1.1 Fundsmith LLP ("Fundsmith") is authorised by the Financial Conduct Authority ("FCA") as a UCITS manager and a full scope UK alternative investment manager ("AIFM"). It is subject to the UCITS Remuneration Code and AIFM Remuneration Code which contain a set of substantially similar Remuneration Principles (the "Remuneration Principles") which should be considered by firms when establishing and applying their remuneration policies.
1.2 The purpose of this Remuneration Policy Statement is to provide information on Fundsmith's remuneration policies and practices.
2. FUNDSMITH'S BUSINESS
2.1 Fundsmith is a limited liability partnership which was established by its Founding Partners. Fundsmith has recently promoted staff as New Partners in the firm (the Founding Partners and New Partners together are referred to as "Partners"). The business is managed, owned and controlled by its Partners. The Founding Partners form the firm's Management Committee.
2.2 Fundsmith is the manager of a small number of UCITS funds, UK listed investment trusts and Delaware limited partnerships (collectively referred to as the "Funds”). In addition, Fundsmith manages a small number of discrete portfolios for professional investors on substantially the same investment strategy as the Fundsmith Equity Fund.
2.3 The same fundamental "buy and hold" equity investment strategy applies across all of the Funds and portfolios. 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 "investable universe" of permitted stocks. The fund managers select stocks for a portfolio only from the investible universe.
2.4 Sound and effective risk management is also a core element of the investment process. In addition to day to day monitoring and oversight, a separate Risk Committee and the Management Committee formally review all portfolios regularly. These processes ensure that each portfolio is managed in accordance with the investment objectives and policies and risk parameters of the Fund or client mandate and in a manner which complies with the relevant regulatory requirements applicable to that type of Fund. None of the portfolios invest in complex instruments or in derivatives, nor are any of the Funds leveraged. Fundsmith does not receive any performance related fees for managing the Funds.
3. FUNDSMITH'S OVER-ARCHING PHILOSOPHY
3.1 Fundsmith seeks to ensure that its remuneration policies and practices:
3.1.1 are consistent with and promote sound and effective risk management;
3.1.2 do not encourage risk taking which is inconsistent with the risk profiles and constitutions of the Funds;
3.1.3 include measures to avoid conflicts of interest; and
3.1.4 are in line with Fundsmith's business strategies, objectives, values and long-term interests and with those of the Funds which it manages.
3.2 The Management Committee understands that the ultimate objective of the UCITS and AIFM 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.
3.3 Fundsmith's structure and business model creates a strong, natural alignment of interests between the Partners, the firm, the Funds and their investors.
3.4 The Partners are the sole owners of Fundsmith LLP. All of the Partners have invested their own money into the business and are involved in the management of the business on a full time, executive basis. The Partners are each paid a pre-determined, fixed proportion of Fundsmith’s net profits, in accordance with their ownership of the partnership.
3.5 The Founding Partners do not receive any other form of remuneration from Fundsmith other than their Partnership profit share. The Founding Partners' interests are therefore totally aligned with and dependent upon the long term profitability and sustainability of Fundsmith. Given Fundsmith's single business model, the long term profitability and sustainability of the firm is inextricably linked to the management fees generated from managing the Funds and segregated accounts, as this is the only source of the firm's revenue. It is, therefore, very much in Fundsmith's interests (and the Founding Partners' interests) to ensure that the Funds and portfolios perform well, in a manner which is consistent with their stated investment objectives. As a result, there is a natural alignment between Fund investors' interests, the interests of Fundsmith and the interests of the Founding Partners.
3.6 In addition, a significant proportion of the Founding Partners' investable wealth is invested in the Fundsmith Equity Fund.
3.7 The New Partners also have an ownership interest in Fundsmith which ensures that their interests are aligned with those of Fundsmith and the investors in the Funds. In addition, the New Partners receive a salary, certain benefits and are eligible for an award of a discretionary bonus from Fundsmith.
4. APPLICATION OF THE REMUNERATION CODE
4.1 Under the UCITS and AIFM Remuneration Codes, some of the Remuneration Principles are directed at certain "Remuneration Code Staff", rather than all employees.h.
4.2 Remuneration Code Staff are, except where it is demonstrated that they have no material impact on the risk profile of Fundsmith or the Funds:
4.2.1 senior management (i.e. those individuals who are FCA Approved Persons performing a Significant Influence Function);
4.2.2 risk takers (i.e. those individuals responsible for making investment decisions);
4.2.3 heads of control functions (i.e. risk management, compliance, internal audit);
4.2.4 staff responsible for heading functions such as marketing, administration and human resources; and
4.2.5 any individuals receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers.
4.3 Fundsmith has considered carefully which of its staff are within the definition of Remuneration Code Staff. The Management Committee has determined that only the Partners and any employee who is the lead investment manager of a Fund are Remuneration Code Staff.
4.4 Fundsmith is required to comply with the UCITS and AIFMD Remuneration Codes in a way and to the extent that is appropriate to the firm's size and internal organisation and to the nature, scale and complexity of the firm's activities.
4.5 Fundsmith applies the Remuneration Principles in relation to New Partners (in respect of their salary, benefits and any discretionary bonus), other Remuneration Code Staff and the employees in a proportionate manner.
5. REMUNERATION POLICIES
5.1 Fundsmith's distinguishes the approach to remuneration between the Founding Partners, the New Partners, other Remuneration Code Staff and the other employees of the firm.
5.2 All of the Partners are each paid a pre-determined, fixed proportion of Fundsmith’s net profits, in accordance with their ownership of the partnership. The Founding Partners do not receive any other form of remuneration from Fundsmith. There is a strong, natural alignment between Fund investors' interests, the interests of Fundsmith and the interests of the Founding Partners.
5.3 The other Remuneration Code Staff (including the New Partners) and other employees receive a basic 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 competitive level and will always be at a sufficiently high level to allow for a fully flexible approach to be taken to the possibility of awarding (or not awarding) an annual bonus.
5.4 The award of a discretionary bonus is entirely at Fundsmith'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:
5.4.1 For investment staff performance will be assessed by reference to their contribution to the investment process but there is no financial incentive for staff to take risks which are not consistent with the risk profiles of the Funds.
5.4.2 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.
5.4.3 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.
5.5 All bonus payments are agreed by unanimous consent of Management Committee.
5.6 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 will be paid with the following conditions:
5.6.1 up to 40% of the award will be paid within 3 months of the end of the financial year to which it relates;
5.6.2 the balance of at least 60% of the award will be deferred and, subject to Fundsmith's ability to cancel or reduce the award, paid out in equal instalments over the next three financial years;
5.6.3 each part of a bonus award will be paid by Fundsmith in cash but at least 50% must be invested by the recipient in shares of the relevant Fund, which shall then be held by the recipient for at least 6 months;
5.7 Fundsmith reserves the right to cancel or reduce any deferred portion of a bonus award in its absolute discretion. Any decision to cancel or reduce a bonus award will be made by unanimous decision of the Management Committee. In certain circumstances Fundsmith also has the right to require a person to repay a bonus award.
5.8 For other employees 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.
5.9 As far as pension benefits are concerned, Fundsmith contributes a percentage of salary into a personal pension scheme. The firm's policy is not to make any increases in pension contribution when someone leaves the firm
5.10 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.
5.11 Fundsmith's policy is not to pay staff leaving the firm any early termination payments.
5.12 Fundsmith staff (including the Partners) are not permitted to undermine the principles of the UCITS and AIFMD Remuneration Codes by using personal hedging strategies, remuneration-related insurance or liability-related insurance.
6. GOVERNANCE AND REVIEW
6.1 This Remuneration Policy Statement has been approved by the Management Committee. The Management Committee is responsible for approving, maintaining and overseeing the Remuneration Policy. The Remuneration Policy will be reviewed by the Management Committee at least annually.