Capital Member.
4.6 Founding Members
Founding Members do not receive any form of variable remuneration from Fundsmith.
The Founding Members are each entitled to a pre-determined, fixed proportion of the Firm’s profit, in accordance with their ownership of the Firm.
The Founding Members' interests are therefore totally aligned with and dependent upon the long-term profitability and sustainability of Fundsmith LLP.
4.7 Executive Members
An Executive Member’s entitlement to the profit of Fundsmith LLP is set out in a Letter of Entitlement. Executive Members receive a fixed amount of profit, are eligible for an annual discretionary amount of profit, and are also entitled to the allocation of a pre-determined, fixed proportion of the profit of Fundsmith LLP and the profit of Fundsmith Investment Services Limited, in accordance with their ownership of the Firm.
4.8 Capital Members
Capital Members receive a salary, certain benefits, and are eligible for an award of an annual discretionary bonus. Capital Members are also eligible for an additional discretionary bonus calculated by reference to the profit of Fundsmith LLP and the profit of Fundsmith Investment Services Limited, in accordance with their ownership of the firm.
4.9 Independent non-executive Members of the Management Committee
The independent non-executive members of the Management Committee receive a fixed fee for their services and are not eligible to receive any variable remuneration.
4.10 Other Staff
Other Staff who are not members of the LLP receive a salary, certain benefits, and are eligible for an award of a discretionary bonus.
5. APPLICATION OF THE REMUNERATION POLICY
5.1 This policy applies to all Partners and staff of Fundsmith LLP, Fundsmith Partners US LLC, and Fundsmith Investment Services Limited.
5.2 Under the Remuneration Codes, some of the Remuneration Principles and provisions are directed at certain "Remuneration Code Staff", rather than all employees.
5.3 The Management Committee considers which staff are material risk takers and determines which staff are within the definition of Remuneration Code Staff. The Management Committee has determined that those individuals undertaking Senior Manager Functions for Fundsmith LLP, the lead portfolio managers of the global equity funds and the small and mid-cap equity funds, and the Head of Research, are Remuneration Code Staff.
5.4 Allocations to Founding Members and Executive Members, and any additional bonuses (reflecting a share of profit) paid to Capital Members are pre-determined, fixed proportions of profit.
These amounts are due to the Members because of their investment of capital and their ownership of the business, are not related to individual or Fund performance, and cannot be varied, and therefore are not variable remuneration under the Remuneration Codes.
5.5 Fundsmith applies the Remuneration Principles in a proportionate manner.
6. REMUNERATION POLICIES
Remuneration Structure and Core Policies
6.1 Founding Members do not receive any form of variable remuneration from the business.
6.2 Executive Members receive a fixed amount of profit and are eligible for an annual discretionary amount of profit.
6.3 Staff and Capital Members receive a fixed salary, certain other benefits including personal pension contribution and are eligible for an award of an annual discretionary bonus. The salaries of these staff are set at a sufficiently high level to allow for a fully flexible approach to be taken to awarding any annual discretionary bonus.
6.4 The award of an annual discretionary bonus is at the Executive Committee’s discretion and will depend on both the financial position of the firm and the outcome of the individual's performance review which is undertaken at the end of each financial year. The performance review process takes into account a range of factors including the individual's performance and their broader contribution to the business. Those employees working in control functions such as risk management or compliance have their personal objectives set by reference to their specific functions and will be rewarded according to the achievement of those objectives, rather than the performance of the business more generally.
6.5 All bonus payments are approved or recommended by the Executive Committee. The level of discretionary bonus for the head of the firm’s second line of defence is recommended to the Management Committee for approval.
6.6 For Remuneration Code Staff whose bonus is more than one-third of their total remuneration or whose total remuneration exceeds £500,000 any award of a discretionary bonus that is in excess of £500,000 or although less than £500,000 is considered by the Firm to be particularly high will be paid in accordance with the following conditions:
6.6.1 40% of the Bonus is payable in cash (the "Cash Bonus") within 3 months of the end of the financial year to which it relates;
6.6.2 50% of the value of the Cash Bonus after deductions (for tax and social security) must be invested in one of the funds managed by the LLP as directed by the Executive Committee within 30 days from the date the Cash Bonus is paid;
6.6.3 The shares acquired under 6.6.2 above are not permitted to be sold or transferred for a period of at least six months from the date of purchase;
6.6.4 The remaining 60% of the Bonus is deferred (the "Deferred Bonus") and 50% of the Deferred Bonus (the “Mandatory Portion”) will be held as an investment in one of the funds managed by the LLP as directed by the Executive Committee with the option that the other 50% (the “Optional Portion”) can be invested in any of the funds managed by the LLP or held in cash;
6.6.5 the Deferred Bonus will vest in three equal instalments over a period of 3 years (the "Deferral Period");
6.6.6 in relation to each vested instalment of the Deferred Bonus, the shares purchased through the investment of the Mandatory Portion must be held for a period of at least 6 months from the vesting date.
6.7 For Remuneration Code Staff whose bonus is more than one-third of their total remuneration or whose total remuneration exceeds £500,000 any award of a discretionary bonus of less than £500,000 and which is not considered by the Firm to be particularly high will be paid in accordance with the conditions in 6.6 above except that:
6.7.1 50% of the Bonus is payable in cash (the "Cash Bonus") within 3 months of the end of the financial year to which it relates; and
6.7.2 the remaining 50% of the Bonus is deferred (the "Deferred Bonus") and 50% of the Deferred Bonus (the “Mandatory Portion”) will be held as an investment in one of the funds managed by the LLP as directed by the Executive Committee with the option that the other 50% (the “Optional Portion”) can be invested in any of the funds managed by the LLP or held in cash.
6.8 Fundsmith reserves the right to cancel or reduce any Deferred Bonus award in its absolute discretion. Any decision to cancel or reduce a bonus award will be made by the Executive Committee.
6.9 For staff whose bonuses are not deferred the full amount of any discretionary bonus awarded will be paid in cash within 3 months of the end of the financial year to which it relates.
6.10 For Fundsmith LLP staff other than the Founding and Executive Members Fundsmith contributes 9% of salary (up to a cap) into a personal pension scheme. The firm's policy is not to make any increases in pension contribution when someone leaves the firm.
6.11 Fundsmith does not guarantee any annual bonus award, except where this is absolutely necessary in the context of hiring a new member of staff in the first year of their employment.
6.12 Fundsmith’s policy is that any buy-out award or compensation for a material risk taker’s contracts in previous employments is aligned with the long-term interests of the Firm and contains appropriate provisions so that the terms are no less strict than those originally applied.
6.13 Fundsmith's policy is not to pay staff leaving the firm any early termination payments.
6.14 Fundsmith's policy is not to pay any Remuneration Code Staff a retention award.
6.15 Staff are not permitted to undermine the principles of the Remuneration Codes by using personal hedging strategies, remuneration-related insurance or liability-related insurance. This Remuneration Policy is supplemented by the Personal Account Dealing Policy.
6.16 Fundsmith is required to ensure that remuneration practices are consistent with, and promote, sound and effective risk management. The remuneration policy should not encourage risk taking which is inconsistent with the risk profiles of the Funds.
6.17 The Management Committee has identified two primary types of risk which could arise within a typical asset management business from inappropriate remuneration structures:
6.17.1 incentives related to investment performance, which could give rise to a focus on short term investment performance and potentially increase the risks for the investors; and
6.17.2 incentives related to sales, which could encourage staff to inappropriately sell a Fund to investors for whom it is unsuitable.
The nature of Fundsmith’s business, the nature of the Funds which it manages and the nature of its remuneration practices adequately mitigate these risks.
6.18 Sound and effective risk management is a key element of Fundsmith's investment strategy. The same fundamental strategy is adopted for all of the Funds and segregated accounts. The investment process is adhered to at all times. All portfolios are constructed with a long term "buy and hold" philosophy and it is therefore unusual for there to be significant changes to stock selection within a portfolio. Fundsmith does not have any practice of remunerating its investment personnel for generating high returns in the short term. Performance fees are not charged. There is no financial incentive to take risks which are not consistent with the risk profiles of the Funds.
6.19 From a sales perspective, given the clear and simple nature of the investment strategies, the Funds are generally suitable for the majority of investor types, including retail investors. Fundsmith emphasises the long-term nature of the investment proposition in all Fund literature and other documentation and seeks to ensure that investors understand that the strategy is not appropriate for those seeking short term returns. The sales team’s performance is considered in the light of the net sales of the relevant Funds and will therefore be negatively affected if investors sell their investment. Any concerns raised in relation to the sales process such as investor complaints, intermediary feedback or issues identified in compliance monitoring are properly taken into account in the performance assessment process.
Alignment with Business Strategy and the Interests of the Funds
6.20 Remuneration practices must be in line with the business strategy, objectives, values and interests of each of Fundsmith, the Funds and the investors and should include measures to avoid conflicts of interest.
6.21 The remuneration policies are in line with Fundsmith's business strategy, objectives, values and interests.
6.22 The Management Committee therefore believes that the firm's remuneration practices are in line with the interests of the Funds and the investors within the Funds.
7.1 Fundsmith includes quantitative and qualitative remuneration disclosures in the annual fund report for each Fund as required by the UCITS Directive and AIFMD.
7.2 This Remuneration Policy contains details of Fundsmith's remuneration policies and practices for the firm as a whole. A summary is available on the Fundsmith website and to all staff on request.
Last Updated: November 2023
Approved by the Management Committee on: 4 December 2023