Order Execution Policy

1. Introduction

   1. The Policy describes Fundsmith's approach to providing best execution for its Clients. 

   2. Fundsmith is required to establish and implement a policy which allows it to obtain, when placing orders on behalf of Clients for execution, the best possible result for its Clients, taking into account certain prescribed factors.  The Policy is intended to satisfy those requirements.

   3. Fundsmith only acts as an investment manager in relation to equity investments; it does not manage or trade in other types of financial instrument.  Fundsmith does not execute trades on behalf of its Clients directly.

   4. All Fundsmith's Clients are per se professional clients in accordance with the definition in the FCA handbook.

2. Best execution, execution factors and criteria

   1. When placing orders on behalf of Clients, Fundsmith must act in the Client's best interests and is required to take all sufficient steps to achieve the best possible result for its Clients, taking into account the execution factors.  This is what is meant by "best execution".

   2. The execution factors which must be taken into account are: price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. 

   3. The following criteria are taken into account when determining the relative importance of the execution factors to a particular trade, these are the best execution criteria:

      1. the characteristics of the Client, including its categorisation as a professional client.  Where the Client is the fund, Fundsmith will consider the objectives, investment policy and risks specific to that fund as set out in its prospectus or private placement memorandum;

      2. the characteristics of the order; 

      3. the characteristics of the financial instruments that are the subject of that order; and 

      4. the characteristics of execution venues to which that order can be directed.

3. Relationship with Northern Trust

   1. Fundsmith has outsourced trade execution to Northern Trust Securities LLP ("Northern Trust"). 

   2. Northern Trust is a leading provider of execution services with in-depth expertise of trade execution across global equity markets.  Northern Trust was selected to undertake this function on behalf of Fundsmith following detailed due diligence and analysis of their execution capabilities, expertise, systems and controls.  The outsourced trading arrangement provides Fundsmith with comprehensive dealing desk functions which operate globally and facilitate access to all relevant brokers and execution venues.  Northern Trust acts solely in an agency capacity on behalf of Fundsmith.

   3. Northern Trust is required to take all sufficient steps to achieve the best possible result for Fundsmith on a consistent basis taking into account the execution factors and the relative importance of those execution factors as agreed with Fundsmith.  There are detailed trading protocols which Northern Trust adheres to when providing these dealing services on behalf of Fundsmith.

   4. Northern Trust also provides Fundsmith with detailed execution data and analysis in relation to each trade undertaken.

   5. Fundsmith believes that the arrangements with Northern Trust ensures that the Firm  obtains the best possible results in relation to the execution of trades.

4. Best execution procedures in practice

   1. For every trade undertaken on behalf of Fundsmith, Northern Trust considers the execution factors and the execution criteria set out above and determines the most appropriate approach to the execution of that order with a view to achieving the best possible result for Fundsmith. 

   2. Generally, Fundsmith's trading protocols place greater weight on the execution factors of price, likelihood of execution and settlement, size and nature of order and market impact.

   3. Fundsmith aims to build a position in its chosen stocks when the liquidity is available, for the best available price. Given Fundsmith’s buy and hold investment philosophy, the Firm tends to place more importance on price and the likelihood of execution rather than speed of execution, whilst at the same time ensuring that other relevant factors are given due consideration.  Fundsmith will also prioritise the impact its orders may have on the market as the Firm’s standard trade and position size have grown in line with AUM.

   4. In general, any unfilled orders will be cancelled at the end of the day. Occasionally, unfilled orders at the end of the day will be left open until completed, but only if this is agreed following a discussion between Fundsmith and Northern Trust.

   5. If Northern Trust were ever concerned that a particular order might impact the market price or cause any other form of market disturbance, it would refer back to Fundsmith before proceeding in line with their regulatory obligations and market conduct requirements. This would be highly unlikely for Fundsmith’s developed equity market portfolios.

   6. Northern Trust arranges the execution of trades through a number of brokers, trading platforms and venues including regulated markets, multilateral trading facilities, systematic internalisers and other venues. It is possible that trades will be executed outside of a regulated trading venue.

   7. Northern Trust uses a number of trading platforms and venues requesting competing quotations from potential counterparties to assess market liquidity. Northern Trust use their expertise and judgement to assess the quotes and the execution factors are considered as a fundamental part of the process to determine the counterparty or execution venue which will best serve Fundsmith’s interests.  When evaluating different counterparties Northern Trust takes into account a number of criteria including their market share, tenure in the market and breadth of market coverage, their ability to manage complex orders, their recent performance on other orders, any specialisations, the speed of execution, responsiveness and their credit worthiness. 

   8. Unless instructed otherwise, Northern Trust will select the execution venues, with and through whom they execute Fundsmith’s orders, which enables them to obtain on a consistent basis the best possible result for Fundsmith. Northern Trust will utilise their expertise and judgment to seek prices from available counterparties (including connected parties) which Fundsmith considers will best serve the Firm’s interest. The factors Northern Trust consider relevant to determine the number and appropriate counterparties from who to seek prices in connection with the execution of our orders include, but are not limited to: 

      a) Level of trading interest and depth of market;

      b) The quality of indicative bids and offers;

      c) Availability of dealers quoting a market;

      d) Ticket size;

      e) Electronic execution capability;

      f) Regulatory status of the venue and the instrument, in particular in respect of pre- and post-trade transparency requirements; and

      g) The ability of the venue to meet any trading obligations applicable to the class of instrument to which the order relates.

      When Northern Trust places an order for execution on behalf of Fundsmith, Northern Trust will ensure that, where applicable, the broker is under an obligation to provide best execution in relation to that trade.

   9. Appendix 1 contains a list of the execution venues utilised; Northern Trust has ongoing and periodic venue and broker reviews.

5. Specific client instructions

   1. The duty of best execution is modified to the extent that a Client gives a specific instruction concerning the execution of its order.  Although it would be highly unusual for a Client to do this, if there is a specific instruction from the Client, Fundsmith, in connection with Northern Trust, must execute the order following the specific instruction.  

   2. Any specific instruction from the Client may prevent Fundsmith from taking the steps that it has designed and implemented in the Policy to obtain the best possible result for the execution of orders in respect of the elements covered by those instructions.

   3. Even where the Client gives Fundsmith a specific instruction, Fundsmith must still obtain the best possible result for the Client.  Fundsmith must be able to explain to the Client or the FCA how it handled those parts of the order which were not subject to a specific instruction.

6. Client disclosures, consent and notifications

   1. Fundsmith makes the Policy and any material changes to it available to Clients and fund investors via its website at www.fundsmith.com.  Fundsmith will respond to all reasonable and proportionate requests from investors for information about the Policy or its order execution arrangements clearly and within a reasonable time.

7. Monitoring and review

   1. Ongoing monitoring and assessment

      1. Fundsmith monitors on an ongoing basis the effectiveness of its order execution arrangements and this Policy in order to identify and, where appropriate correct, any deficiencies. 

      2. In addition, Fundsmith assesses, on a regular basis, whether the execution quality obtained is consistent with its obligation to provide for the best possible result for its Clients or whether changes to the execution arrangements are required.  This includes assessing whether the execution venues used provide for the best possible result for its Clients. In making this assessment Fundsmith will take into account the information published by execution venues and by other firms in relation to the quality of execution of orders (including information about price, costs, speed and likelihood of execution for individual financial instruments). 

      3. Reviews of best execution are carried out with Northern Trust and Abel Noser, an independent third party that provides detailed reports and consultancy services for this purpose.

      4. Fundsmith has appropriate procedures in place to obtain relevant data published and takes a proportionate approach to its assessment of such data.

   2. Formal review of the Policy

      1. Fundsmith reviews the Policy, and its order execution arrangements, on an annual basis. This review comprises a formal assessment of the relationship with Northern Trust, the execution venues and brokers used, the quality of execution obtained, and an analysis of the information published by brokers and execution venues. 

      2. Fundsmith will carry out an additional review should a material change occur which affects its ability to continue to obtain the best possible result for its Clients on a consistent basis using the arrangements, venues and brokers listed in the Policy, including considering making changes to the relative importance of the best execution factors or the execution venues in meeting the best interests requirements.  A material change for these purposes is a significant event of an internal or external nature that could impact the parameters of best execution such as cost, price, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the order.  As noted above, Fundsmith notifies its Clients of any material changes to the Policy.

APPENDIX 1 – NORTHERN TRUST EXECUTION VENUES (EQUITIES)