January 2016

Dear Fellow Investor,

This is the sixth annual letter to owners of the Fundsmith Equity Fund (‘Fund’).

The table below shows performance figures for the last calendar year and the cumulative
and annualised performance since inception on 1st November 2010 compared with various
benchmarks.

% Total Return 1st Jan to Inception to 31st Dec 2015

31st Dec 2015 Cumulative Annualised

Fundsmith Equity Fund1 +15.7 +131.4 +17.6

Equities2 +4.9 +64.3 +10.1
UK Bonds3 +1.0 +24.3 +4.3
Cash4 +0.0 +3.5 +0.7
1 2
T Class Acc shares, net of fees, priced at noon UK time. MSCI World Index, £ net, priced at close of business US time.
3 4
Bloomberg/EFFAS Bond Indices UK Govt 5-10 yr. 3 Month £ LIBOR Interest Rate.
1,3,4 2
Source: Bloomberg Source: www.msci.com

The table shows the performance of the T Class Accumulation shares which rose by
15.7% in 2015 and compares that with 4.9% for the MSCI World Index in Sterling with
dividends reinvested. The Fund therefore outperformed the market in 2015 by 10.8%, its
fifth consecutive year of outperformance, which is ironic given that outperforming the
market in any given reporting period is not what we are seeking to achieve.

However, we realise that many or indeed most of our investors do not use the MSCI World
Index as the natural benchmark for their investments.

Those of you who are based in the UK and look to the FTSE 100 Index as the natural
yardstick for measuring your investments and/or who hold funds which are benchmarked
to the FTSE 100 Index and often hug it will have had a much worse experience than the
performance of the MSCI World Index. The FTSE 100 Index was down -4.9% in 2015 and
the total return including dividends reinvested was still negative at -1.0%.

Similarly, for US dollar investors, the S&P 500 finished the year down -0.7% and only
delivered a return of +1.4% with dividends reinvested.

2015 was also the fifth anniversary for our Fund and so maybe a good moment to pause
and reflect on the longer term performance. As well as outperforming the market with a
compound return of +17.6% against +10.1% for the MSCI World Index, our Fund was the
third best performing fund out of 203 in the Investment Association’s Global Sector. Why
only third, you might ask? The two funds which performed better than ours are specialist
healthcare funds which have benefited from the extraordinary boom in takeovers within the
biotech sector in recent years. That won’t last indefinitely, at which point anyone who has
benefited from investment in those companies and funds needs to find the next hot sector
if that is their investment strategy. This is a game we profess no skill at and therefore will
not be playing. This skill also seems to elude most other investors but that does not seem
to stop them trying.

2015 was not a particularly bullish year for equity markets which were held back by the
slowdown in China, setbacks in other Emerging Markets and the move on from the end of
quantitative easing in America to the first rise in interest rates by the Federal Reserve
(‘the Fed’) in nearly ten years. After all that the S&P 500 Index was down by -0.7% for the
year.

Trillions of pixels have been expended on the likely impact of this increase in interest rates
and I do not intend to add much, if anything, to the debate. However, one aspect may be
worth commenting upon. For at least the past three years we have been reading
comments which suggested that investors in our Fund faced at least one problem: the
shares we own are highly rated and have become more highly rated in recent years. This
has often been linked with the observation that these stocks are ‘bond proxies’ - that the
relative certainty of their returns and dividends compared with most equities makes them a
substitute for bonds, which many investors now seek to avoid, and so they may fare badly
along with bonds as and when interest rates rise.

There are several points to consider in response to this.

One is that during the period that these commentators have been sounding this warning,
these stocks and our Fund have continued to outperform the market significantly. So if,
like the proverbial stopped clock which is right twice a day, the scenario which they paint
eventually comes to pass, it will be worth remembering what you would have missed out
on if you had followed their advice when they gave it. They will certainly forget to mention
it when they proclaim the brilliance of their foresight and the accuracy of their predictions.

There are also reasons to doubt both their predictions and the efficacy of their proposed
solutions.

Firstly, the assumption that all US interest rates are set by the Federal Reserve (‘Fed’) is
too simplistic. The target federal funds rate is a short term rate and was increased from 0-
0.25% to 0.25-0.50% on 17th December 2015. Longer term rates are set by the US
Treasury bond market and the swap market in which banks, companies, people with
mortgages and investors can switch between fixed and floating interest rates. The current
30 year US Treasury bond has a yield just under 3% which does not look quite so low.

It is possible that the main surprise with the Fed’s rate rise (I refuse to use the popular
term ‘hike’ as ‘to hike an object’ is described in the dictionary as a sharp or unexpected
increase - a description which clearly does not apply to the Fed’s decision) is the limited

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scope for subsequent increases and the lack of effect on long term rates. In which case
worries about the effect on so-called bond proxies may prove to be overdone.

Secondly, what would these commentators have you do about this possible adverse
impact on so-called ‘bond proxies’? Presumably they recommend selling them in view of
this predicted disaster and investing your money elsewhere. Leaving aside the
commentator who suggested that the answer was to invest in a fund which is ‘more
immune to future market performance’ (seems like an overly modest target - why not just
find one that only ever goes up?), the most common suggestion, it seems, is that you
should consider switching into more cyclical stocks because they are more lowly rated and
their returns are too volatile to be considered as bond proxies. Switching into cyclical
stocks in anticipation of a rise in interest rates, what could possibly go wrong?

As ever, spotting potential problems with our or any other investment strategy is not that
difficult. In all my years in business I have never found that identifying a problem is quite
as difficult as solving it. Likewise, suggesting what it is you should switch into that is
immune from problems which may result from an interest rate rise is a bit more difficult.

However, it seems likely that sooner or later the ‘stopped clock’ commentators will prove to
be right and our Fund will experience a period of underperformance. What to do about
that? You could try some so-called market timing and redeem your shares in the Fund in
advance of this event and maybe re-invest later when you think the time is right for it to
begin outperforming again. If you do so I hope you have better luck and/or skill than I have
because I know that I can’t accomplish that successfully.

If you intend to remain invested in the Fund, as I do, including through any periods of
underperformance, you might also, like me, take comfort in the fact that our investment
strategy is based first and foremost on buying shares in good companies. We cannot
promise you much about our Fund. But one thing we are clear about is that we seek to
own shares in good companies and at least most of the time we succeed in that objective.

Repeating an approach we took last year to demonstrate this, the table below shows what
Fundsmith would be like if instead of being a mutual fund it was a company and accounted
for the stakes which it owns in the portfolio on a ‘look through’ basis and compares this
with the market (in this case the FTSE 100 Index and the S&P 500 Index).

Fundsmith FTSE 100 S&P 500

Equity Fund* Index+ Index+
ROCE 26.0% 14.8% 17.5%
Gross Margin 61.1% 40.2% 43.7%
Operating Profit Margin 25.0% 14.3% 15.3%
Cash Conversion 98.4% 69.8% 70.9%
Leverage 29.3% 38.5% 52.5%
Interest Cover 16.1x 8.2x 8.7x
Note: ROCE, Gross Margin, Operating Margin and Cash Conversion are the weighted average for the Fundsmith Equity Fund and
averages for the FTSE 100 Index and S&P 500 Index. The FTSE 100 and S&P 500 numbers exclude financial stocks. The Leverage
and Interest Cover numbers are medians.
* +
Source: Fundsmith LLP Source: Bloomberg

What does this table demonstrate? In short, that our companies have much better
financial performance than the market as a whole and are more conservatively funded.
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The companies in our portfolio are certainly not immune to periodic downturns in business
and/or management errors, and their share prices are subject to the usual factors which
affect the stock market, but we can at least be reasonably sure that they are adding to
their intrinsic value over time by continuing to invest at wonderful rates of return.

If I gave you an exhaustive list of all the subjects in investment and the ways in which
investors and commentators behave that perplex me then this annual letter would be
considerably longer. However, one of these subjects is the obsession with share prices.
Ultimately, of course, a focus on share price movements must be correct. It is no use
owning shares in good companies if the strength of their business is never reflected in the
share price, but a continuous focus on share price movements to the exclusion of the
underlying fundamental economics of the companies is neither healthy nor useful. In the
long term one will follow the other, and it is not the fundamentals which will follow the
share price.

Returning to the subject of valuation, what are the facts as opposed to commentators’
views? The weighted average Free Cash Flow (‘FCF’) yield of the portfolio (the free cash
flow generated by the companies divided by their market value) started the year at 4.5%*
and ended it at 4.3%* so the overall portfolio saw little increase in valuation in 2015. Our
companies on average grew their free cash flow per share by 9.7%* during the year which
was a much more significant contribution to performance.

This 4.3% FCF yield compares with a median FCF yield for the non-financial stocks in the
S&P 500 Index of 4.4%+ and a mean of 2.7%+ or a median for the non-financial stocks in
the FTSE 100 Index of 3.8%+ and a mean of 3.9%+. Our stocks do not look bad value in
comparison to the market especially when their relatively high quality is taken into account.
Although of course, both may be expensive, but then both may continue to be so or even
become more expensive.

For the year, the top five contributors to the Fund’s performance were:
Dr Pepper Snapple + 1.94%
Imperial Tobacco + 1.79%
Microsoft + 1.69%
Sage + 1.36%
Reckitt Benckiser + 1.05%

The bottom five were:

Procter & Gamble - 0.22%

PayPal - 0.15%
3M - 0.02%
Kone + 0.02%
Colgate Palmolive + 0.05%

Of the bottom five performers, the only one which gives us significant cause for concern is
Procter & Gamble which is on its third internally sourced CEO in as many years.

We sold our holding in Domino’s Pizza during the year since it had reached a valuation
which we felt was only justifiable if the current rapid rate of growth is sustainable, which we
would doubt. However, we sold it with some regret and trepidation. Regret since it is
4


undoubtedly a fine business and had been our best performing share since the inception
of our Fund. Trepidation since selling shares in good companies is something we are
justifiably reluctant to do. Still we believe that you ‘make money with old friends’ which is to
say that we would be keen to own Domino’s again if the opportunity arises at a valuation
which we regard as at least reasonable.

We also sold our holding in Choice Hotels in 2015 as we did not like the risk/reward
potential from the company’s investment in developing a third party reservations system
called SkyTouch. As we do not do much trading to reallocate the Fund’s capital between
our holdings we are reliant on the management of our investee companies to make
decisions to reinvest part of their companies’ cash flows for us. When they do things which
are different, exciting and outside their core area of competence we become worried.
Hence our sale of Choice Hotels.

We also sold the holding in eBay which we obtained when eBay split the eponymous
online marketplace business and PayPal, the online payments processor, which we have
retained.

During the year we built a holding in Waters Corporation, a US based manufacturer of

mass spectrometry, liquid chromatography and thermal imaging equipment, which makes
much of its returns from the sales of consumables, service, spares and software to the
operators who have installed its equipment. It should have a clear source of growth from
the seemingly inexorable trend for more testing and certification of products.

We also began building a stake in another testing company with a similar source of growth
and a new consumer staples company, both of which will be revealed in due course.

Minimising portfolio turnover remains one of our objectives and this was again achieved
with a portfolio turnover of 2%* during the period. It is perhaps more helpful to know that
we spent a total of £496,507 or just 0.014% (1.4 basis points) of the Fund on voluntary
dealing which excludes dealing costs associated with fund subscriptions and redemptions
as these are involuntary.

Why is this important? It helps to minimise costs, and minimising the costs of investment is
a vital contribution to achieving a satisfactory outcome as an investor. Too often investors,
commentators and advisers focus on the Annual Management Charge (‘AMC’) or the
Ongoing Charges Figure (‘OCF’), which includes some costs over and above the AMC,
which are charged to the Fund. The OCF for 2015 for the T Class Accumulation shares
was 1.07%*. 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 the cost of commission paid to a broker, the bid-offer spread
on the stocks dealt in and, in some cases, Stamp Duty. This can add significantly to the
costs of a fund yet it is not included in the OCF.

We have published our own version of this total cost including dealing costs, which we
have termed the Total Cost of Investment (‘TCI’). For the T Class Accumulation shares in
2015 this amounted to a TCI of 1.13%*, including all costs of dealing for flows into and out
of the Fund, not just our voluntary dealing. We think that figure will prove to be low if or
when other funds produce comparable numbers, although we are not holding our breath
whilst we await this. However, just as we think an obsession with share prices to the
exclusion of companies’ fundamental performance is unhealthy, we would caution against
becoming obsessed with charges to such an extent that you lose focus on the
5


performance of a fund. It is worth pointing out that the performance of the Fund at the
beginning of this letter is after charging all fees, or as someone expressed it more
elegantly “You get what you pay for”, or at least you should aim to.

Finally, I wish you a Happy New Year and thank you for your continued support for our
Fund. I and my colleagues look forward to seeing many of you at our Annual
Shareholders’ Meeting on 1st March and to trying to answer your questions.

Yours sincerely,

Terry Smith
CEO
Fundsmith LLP

An English language prospectus for the Fundsmith Equity Fund is available on request
and via the Fundsmith website and investors should consult this document before
purchasing shares in the Fund. 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. Fundsmith LLP does not offer investment advice or make any
recommendations regarding the suitability of its product. This letter is intended for owners
of the Fundsmith Equity Fund only and is communicated by Fundsmith LLP which is
authorised and regulated by the Financial Conduct Authority.
* +
Source: Fundsmith LLP Source: Bloomberg