Smithson Inv.Trust - Final Results

SMITHSON INVESTMENT TRUST PLC

LEI: 52990070BDK2OKX5TH79

RESULTS ANNOUNCEMENT

Audited results for the year ended 31 December 2021

Financial Highlights

Source: Bloomberg

This report contains terminology that may be unfamiliar to some readers. The Glossary in the Annual Report gives definitions for frequently used terms.

3 Year Record

1 These are Alternative Performance Measures ("APMs"). Definitions of these and other APMs used in the Annual Report, together with how these measures have been calculated, are disclosed in the Annual Report.

2 Total returns are stated in GBP sterling.

Chairman's Statement

Introduction

I am pleased to present our third Annual Report and my first as Chairman.

Performance

The Company's net asset value (NAV) per share total return for the year was +18.9% outperforming the MSCI World SMID Index by 1.1% points. The Company's annualised NAV per share total return since inception is +23.4% compared with the +13.0% return from the index with dividends reinvested.

The Company's shares traded at a premium to its NAV throughout 2021 reflecting the continued demand from investors. The premium at the end of the year was 3.0%, slightly narrower than the 3.7% at the end of the previous year, and the Company's share price therefore increased by 18.1% during 2021, slightly lower than the increase in the NAV per share. The annualised share price return total return since inception is +24.5%, slightly higher than the annualised increase in NAV per share.

The Company's market capitalisation at the end of 2021 was £3.5 billion and it is a member of the FTSE 250 index.

Capital Structure

The Company was floated on the premium list of the London Stock Exchange ("LSE") on 19 October 2018, breaking the record for the largest IPO of an investment trust in the history of the LSE with funds raised exceeding £822 million. The Company raised a further £531 million net of costs during 2021, taking the total amount raised since the IPO to £1,305 million net of costs.

The Board monitors the level of premium to NAV at which the Company's shares trade and has a regular share issuance programme to manage the premium. Shares are only issued at a premium to net asset value which creates additional value for shareholders net of all issue costs. The average premium to the prevailing net asset value at which new shares were issued during the year was 2.65% and the net premium on share issues amounted to approximately £6.8 million.

Since the year end and up to 10 March 2022, a further 5,235,000 ordinary shares have been issued, raising £89.8 million net of costs. This brings the total net funds raised since the Company's IPO in October 2018 to £1,395 million.

In view of the continuing strong demand for the Company's shares, shareholders will be asked, at the forthcoming Annual General Meeting, to grant the Company authorities to issue up to a further 20% of the issued share capital as at the latest practicable date before publication of the Annual Report. This will enable the Directors to continue to create further shareholder value and help manage the level of any share price premium. Any such issues will be on a non pre-emptive basis.

Results and Dividends

The Company's total return after tax for the year was £503.7 million (2020: £496.5 million), equivalent to 316.2p per share (2020: 396.7p) comprising a capital return of £512.1 million (2020: £499.4 million), equivalent to 321.5p per share (2020: 399.3p) and a revenue loss of £8.4 million (2020: loss of £2.9 million) equivalent to a loss of 5.3p per share (2020: loss of 2.3p).

The revenue losses, which are netted against capital gains reported in the total returns, arise because the Company's dividend income is lower than its operating expenditure, all of which is charged to revenue, rather than a percentage being allocated to the capital reserve. This reflects the Company's objective of focusing on capital growth which means that its accounting policy is not designed to facilitate maximisation of revenue reserves and dividend payments.

In accordance with the Company's policy, a dividend is not proposed by the Board.

Whilst the position will be kept under review, there is no current intention to change the policy, even if losses continue to be reported in revenue reserves. It should not be expected that the Company will pay a significant annual dividend and it is likely that no interim dividends will be declared, but the Board intends to declare such annual dividends as are necessary to maintain the Company's UK investment trust status.

Investment Approach

In common with all funds managed by Fundsmith, the Company has a simple, focused strategy of investing in high-quality, listed company shares, seeking not to overpay for those shares and then holding them as long term investments; the Company does not use derivatives and has no borrowings.

As a closed-end investment vehicle focusing on capital growth, the Company is free to focus its energies on pursuing its strategy without having the limiting factors of funding client redemptions, dividend payments (other than a minimum to maintain investment trust status) or gearing concerns. The Company expects to hold between 25-40 investments; at year end, it held 31 investments. During the year it made two new investments and divested two. The Company has a strong balance sheet of highly liquid investments.

The composition of the portfolio at 31 December 2021 is shown below, and the Investment Manager's Review explains the investment performance and the evolution of the portfolio in detail.

The Investment Manager's Review also includes an overview of how the Investment Manager considers  Environmental, Social and Governance ("ESG") and other sustainability issues when implementing its investment strategy and how the Company has discharged its governance duties in respect of investee companies.

Fundsmith is a signatory to the FRC's 'UK Stewardship Code 2020'. A copy of Fundsmith's Stewardship Policy, UK Stewardship Report 2020, and a statement setting out the Company's approach to the integration of ESG factors is integrated into the investment process are available on the Company's website at www.smithson.co.uk.

Investment Policy

The Board held a strategy session in November with the Investment Manager and the Company's advisers to review the investment objective and policy, the evolution of the investible universe and the portfolio since the IPO, the stock selection criteria, and communications with shareholders. One of the conclusions from the review is that we should make a change to clarify the investment policy.

The proposed change clarifies that the market capitalisation range of £500 million to £15 billion applies at the time of the initial investment in a company. We also propose to remove the stated expectation with respect to the average market capitalisation of companies in the portfolio as the Board considers that, as the Company's investments have prospered in the time they have been held, this is no longer appropriate.

The revised investment policy which will not affect, in any way, how the Company's investments are managed, is set out below.

"The Company's investment policy is to invest in sharesissued by small and mid-sized listed or traded companies globally with a market capitalisation (at the time of initial investment) of between £500 million to £15 billion."

The amended investment policy will apply, subject to shareholder approval (which is required by the Listing Rules as these changes are considered material), with effect from the Company's Annual General Meeting to be held on Wednesday, 3 May 2022; the FCA has already approved these proposed changes. Full details of the proposed amendments are set out in the Notice of Meeting that accompanies this Annual Report. The Board unanimously recommends that shareholders vote in favour of this resolution.

Governance

On 15 February 2022 it was announced that Mark Pacitti, the Chair of the Board from the Company's IPO in October 2018, would step down as a director at the end of February 2022, and I took over as Chairman of the Board. On behalf of the Board, I would like to thank Mark for his contribution, as Chairman, to the success of the Company since its IPO.

Following my appointment as Chairman, Lord St John of Bletso replaced me as Chair of the Audit Committee.

Jeremy Attard-Manche joined the Board on 1 March 2022 and is Chair of the Management Engagement Committee.

We will all stand for election or re-election at the AGM, and details on our background and experience are given in the Annual Report.

Annual General Meeting ("AGM") and Shareholder Engagement

The Company will hold its AGM on 3 May 2022. My fellow Directors and I are keen to meet with shareholders. However, we recognise that many of our shareholders will not yet feel confident to attend shareholder meetings, given the ongoing risk of contracting COVID-19. I would therefore like to remind shareholders that they are welcome, at any time, to submit any questions they may have either to the Board at smithsonchairman@fundsmith.co.uk or to the Investment Manager at smithson@fundsmith.co.uk.

At the AGM, shareholders will hear a presentation by Simon Barnard our Investment Manager, which will also be made available on the Company's website at www.smithson.co.uk after the meeting. Simon Barnard will also be present in person at the AGM to address any questions. In addition, we would encourage shareholders to visit our website at www.smithson.co.uk where more information is available and which is regularly updated.

Outlook

Since the start of this year the world's stock markets have experienced significant falls. Both the Company's NAV and share price have fallen by more than the MSCI World SMID Cap Index, which we use as a comparator for the Company. Nevertheless, the annualised rate of return from the Company's IPO to the end of February was 14.9% compared with the comparator index return of 10.0%.

At the end of February the Company's shares traded at a discount to NAV of 1.5%, having consistently traded at a premium throughout 2021. At the outbreak of COVID-19 in early 2020, the Company's shares traded at a discount to NAV for a brief period. The Board will monitor the current situation and in the event that the discount persists, the Board will look to take appropriate action.

The last two months have clearly been very challenging for investors, but the Investment Manager and the Board encourage shareholders to take a long term perspective on their investment.We face unprecedented times with the recent invasion of Ukraine which raises a spectrum of uncertain variables. Fortunately, the Company's portfolio has low exposure to that region.

The Investment Manager focuses on investing in companies it believes can compound in value over many years. Owning high quality companies with sustainable growth is a strategy that has been shown to work over the long term, through several economic cycles, and the Board has confidence that the Investment Manager can execute the strategy successfully.

The Company continues to offer investors exposure to some of the best companies available in the small to mid cap sector and the Board believes that the long-term investor will be well rewarded.

Diana Dyer Bartlett

Chairman

14 March 2022

Investment Manager's Review

The Investment Manager's review was first published as a letter to shareholders on 7 February 2022 and is incorporated as published within the Company's Strategic Report as it continues to be an accurate assessment of the Company's investment performance during the year to 31 December 2021.

Dear Fellow Shareholder,

The performance of Smithson, along with comparators, is laid out below. In 2021 the Net Asset Value per share (NAV) of the Company increased by 18.9% after fees and the share price increased by 18.1%. Over the same period, the MSCI World Small and Mid Cap Index ('Index'), our reference index, increased by 17.8%, leading to an outperformance for the shares of 0.3%. While this is a very small degree of outperformance, particularly compared to recent years, we remain satisfied by the absolute gain in value for the fund over the year. We would caution that it is not possible to outperform the Index by a significant amount every year, and from time to time, there will also be years of underperformance. We have provided below the performance of UK bonds and cash for comparison.

¹ Source: Bloomberg, starting NAV 1000.

² MSCI World SMID Cap Index, £ Net source: www.msci.com.

³ Bloomberg/Barclays Bond Indices UK Govt 5-10 yr, source: Bloomberg.

⁴ Month £ Interest Rate source: Bloomberg.

⁵Alternative Performance Measure.  

Smithson shares traded at an average premium to NAV of 2.2% during the year and at no time did they trade at a discount. During the year, a total of 30.3 million new shares in the Company were issued, for gross proceeds of £534 million, which were invested both in existing holdings and the new positions discussed below. New shares were issued at an average premium to NAV of 2.65%, so the process remained accretive to existing shareholders on a per share basis.

The Ongoing Charge Figure was 0.96%, including the Annual Management Fee of 0.9%. All dealing, costs and taxes amounted to just 0.02% (2 basis points) of NAV in the period, resulting in a Total Cost of Investment (TCI) of 0.98%.

Our portfolio only holds high quality companies - more on which later - but included in these are a number of high growth companies which naturally have higher ratings than the market average. This means that in a year when US 10 year treasury yields increased by 66%, from 0.91% to 1.51%, we should theoretically have underperformed the broader Index. This is because high interest rates reduce the value of the future earnings of these companies once discounted back at the higher rates. The slower growing companies in the Index are less affected by this phenomenon, which is why many commentators have been discussing a stock market 'rotation' into lower rated companies, or 'value' stocks.

What enabled the portfolio to keep up with the Index then? The answer is that on this occasion there were a number of companies that performed well for individual reasons. It is also the case that sometimes financial theory proves to be just that, a theory, which doesn't actually play out perfectly in the financial markets, driven as they are by millions of fallible, emotional people. Indeed, our highest rated company was one of the best performers last year, up over 30%. This also serves to remind us that 'highly rated' does not automatically equate to 'expensive' - it always depends on what you are getting for the price. Having said all this, we still consider ourselves fortunate to have outperformed in this environment, and if this trend of increasing interest rate expectations persists, we may not continue to be so lucky.

One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn't we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you're particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off.

Imagine a dog walker crossing a field, their dog wildly zigzagging around them. We would relate the companies we own to the walker, clear in direction and making steady progress across the field, while the daily market price is like the dog, moving back and forth quite randomly. Now, the current economic storm may well send the dog cowering for cover, but given enough time, we know that the price and value will eventually meet again, just as the dog and walker will ultimately leave the field together. We also know that, as well as making constant progress, a high quality company, if it trips during the storm, will rise again and keep going. Low quality, value companies on the other hand, may never get back up.

Of course, interest rates are on the rise because central banks are trying to contain inflation, which many fear may not be transitory, as first thought. It is worth mentioning that we do not fear moderate inflation, which by itself would likely not cause a significant problem for our companies. This is owing to a couple of reasons. First, the companies we own have high gross margins, and therefore low raw material costs. They also tend to have low capital requirements, which allows them to generate high returns on that capital. As inflation affects both the cost of raw materials and the cost of plant and equipment, those that spend less as a proportion of revenue on these items will be relatively less impacted by cost inflation. On top of this, the market structure and competitive positioning of many of our companies mean that they would also be in a position to raise the prices charged to their customers should the costs of the business increase. This is not necessarily something we want them to do unilaterally; as a market leader raising prices can often create an 'umbrella' under which competitors can flourish by charging slightly lower prices while still maintaining a good margin. But if inflation is creating a cost issue for the whole industry, it is comforting to know that our companies have the market power to increase prices should it become necessary.

To highlight some of the individual companies responsible for the fund outperformance, the top five contributors are listed below.

Fortinet is a cyber security company specialising in firewall appliances and security software. The shares have been strong ever since the SolarWinds hacking attack was discovered in December 2020, after which many corporate technology departments made clear their intention to increase spending on cyber security. This has been reflected in the growth of Fortinet's revenue, which at 33% in the last reported quarter, was the fastest since 2016, and has resulted in the share price increasing by over 140% during the year.

Nemetschek sells software for construction design and entertainment. There were concerns regarding the construction industry during the initial stages of the pandemic, but by the middle of last year it became apparent that industry growth was as strong as ever. This development also benefitted AO Smith, at the bottom of the list, given it sells residential and commercial water heaters and boilers, which are also somewhat affected by the construction industry cycle.

Equifax is a credit bureau which supplies consumer credit details to banks and other lenders, as well as social security data to employers. As 2021 progressed, it became clear that mortgage and other loan applications would remain strong and a high number of workers would be hired in the US economy. This meant that the demand for Equifax services accelerated to a growth of 26% by the mid-point of the year, and after a strong year in 2020, revenue was 42% ahead of the pre-pandemic level in mid-2019.

Almost all the share price performance in Domino's Pizza Group came at the end of the year. For some time, the management of the company has been at odds with its franchisees, who were requesting more investment by the company into menu and technology development and a reduction in food costs. This was hampering the growth of the company, as many franchise owners were refusing to open new restaurants until their demands were met. This issue was finally resolved in December, when management reached an agreement with the franchisee association, providing some of what they demanded, in return for a commitment to open new restaurants. This was taken well by the market, sending the shares up 22% in one day, and we are optimistic that the deal could further unlock the potential of the attractive UK market.

The five worst detractors to performance are below.

Sabre, the provider of software to the travel industry, had a strong start to the year as countries began lifting COVID-19 restrictions.

However, that proved to be short lived, as the Delta and then Omicron variants caused travel restrictions to be reimposed, to which the shares reacted negatively.

Ambu, which manufactures medical devices including single-use endoscopes, often required for COVID-19 treatment, underperformed in 2021 after an extremely strong performance in 2020. Although we continue to like the long-term outlook for the company, it was always quite unlikely that profits were going to match the extraordinary levels of the prior year, despite further infection waves.

The manufacturer of industrial lasers, IPG Photonics, had a successful year in 2021 after a weak 2020, with reported revenue up 26% year to date. Unfortunately, as ever, this improved operating environment was anticipated ahead of time by the stock market, meaning that once better profitability arrived, it was not actually enough to please the market. Similarly, Paycom was another victim of high market expectations. Despite strong revenue growth, currently running at 24%, this was regarded as a disappointment at the most recently reported results.

Simcorp, on the other hand, has simply struggled to sign many new clients this year. As a producer of asset management software, each deal it signs tends to be large, so it often requires a series of face-to-face meetings for clients to feel comfortable taking on a new licence. This has proven to be difficult to arrange given the restrictions in different countries in 2021, and so sales have slowed.

We added two new companies to the portfolio during the year, namely Rollins and Wingstop. Rollins is a US-based pest control business with strong margins and returns on capital. The organic growth of the business, whilst not high at around 4.5%, is supplemented by acquisitions of other small pest control businesses, such that the overall revenue growth of the company has averaged 9% over the last few years. Unlike in the UK, houses and businesses in many parts of the world require frequent attendance by pest control professionals to keep them comfortable, and in some cases, habitable. This leads to highly repeatable revenue, as many customers pay for the services on a monthly subscription basis. The company has had significant family ownership since its foundation 73 years ago and, given the consistent sound management, we expect little to change for the next several decades.

Wingstop is somewhat different. This is a fast-growing franchised chicken wing restaurant and delivery business. It was founded in Texas, in 1994, with the intention to make chicken wings the main course of a meal, rather than just a starter or side dish. Aside from the food (we recommend the Louisiana Rub wings), the key to the continued growth of this business is the excellent returns of 70% that franchisees are able to generate on their investment in new restaurants after three years. This has created an enormous pipeline of new units waiting to be built, which should underpin double digit growth for the company for years to come.

We also sold two companies during the period. One is a biotechnology business based in the UK, called Abcam. This is a company that has been undergoing a change in strategy over the last couple of years, and which is set to continue for some time. Abcam has identified several markets with high growth potential which are, some closely and some loosely, related to its core business of producing and distributing antibodies for medical research. While we do not disagree with the strategy to enter new markets, it brings elevated risk given the large amount of spending required to conduct R&D and acquire companies in these new areas, and the uncertain paybacks on those investments. It is this uncertainty, combined with a high valuation at the time of our sale, that led us to divest the company. It remains one that we will continue to watch with interest as it progresses through its transformation.

The second company to be sold was Chr. Hansen, the reason being very similar to the one for Abcam. There is little wrong with its core business of producing cultures and enzymes for food processing, although declining growth will eventually become an issue in this division. However, it is the expansion into other areas that concerns us, particularly as the company has far less of a competitive advantage in the new markets than it does in its original business.

The result of these trading actions is shown below, with a breakdown of the portfolio in terms of sector and geography at the end of the period. The median year of foundation of the companies in the portfolio at the year end was 1973, similar to last year.

Sector

Information Technology stayed roughly constant at a 44% weighting over the year. The reason for the apparently large allocation to Information Technology remains the same as outlined in previous reports, which is that this broad MSCI-designated sector actually encompasses a large number of diverse businesses and end markets. One example is IPG Photonics, discussed earlier, which produces lasers for raw material processing and manufacturing, and which we would class as part of the industrial exposure of the portfolio. During the year, the industrials weight increased by 2%, due to the addition of Rollins to the portfolio. Healthcare decreased by 1% partly due to the sale of Abcam, while Consumer Discretionary increased slightly after the addition of Wingstop to the portfolio. Chr Hansen is classed as a Materials company, and so we no longer have exposure to this sector.

Country of Listing

The USA continues to be the largest country weighting by listing and in fact increased by 3% from the end of 2020 partly due to the portfolio additions. The UK remains a large weighting, although it did decrease slightly from a year ago. The reason we have a large exposure to UK companies is because several high-quality businesses we have found happen to be listed in the UK and, perhaps due to generally depressed valuations in the UK market, still appear to be reasonably valued.

Source of Revenue

Most importantly though, the real geographical exposure for the portfolio is where the revenue our companies generate actually originates. This always appears more evenly distributed, with North America and Europe at similar levels, along with quite a high exposure to Asia Pacific, which encompasses Australia and New Zealand. Although we only invest in companies listed in developed markets, they do sometimes generate revenue from emerging markets, which is why you see regions such as the Middle East and Latin America represented here.

As we discuss in every report, our three part strategy is to buy good companies, not overpay for those companies, and then "do nothing", or trade as little as possible. In order to demonstrate that we do indeed buy good companies, we include the table below, which is the weighted average operating metrics of our owned companies over the last 12 months compared to the Index.

Data for the MSCI World SMID Cap Index is shown ex-financials, with weightings as at 31.12.2021.

Data for MSCI World SMID Cap Index is on a weighted average basis, using last available reported financial year figures as at 31.12.21.

Data for Smithson is on a weighted average basis, ex-cash, using last available reported financial year figures as at 31.12.21.

Interest cover (EBIT ÷ net interest) data for Smithson and MSCI World SMID Cap Index is done on a median average basis.

You can see from this table that the companies we own are far superior in quality to the average in the Index. Not only are returns on capital employed substantially higher, but the margins are sometimes multiples of those found in the Index, likely because of the difficult operating environment that has been suffered over the last couple of years. Finally, the interest cover is high because the majority of our companies actually have a surplus of cash, and no debt.

Further, our companies have been able to grow strongly during the year. The weighted average growth of free cash flow (the cash produced after paying for everything except dividends and growth capital) for the companies in the portfolio was 21% in 2021.

The second part of the strategy, of not overpaying for these great companies, can be assessed by looking at the average free cash flow yield (the free cash flow divided by the market capitalisation) of the portfolio. At the end of 2021 this was 2.0%, down from 2.9% a year earlier, and compares to the Index at 2.5%. The decline was a combination of share price appreciation and portfolio changes but also note that the figure is based on the last reported full financial year results for the companies, many of which might be representing the more difficult 2020 rather than 2021. While it may seem that the portfolio is more 'expensive' than the Index, the companies we own are far higher quality and are likely growing much faster. When put this way, it would seem bizarre if they were not more highly rated than the Index average (although this can, and does, sometimes happen).

Finally, we then try to "do nothing". In 2021 our portfolio turnover, not counting the investment of share issuance proceeds, was 9.5%. In other words, this indicates an average holding period of just over 10 years for each of our positions, which broadly fits with the way we think about the investment cases for each company.

We are often asked about our approach to Environmental, Social and Governance (ESG) issues. This consideration really begins at the earliest stages of our research when we are identifying companies which can potentially sustain strong margins and returns on invested capital long into the future. Clearly, companies that are causing ongoing damage to the environment and society, or are poorly governed, are unlikely to prosper over the long term or appear attractive to us as an investment.

The main issue that we face in assessing small and medium sized companies in this regard, is that many are not as advanced as most large cap companies in their reporting capabilities. For example, only 59% of our portfolio companies are currently able to report greenhouse gas emissions. Of those that do, the picture is a relatively positive one, with average scope 1 and 2 emissions per company of 37,000 tonnes per year, compared to the MSCI World average of around 4.6 million tonnes. Taking into account the different size of companies, our holdings emit on average 14 tonnes per year for every one million pounds of revenue they generate. The equivalent number for the MSCI World is around 84,000 tonnes (yes, 6000 times more). Within the portfolio, Rightmove has the lowest emissions at only 300 tonnes per year, understandable given it operates an online business, while Geberit, the toilet flushing systems and sanitaryware manufacturer, is the highest emitter at 206,000 tonnes. Many of our companies, including Ambu, MSCI and Verisk, have committed to significantly reducing their emissions, some to net zero, while others, such as Domino's Pizza Group and Temenos, are now linking management pay to ESG measures.

Focusing on social impact, there are not many helpful statistics to provide in this area, although one we do look at is gender equality in boardrooms. Within our portfolio companies, women make up 26% of boards on average. This is still a long way short of what one would hope for, but it is at least comparable to the global average of 28%.

Our most frequent engagement with companies regarding ESG is in the area of corporate governance. Unusually for portfolio managers, or so we are told, all the proxy votes for our companies are researched, assessed and voted for by ourselves. We do not have a separate team to handle these decisions. We do not subscribe to nor receive recommendations from external proxy voting services. A meaningful amount of our time each year is spent reading about, thinking and discussing with companies their corporate governance structure, especially elements such as remuneration policy. We believe that this, in particular, is a critical component to the success of our investments. As Charlie Munger, the Vice President of Berkshire Hathaway, famously said, "show me the incentive and I will show you the outcome".

It will come as no surprise that the targets we prefer to see reflected in management remuneration policies include simple metrics that will build underlying value in the enterprise over time, such as return on capital employed and growth in free cash flow. What we find incredible, is the number of targets that are included in remuneration policies which require outcomes over which management should have little to no control.

Take total shareholder return (TSR) as an example. This is the return to investors from their shareholding, taking into account the share price movement plus any capital returns in the form of dividends and buybacks. On the face of it, this looks sensible, as one could make the argument that it is closely linking together the fortunes of the company management and its investors. While this is true, what are the managers actually meant to be able to do about it? Think back to the example of the walker and the dog and ponder how much control anyone can have, moment to moment, over a frantic dog let loose in a field. And yet management's compensation, sometimes a lot of it, is tied to the random meanderings of that dog over very specific timeframes. What effect must this have on their actions? At best, managers will conclude correctly that they have little control over the share price and so it will incentivise them to do nothing more than improve the underlying fundamentals of the business, which is what we wanted them to do in the first place. But at worst, managers may actually decide that they will try to control this key determinant of their compensation (and can you blame them?). This can lead to short termism by managers, bearing in mind that many of them won't be around for that long: the accountancy firm PwC found that CEOs of the largest 2,500 companies in the world had a median tenure of only 5 years. In practice, this could mean a host of perverse outcomes, from cutting long term product development costs to boost current margins, a spending spree on hastily evaluated acquisitions or, at an extreme, corporate accounting so aggressive that it becomes plainly deceptive. And if you think all this sounds like a misdirection of management focus, wait until you hear about the current trend of management being remunerated based on relative TSR, that is, the shareholder return compared to that of other companies. Don't get us started on that one.

Hopefully this serves to illustrate that our voting of corporate governance proxies is far from a rubber-stamping exercise. In fact, of the 340 votes we cast in 2021, 41 related to management remuneration, and we voted against the company management on 34% of these. For the vast majority of our votes made against management, we had already debated the policy in question with representatives from the supervisory boards of those companies, so that they were able to put across their reasoning as much as we could our own.

We are not always the bad guys though. We do want to support the management teams who we think are being appropriately paid for doing an excellent job, given that we view them as our partners in these long-term investments. In fact, in one instance, we voted in favour of the management remuneration policy, despite the shares being one of our worst performers, and also despite so many of our peers voting against them that the shareholder vote didn't actually pass at the AGM.

Why did we buck the trend on this one? The company in question was Sabre, and the 2020 remuneration policy initially required management to hit certain revenue and profit targets to achieve their targeted pay out. However, when the pandemic hit, it quickly became obvious that this would now be impossible. Because of this, the supervisory board, pragmatically in our view, changed management's targets to ones more appropriate to the situation. These included significant cost cutting and maintaining the liquidity and financial flexibility of the company throughout the pandemic, while also capping management pay outs to 50% of the prior totals, given the austerity now required by the company. Clearly, this was an adjustment from targets that could no longer provide an incentive, to ones that induced management to behave in a manner that was most pertinent to the company at that time. This was perfectly logical to us and so we will never know exactly why other investors voted against it, but our suspicion is that some third party voting services automatically recommended a vote against simply because the 'goalposts' were moved during the term of the policy. Another reason we choose to think for ourselves.

To leave you with a final thought, as we write this at the start of the new year, major equity indices such as the S&P 500 and Nasdaq are already heading into correction territory from their highs at the end of 2021. It is at times like these that it's worth remembering what you are hoping to achieve from investing over the long term (which is our aim, and we hope yours too). When markets turn down, it will always be tempting to sell investments that are still in profit to "lock in the gains", but it is not something we would advise, unless the investment in question is particularly overvalued. The reason is that long term compounding investments, such as those we seek for the portfolio, are extremely hard to find.

To sell a rare investment in which you still have confidence regarding the long term outcome, to avoid a short term decline which you cannot be confident in, makes no sense to us. Ultimately, we believe that whatever the macroeconomic environment, the secret to investment success is always to focus patiently on the long term result. Because after all, that's what you end up with.

We are pleased that Smithson has had a successful year and thank you once again for your continued support.

Simon Barnard

Fundsmith LLP

Investment Manager

14 March 2022

Investment Portfolio

Investments held as at 31 December 2021

Investment Objective, Policy and Investment Methodology

Investment Objective

The Company's investment objective is to provide shareholders with long term growth in value through exposure to a diversified portfolio of shares issued by listed or traded companies.

Investment Policy

The following investment policy wording is subject to shareholder approval at the Company's AGM. Further details on the proposed changes to the investment policy are given in the Chairman's Statement.

The Company's investment policy is to invest in shares issued by small and mid-sized listed or traded companies globally with a market capitalisation (at the time of initial investment) of between £500 million to £15 billion. The Company's approach is to be a long-term investor in its chosen shares. It will not adopt short-term trading strategies. Accordingly, it will pursue its investment policy by investing in approximately 25 to 40 companies as follows:

(a)     the Company can invest up to 10 per cent. in value of its gross assets (as at the time of investment) in shares issued by any single body;

(b)     not more than 20 per cent. in value of its gross assets (as at the time of investment) can be in deposits held with a single body. This limit will apply to all uninvested cash (except cash representing distributable income or credited to a distribution account that the depositary holds);

(c)     not more than 20 per cent. in value of its gross assets (as at the time of investment) can consist of shares issued by the same group. When applying the limit set out in (a) this provision would allow the Company to invest up to 10 per cent. in the shares of two group member companies (as at the time of investment);

(d)     the Company's holdings in any combination of shares or deposits issued by a single body must not exceed 20 per cent. in value of its gross assets (as at the time of investment);

(e)     the Company must not acquire shares issued by a body corporate and carrying rights to vote at a general meeting of that body corporate if the Company has the power to influence significantly the conduct of business of that body corporate (or would be able to do so after the acquisition of the shares). The Company is to be taken to have power to influence significantly if it exercises or controls the exercise of 20 per cent. or more of the voting rights of that body corporate; and

(f)     the Company must not acquire shares which do not carry a right to vote on any matter at a general meeting of the body corporate that issued them and represent more than 10 per cent. of the shares issued by that body corporate.

The Company may also invest cash held for working capital purposes and awaiting investment in cash deposits and money market funds.

For the purposes of the investment policy, certificates representing certain shares (for example, depositary interests) will be deemed to be shares.

Hedging Policy

The Company will not use portfolio management techniques such as interest rate hedging and credit default swaps.

The Company will not use derivatives for purposes of currency hedging or for any other purpose.

Borrowing Policy

The Company has the power to borrow using short-term banking facilities to raise funds for short-term liquidity purposes or for discount management purposes including the purchase of its own shares, provided that the maximum gearing represented by such borrowings shall be limited to 15 per cent. of the net asset value at the time of drawdown of such borrowings. The Company may not otherwise employ leverage.

Investment Methodology and ManagementProcess

The Investment Manager seeks to apply the investment methodology and management process summarised below (to the extent appropriate given the nature of a relevant investment opportunity):

Seeking high-quality businesses with specific characteristics and intangible assets

In the Investment Manager's view, a high-quality business is one which can sustain a high return on operating capital employed and which generates substantial cash flow, as opposed to only creating accounting earnings. If it also reinvests some of this cash back into the business at its high returns on capital, the Investment Manager believes the cash flow will then compound over time, along with the value of the Company's investment.

The Investment Manager will not just look for a current high rate of return, but will seek a sustainable high rate of return. Fundamentally, such companies need to demonstrate the ability to continue competing against all other companies which are trying to take a share of their profits. This can come in many forms, but the Investment Manager will look for companies that rely on intangible assets such as one or more of the following: brand names; patents; customer relationships; distribution networks; installed bases of equipment or software which provide a captive market for services, spares and upgrades; or dominant market shares.

The Investment Manager will generally seek to avoid companies that rely on tangible assets such as buildings or manufacturing plants, as it believes well-financed competitors can easily replicate and compete with such businesses. In many instances, such competitors are able to become better than the original simply by installing the latest technology in their new factory. Banks are quite keen to lend against the collateral of tangible assets, and such companies tend to be more heavily leveraged as a result. The Investment Manager believes that intangible assets are much more difficult for competitors to replicate, and companies reliant on intangible assets require more equity and are less reliant on debt as banks are less willing to lend against such assets.

The Investment Manager believes such companies will resist the rule of mean reversion that states returns will revert to the average over time as new capital is attracted to business activities which earn above average returns. They can do this because their most important assets are intangible and difficult for a competitor to replicate. Since stock markets typically value companies on the assumption that their returns will regress to the mean, businesses whose returns do not do so can become undervalued. This presents an opportunity for the Company.

The Investment Manager will seek businesses which have growth potential. The Investment Manager views growth potential as the ability of a company to be able to reinvest at least a portion of its excess cash flow back into the business to grow, whilst generating a high return on the cash thus reinvested. Over time, this should compound their shareholders' wealth by generating more than a pound of stock-market value for each pound reinvested.

The Investment Manager is interested in growth that is driven through either increases in volume or increases in price and will prefer a mixture of both. The ability to increase product prices above the rate of inflation is the most profitable way to grow and demonstrates that the company has a healthy competitive position selling products or services which are strongly desired by their customers. However, growth through price alone can build a shelter under which competitors can flourish, eventually resulting in cheaper competition gaining significant market share. On the other hand, growth through additional unit volumes almost always requires more cost, in both manufacturing capacity and materials used to produce the products, as well as transportation to get them to customers. Increasing scale in this way will eventually make a company's market position more difficult to compete against, however, unlike growing through price alone, with the further benefit that volume growth can sometimes continue indefinitely.

The Company will only invest in companies that earn a high return on their capital on an unleveraged basis and do not require borrowed money to function. The Investment Manager will avoid sectors such as banks and real estate which require significant levels of debt in order to generate a reasonable shareholder return given their returns on unlevered equity investment are low.

While the Investment Manager favours companies that are able and willing to spend cash on the research and development of their products to create important intangible assets such as patents and manufacturing efficiency, it will avoid industries that innovate very quickly and are subject to rapid technological change. Innovation is often sought by investors, but does not always produce lasting value for them and can have high capital costs.

Avoiding overpaying for shares

The Company will only invest in shares where the Investment Manager believes the valuation is attractive. The Investment Manager will estimate the free cash flow of every company after tax and interest, but before dividends and other distributions, and after adding back any discretionary capital expenditure which is not needed to maintain the business. The Investment Manager aims to invest only when free cash flow per share as a percentage of a company's share price (the "free cash flow yield") reflects value relative to long-term interest rates and when compared with the free cash flow yields of other investment candidates both within and outside the Company's portfolio. The Investment Manager will buy securities that it believes will grow and compound in value, which bonds cannot, at yields that are similar to or better than the Company would get from a bond.

Buying and holding

The Company will seek to be a long-term, buy-and-hold investor. The Investment Manager believes this will facilitate the compounding of the Company's investments over time as the investee companies continue to reinvest their cash flows. The Investment Manager, however, will continually test its original views against new information it may discover while regularly reviewing the news and results concerning the investee companies. The resulting low level of dealing activity also minimises the frictional costs of trading, a cost which is often overlooked by investors as it is not normally disclosed as part of the costs of running funds.

Not attempting market timing

The Investment Manager will not attempt to manage the percentage invested in equities in the Company's portfolio to reflect any view of market levels, timing or developments. The Investment Manager's unwillingness to make investment decisions on the basis of market timing is one factor that will prevent the Company from investing in sectors that are highly cyclical.

Business Review

The Strategic Report has been prepared in accordance with the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 to provide information to shareholders to assess how the Directors have performed their duty to promote the success of the Company.

The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Purpose, Strategy and Business Model

The Company is registered in England and Wales and is an externally managed investment trust; its shares are premium listed on the Official List and traded on the main market of the London Stock Exchange. It was established by its Investment Manager, Fundsmith LLP and listed on 19 October 2018.

The purpose of the Company is to provide a vehicle for investors to gain exposure to a portfolio of small and mid-sized listed or traded companies globally, through a single investment.

The Company's strategy is to create value for shareholders by addressing its investment objective, which is to provide shareholders with long-term growth in value through exposure to a diversified portfolio of shares issued by listed or traded companies.

The Company is an alternative investment fund ("AIF") under the alternative investment fund managers' directive ("AIFMD") and has appointed Fundsmith LLP as its alternative investment fund manager ("AIFM").

As an externally managed investment trust the Company has delegated its operational activities to specialised third party service providers who are overseen by the Board of non-executive Directors. Details regarding the Company's key third party service providers are included in the Management Engagement Committee Report. The Company has no executive directors, employees or internal operations.

Key Performance Indicators ("KPI")

The Company's Board of Directors meets regularly and reviews performance against a number of key measures, as follows:

·          Net asset value total return against the MSCI World SMID Cap Index measured on a net sterling adjusted basis;

·          Share price total return;

·          Premium/discount of share price to net asset value per share; and

·         Ongoing charges ratio.

The KPI measures are Alternative Performance Measures ("APM"). Please refer to the APM section and Glossary for definitions of these terms and an explanation of how they are calculated.

Net asset value total return against the benchmark

The Directors regard the Company's net asset value total return as being the overall measure of value delivered to shareholders over the long term. The Investment Manager's investment style is such that performance is likely to deviate from that of the benchmark index.

The Company's net asset value per share at 31 December 2021 was £19.61. The net asset value total return for the year to 31 December 2021 was 18.9% and the annualised net asset return for the period from listing on 19 October 2018 to 31 December 2021 was 23.4%. The Board considers the MSCI World SMID Cap Index measured on a net, sterling-adjusted basis, to be the most appropriate comparator to the Company's performance. The returns generated by the MSCI World SMID Cap Index over the same periods were 17.8% and 13.0% respectively, thus the Company outperformed the benchmark by 1.1 percentage points for the year ended 31 December 2021 and 10.4 percentage points annualised for the period from the Company's listing to the period end.

A full description of performance during the period under review is contained in the Investment Manager's Review.

Share price total return

The Directors also regard the Company's share price total return to be a key indicator of performance.

The share price total return for the year to 31 December 2021 was 18.1% and the annualised share price total return for the period from listing on 19 October 2018 to 31 December 2021 was 24.5%, outperforming the MSCI World SMID Cap Index reference benchmark by 0.3 percentage points and 11.5 percentage points respectively.

Premium/discount of share price to net asset value per share

The Board undertakes a regular review of the level of premium/discount. During the year the Company's shares have consistently traded at a premium to net asset value. The Board seeks to generate value for shareholders through the issuance of shares at a premium to net asset value. To this end, during the year to 31 December 2021 the Company issued 30,277,000 million new ordinary shares generating a premium to net asset value of approximately £6.8 million net of costs. The making and timing of any share issuance and/or buy-back is at the discretion of the Board.

As at 31 December 2021, the premium of the Company's share price to the net asset value per share was 3.0% and the average premium to net asset value for the year to 31 December 2021 was 2.2%.

The Directors intend to seek renewal at each Annual General Meeting of their authority to allot shares or to buy back shares with a view to managing the premium/discount as well as creating further shareholder value. Shares will only be issued at a premium to net asset value and bought back at a discount to net asset value.

If, after the end of the fourth financial year of the Company's existence (being 31 December 2022) or any subsequent year, the Company's shares have traded, on average, at a discount in excess of 10 per cent. of net asset value per share in any such year, the Directors will consider proposing a special resolution at the Company's next Annual General Meeting that the Company ceases to continue in its present form. If such a vote is proposed and passed, the Board will be required to formulate proposals to be put to shareholders within four months to wind up or otherwise reconstruct the Company, having regard to the liquidity of the Company's underlying assets. Any such proposals may incorporate arrangements which enable investors who wish to continue to be exposed to the Company's investment portfolio to maintain some or all of their existing exposure.

Ongoing charges ratio

The Directors monitor the Company's expenditure at each board meeting and review the ongoing charges ratio disclosed in the Interim and Annual Reports. The Directors regard the ongoing charges ratio as a measure of the regular recurring costs of running an investment company. Expressed as a percentage of average net asset value, the annualised ongoing charges ratio for the year was 1.0% (2020: 1.0%). The Board seeks to manage and where possible to improve the ongoing charges ratio and to this end the Management Engagement Committee regularly reviews its service provider fee rates.

Risk Management

Risk Management

The Board is responsible for the ongoing identification, evaluation and management of emerging and principal risks faced by the Company and the Board has established a process for the regular review of these risks and their mitigation. This process accords with the UK Corporate Governance Code, the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and the AIC Code of Corporate Governance and a description follows below.

·         The Board maintains and regularly reviews a matrix of risks faced by the Company and controls in place to mitigate those risks. The impact and probability of those risks occurring after controls are performed are charted on a risk heat map and reviewed by the Board along with a risk appetite statement that reflects the Board's relative level of risk tolerance and establishes key triggers necessitating Board management. An annual formal review of the risk procedures and controls in place at the Investment Manager and other key service providers is performed. Emerging risks are actively discussed as part of this process and this should ensure that emerging (as well as known) risks are adequately identified and, so far as practicable, mitigated.

The continuing impact from the COVID-19 pandemic and associated market and outsourcing risks and the ongoing economic impact of measures introduced to combat its spread continue to be monitored by the Board. The Investment Manager and other key service providers gave updates throughout the year on operational resilience and the Board was satisfied that they continue to have the ability to operate effectively whether within an office or remote working environment. The Board and Investment Manager also continue to monitor the political situation in Ukraine and its market and economic impact for any potential risks posed to the Company and portfolio.

·         Each Director brings external knowledge of the investment company sector (and financial services generally), trends, threats as well as strategic insight;

·         The Investment Manager advises the Board at quarterly Board meetings on industry trends, providing insight on future challenges in the markets in which the Company operates/ invests. The Company's broker regularly reports to the Board on markets, the investment company sector and the Company's peer group;

·         The company secretary briefs the Board on forthcoming legislation/regulatory change that might impact on the Company. The auditor also provides updates which are relevant to the Company; and

·         The Company is a member of the AIC, which provides regular technical updates as well as drawing members' attention to forthcoming industry/regulatory issues and advising on compliance obligations.

Principal Risks

The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity.

1.Investment objective and policy risks

The Company may not achieve its investment objective.

The Company is dependent upon the Investment Manager's successful implementation of the Company's investment policy and ultimately on its ability to create an investment portfolio capable of generating attractive returns.

The Company is not constrained on weightings in any sector or geography. This may lead to the Company having significant exposure to portfolio companies from certain business sectors or based in certain geographies. Greater concentrations of investments in any one sector or geography may lead to greater volatility in the Company's investments and may adversely affect performance. This may be exacerbated by the small number of investments held at any time.

Mitigation

The Investment Manager has a proven and extensive track record, and the Board undertakes a review of the performance of the Company and its transactions at each quarterly Board meeting. The Investment Manager spreads the investment risk over a portfolio of investments in accordance with the Company's investment policy, and at the year end the Company held investments in 31 companies with details of the geographic and sector weightings given in the Investment Manager's Review.

2.Market risks

Price movements and stock market conditions may have a negative impact on the Company's portfolio and its ability to identify and execute suitable investments that might generate acceptable returns. Market conditions may also restrict the supply of suitable investments at a price the Investment Manager considers may generate acceptable returns.

If conditions (such as those experienced as a consequence of the COVID-19 pandemic or the current conflict in Ukraine) affecting the investment market negatively impact the price at which the Company is able to buy or dispose of its assets, this may have a material adverse effect on the Company's business and results of operations.

Interest rate movements may affect the level of income receivable on cash deposits and the interest payable both by the Company and by investee companies on their borrowings. In addition, where the Company invests in high growth investee companies, any increase in interest rates may compress the growth of such companies and therefore affect their valuations. As such, interest rate fluctuations may reduce the Company's returns.

The Company's ordinary shares are denominated in pounds sterling while the majority of the Company's investments are denominated in a currency other than pounds sterling. The Company does not hedge its currency exposures and changes in exchange rates may lead to depreciation in the Company's net asset value.

Mitigation

The Company's investment policy and the fact that it will not use hedging instruments to mitigate interest rate or foreign currency risk is clearly explained in the Owner's Manual (which can be found on the Company's website at www.smithson.co.uk). The Investment Manager has a proven and extensive track record and reports regularly to the Board on market developments. The Investment Manager's policy is to hold investments for the long term and not look at market timing issues.

Further details on Market and Financial Instrument risk are disclosed in note 15 to the financial statements.

3.Outsourcing risks

The Company has outsourced all its operations to third party service providers. Failure by any service provider to carry out its obligations in accordance with the terms of its appointment could result in negative implications for the Company. Such failures could include cyber breaches or other IT failures, fraud (including unauthorised payments by the administrator), poor record keeping and loss of assets and failure to collect all the Company's dividend income. Cyber incidents are becoming increasingly common and may cause disruption and impact business operations, potentially resulting in financial losses, theft, interference with the ability to calculate the Net Asset Value or additional operating costs. If the Investment Manager fails to identify risks or liabilities associated with investee companies adequately, this could give rise to an investee company not fitting the Company's investment policy or unexpected losses and adverse performance. The rapid spread of infectious disease such as the COVID-19 pandemic, and measures introduced to combat its spread, could cause disruption to the operations of the Company and its key service providers.

Mitigation

The Company has appointed experienced service providers, each of whom has a service agreement, and the performance of the key service providers is reviewed annually by the Management Engagement Committee. Cyber risk management questions were incorporated in this review. The Company's key service providers report periodically to the Board on their business continuity plans and procedures. The Board monitors the adequacy of controls in place at the key service providers and their planned response to an extended period of disruption, to ensure that the impact to the Company is limited. Each key service provider was asked to present reports on their actions and responses, all of which were entirely satisfactory, and there was no noticeable change in any of the key services provided. The Board continues to monitor the Company's key service providers to ensure there is no negative impact on the Company from the ongoing COVID-19 pandemic control measures.

The procedures of the AIFM, depositary and custodian are reviewed by their external auditors and such reports made available to clients. These reports are also reviewed by the Management Engagement Committee.

4.Key individuals risk

Fundsmith LLP is responsible for managing the Company's investments. The Investment Manager relies on key individuals to identify and select investment opportunities and to manage the day-to-day affairs of the Company. There can be no assurance as to the continued service of these key individuals at the Investment Manager, and the departure of any of these from the Investment Manager without adequate replacement may have a material adverse effect on the Company's business prospects and results of operations.

Mitigation

The Investment Manager has a remuneration policy in place seeking to incentivise key individuals to take a long term view. Additionally, the Company's key individuals are significantly invested in the Company, therefore their interests and the Company's shareholders are more aligned. Finally, the Investment Manager has plans in place to ensure continuity in the event of the departure of key individuals.

5.Regulatory risks

The Company benefits from the current exemption for investment trusts from UK tax on chargeable gains. Any change to HMRC's rules or the taxation of investee companies could affect the Company's ability to provide returns to shareholders.

Mitigation

The Investment Manager and the company secretary monitor proposed changes to tax rules and report to the Board thereon.

Viability Statement

Viability Statement

In accordance with the UK Corporate Governance Code and the Listing Rules, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the "Going Concern" provision. The Company's investment policy is to buy good companies, not overpay and then do nothing. The Smithson Owner's Manual, a copy of which can be found on the Company's website at www.smithson.co.uk states "We will only invest in the equity of companies which we believe can compound in value over many years, if not decades, where we can remain a happy owner, safe in the knowledge that in 5 to 10 years' time our investment is likely to be worth significantly more than what we paid for it". When selecting or reviewing investments, the Investment Manager evaluates the prospects and risks which could affect investee companies over at least a 5 to 10 year period with a view to them being good long term investments capable of generating the Company's required returns. The Board therefore believes that 10 years is the most appropriate time horizon to adopt for the Viability Statement.

In reviewing the Company's viability, the Board considered the Company's business model, the principal risks and uncertainties, including the issues arising from the COVID-19 pandemic, and its present and expected financial position. The Company is a closed end fund which invests in listed or traded global securities which are inherently liquid. It does not intend to borrow (except in short term circumstances to manage a discount) nor will it use derivatives in any hedging operation. It receives dividend income from its investment portfolio with which it settles its operating expenses. Any shortfall in income available to settle expenses could be met by the Company's cash balances or by realising investments; the Board receives regular reports from the Investment Manager to confirm the average time to liquidate any investment position. The Board therefore has substantial options to manage the Company's ongoing solvency.

The Company benefits from certain tax benefits relating to its status as an investment trust. Any change to such taxation arrangements would inevitably affect the attractiveness of an investment in the Company and consequently its viability as an effective investment vehicle.

The Directors have assumed that:

·         the Board will not change the Company's investment objective of providing shareholders with long-term growth in value;

·         the performance of the Company will continue to be satisfactory such that the shareholders will want the Company to continue in existence. (The Board will consider putting a continuation vote to shareholders if in any year after 2022 the Company's share price trades at an average discount of 10% or more to net asset value); and

·         the Board will continue to manage the Company's business to ensure it retains its status as an investment trust.

Based on the results of this review, the Directors have formed a reasonable expectation that the Company will continue in its operations and meet its expenses and liabilities as they fall due over the next 10 years.

Non-Financial Information

Section 172 of Companies Act 2006 Statement

During the period under review, the Board discharged its duty per section 172 of the Companies Act 2006, to promote the success of the Company for the benefit of its members as a whole and having regard to the interests of stakeholders. The Board performed its role as outlined in the schedule of matters reserved for the Board and taking into account the interests of the key stakeholders identified in the map below.

Company Culture and Values

Culture

The culture of the Company is set by the Board and is based on the values set out below. The Board seeks to apply these values in all its dealings with its stakeholders and encourages the same values to be adopted by its key service providers.

Values

High Standards

The Directors want to ensure the success of the Company and generate long term value for its shareholders. To this end the Board will seek to adopt high standards of corporate governance and encourage best practice in all its activities. This approach extends to the Company's dealings with its stakeholders including shareholders, the Investment Manager and other service providers.

Honesty and Integrity

The Board seeks to comply with all relevant laws and regulations which apply to investment companies and has zero tolerance to bribery and corruption or any other fraudulent behaviour. The Board further expects the same standards to be applied by its service providers.

Transparency and accountability

The Board encourages clarity and transparency in its Board discussions and in communications with its stakeholders. The Board seeks to work with all service providers in a collaborative manner while at the same time recognising that the Board's role involves exercising oversight and challenge. The Board further recognises that it is accountable to shareholders and will endeavour to give a fair, balanced and understandable overview of the Company's performance to this end.

Company Sustainability and Stakeholders

As part of its work to evaluate its principal risks, the Board identified its key stakeholders which can be summarised as follows: investors, Investment Manager, other key service providers and investee companies.

The Board is cognisant of the need to foster the Company's business relationships with investors, suppliers and other key stakeholders through its stakeholder management activities as described below.

Stakeholder Management

Investors

Communications are key to establishing a meaningful relationship with our shareholders. The Company publishes monthly fact sheets and reports on its financial performance at the half year and year end, all of which are available on the Company's website. An Owners' Manual can be downloaded from the website which provides an understanding of the Investment Manager's goals and how they are to be achieved.

The Company raised £822 million in its initial public offering ("IPO") in October 2018, which was the largest amount that had been raised by any investment trust Initial Public Offering ('IPO') on the London Stock Exchange to that date. Since IPO the Company has raised a further £1,395 million net proceeds from new ordinary share issues including £531 million in the year to 31 December 2021 and a further £89.8 million since the year end. The net premium above net asset value raised from the ordinary share issues, which is effectively incremental value to the Company and shareholders, was £21.6 million. During the year, the Company's share price has continued to grow, from £17.10 to £20.20 at 31 December 2021, a share price total return of 18.1%. At the same time the Company's shares have continued to attract strong investor demand and the share price has traded at a premium to net asset value with an average premium of 2.2% and a premium at the period end of 3.0%. As a result, under the Company's share issuance programme during the year, the approximate net premium to NAV on share issues was £6.8 million (£21.6 million since IPO). The Board is seeking to renew its authority to issue shares at the Company's AGM to continue to create value for shareholders. The Board is mindful that there should be an active, liquid market in the Company's shares. As a closed-ended fund listed on the Premium segment of the main market, shareholders should always be able to exit through the stock market. The Board recognises the importance of shareholders being able to sell at a price not disadvantageous to them and the premium/discount to net asset value at which the Company's shares trade is monitored at all times.

The Board encourages communications with its Investment Manager and key service providers to be open and transparent, with all parties working together in a collaborative manner at the same time as the Board exercising oversight and challenge (further information can be found in the Business Review section, describing the Key Performance Indicators). The Board believes that effective risk management contributes to the safeguarding of shareholder value and successful operation of the Company and therefore assesses and manages, where possible or appropriate, the risks faced by the Company.

The Company and Investment Manager are seeking to promote an investor base that is interested in a long-term holding in the Company. The Board, through the Company's broker and the Investment Manager, maintains regular contact with shareholders and welcomes shareholders to attend the first in person AGM since the IPO and the lifting of COVID-19 restrictions. It is the intention that the full Board will attend the forthcoming AGM and the Chairman will chair the meeting. Shareholders have the opportunity to attend the AGM where they can question the Board and representatives of the Investment Manager. The Chairs of the Board's committees would also normally attend the AGM, to engage with shareholders on significant matters related to their areas of responsibility. However due to the continuing restrictions on public gatherings at the time of the Company's AGM in April 2021, shareholders were not able to attend. Instead, the Board invited questions from shareholders directly to the Chairman and Investment Manager. Presentations and press articles with the investment manager were made available through the Company's website.

In addition, in order to mitigate future restrictions on meetings, the Board took the decision to propose a resolution that was passed by Shareholders at the AGM, to allow meetings to be held as Hybrid meetings, enabling shareholders to participate and engage with the Board and Investment Manager through virtual technology as well as in person, which accords with the Board's view that the AGM is an opportunity to communicate with investors.

The Directors welcome the views of all shareholders and place considerable importance on maintaining open dialogue with them. Shareholders wishing to contact the Chairman, or any other member of the Board, may do so at anytime by writing to the company secretary. Alternatively, the Chairman can be emailed at the following address: smithsonchairman@fundsmith.co.uk.

Shareholder feedback is discussed in Board meetings with the broker and Investment Manager, whether received directly to the Board or through the Investment Manager and broker's shareholder meetings and the Board is pleased that the feedback received remained positive throughout the period. The Board also received a number of questions on the Company's performance and strategy ahead of the AGM which were either addressed in the manager's presentation or responded to directly. The Company's shareholder engagement strategy and details of shareholder communications can be found in the Annual Report.

In addition to this, the Investment Manager engages with shareholders at regular webinars, where questions are received and answered. The majority of the questions are around the fundamentals of the investees and whether they continue to be congruent with the Company's investment philosophy. In all cases it is noted that this is the case, with specific attention paid towards regular meetings with the investees' executive management and ensuring that investment criteria are being met in all areas.

Investment Manager

As explained above, the Company's business model is such that it has no employees and relies on services provided by third party service providers to manage the Company's operations. The Investment Manager is the most significant service provider of the Company and a description of its role can be found in the Annual Report.

The Board receives regular reports from the Investment Manager, discusses the portfolio at each Board meeting as well as maintaining a constructive dialogue between meetings. Additionally, the Board held a strategy session in November at which the Board and Investment Manager discussed in detail the performance of the Company's portfolio of investments and the investible universe for the Company. The Board and Investment Manager along with the broker also discussed at the strategy session the investment trust market and the Company's position within it, the Company's investment policy and capacity as well as discussing shareholder engagement strategies. A representative of the Investment Manager also attends each quarterly Board meeting and most ad hoc meetings.

The Investment Manager's remuneration is based on the market capitalisation of the Company which aligns the manager's interests with those of shareholders. Furthermore, partners and employees of the Investment Manager are significantly invested in the Company as disclosed in note 17 of the financial statements; further aligning the Investment Manager's interests with those of the shareholders. The Investment Manager paid costs of £5.1 million in respect of the Company's IPO and the Placing Programme prospectus issued in 2020. This means that shareholder's investment was not discounted by the cost of the IPO and that the Company only gains from its ordinary share issues, as prospectus costs were met. This is unusual for investment trusts and is a testament to the relationship which the Company enjoys with its Investment Manager.

The Management Engagement Committee reviews the performance of the Investment Manager, its remuneration and the discharge of its contractual obligations at least annually. Further detail on the Committee's activities and recommendations can be found in the Management Engagement Committee Report.

Other key service providers

In ensuring the smooth operation of the Company, the Board also monitors the performance of other key service providers such as the fund administrator, depositary and custodian (please see the Management Engagement Committee Report) and maintains regular contact through direct reports at Board meetings or through the company secretary to ensure there is open dialogue and good relationship management at the Board level. Additionally, in view of the operational challenges and restrictions caused by the COVID-19 pandemic, the Board received (and continues to receive) regular updates and assurance on the operational effectiveness of its key service providers, taking this feedback into consideration when assessing the Company's risks. The Board was pleased to note there was no significant impact to the Company and its service providers continued to operate effectively.

In maintaining the Company's reputation and high standards of business conduct, the Board is provided with regular reports from the Company's broker and company secretary who alert the Board to recent and proposed changes in regulation and market practice, as well as any likely reputational threats which, in turn, influence the Board's decision making process. The Company's corporate values, established to manage its business relationship with its stakeholders, are stated above and the Company's approach on anti-bribery and prevention of tax evasion can be found below and on the Company's website at www.smithson.co.uk. The Board also seeks assurance of high standards from its service providers as regards governance including whistleblowing, tax evasion, and bribery as part of its service provider annual review. The Board also periodically reviews the market rates for services provided, to ensure that the Company continues to receive high quality service at a competitive cost and during the year secured a reduction in the brokerage charges relating to new issues of shares. This will increase the net premium arising on all new share issues to the benefit of shareholders. Additionally, the Board has agreed with Northern Trust further revisions to the fee rates agreed in 2020 to the benefit of the Company in respect of the depositary, custody and administration services received, effective 1 January 2022.

Investee companies

As an investment trust with no trading activity and an outsourced business model, the Company has no direct social, community or environment responsibilities. However, the Company does have such responsibilities through its investment portfolio. The Company is a long-term investor (please see Owner's Manual at the Company's website at www.smithson.co.uk) and the Investment Manager's Review sets out how the Investment Manager considers ESG matters and explains and summarises their approach and engagement with investee companies. Fundsmith are signatories of the United Nations Principles for Responsible Investment and their ESG approach is overseen by the Fundsmith Stewardship and Sustainability Committee, on which the Company's manager, Simon Barnard, sits. The Board is satisfied that the Investment Manager is actively managing ESG risks and is diligent in its stewardship responsibilities.

The Company recognises the increased interest in reporting on ESG matters and supports the Association of Investment Companies ("AIC") initiative to provide information on investment companies' ESG practices in a centralised database and accordingly has submitted its own commentary in that regard and shareholders can access the statement on the Company's information page of the AIC website (www.theaic.co.uk) and on the Company's website at www.smithson.co.uk.

Conclusion

The Board is mindful of the directors' duties as described by section 172 of the Companies Act 2006 in considering the interests of stakeholders when deliberating all important decisions.

Dividend Policy

The Company's intention is to look for overall return rather than seeking any particular level of dividend. The Company will comply with the investment trust rules regarding distributable income which states that 85% of recognised income be distributed to shareholders, but does not expect significant income from the shares in which it invests.

Any dividends and distributions will be at the discretion of the Board. Subject to the Companies Act, the Company may, by ordinary resolution, declare a final dividend to be paid to members of the Company according to their rights and interests in the profits of the Company available for distribution, but no dividend shall be declared in excess of the amount recommended by the Board. The Company does not intend to pay any interim dividends.

Were the Company to be in a position to pay a dividend, then it may, subject to complying with all relevant criteria and with the approval of the shareholders by ordinary resolution, choose to offer shareholders a scrip dividend alternative or may establish a scrip dividend scheme that would allow shareholders to receive ordinary shares instead of a cash dividend.

Environmental Matters

The Company is an investment company. As such, it does not have any physical assets, property, employees or operations of its own. The Company does not provide goods or services in the normal course of its business and nor does it have customers. In consequence, the Company has no greenhouse gas emissions to report from its operations. As the Company has no material operations and therefore has little energy use, it falls below the 40,000kWh of energy use threshold for reporting under the Companies (Directors' Report) and Limited Liability Partnership (Energy and Carbon Report) Regulations 2018 or Streamlined Energy and Carbon Reporting criteria. The Investment Manager evaluates environmental matters concerning investee companies as summarised in the Investment Manager's Review.

Exercise of Voting Powers and Stewardship Code

The Company and the Investment Manager support the UK Stewardship Code issued by the Financial Reporting Council. Voting on investee company shareholder resolutions is undertaken by the Investment Manager. A copy of Fundsmith's Stewardship Policy, its Proxy Voting Policy and a report on its voting at investee shareholder meetings in 2020 and the first half of 2021 can be found on the Company's website at www.smithson.co.uk.

Modern Slavery Disclosure

Due to the nature of the Company's business, being a company that does not offer goods or services to customers, the Board considers there are no relevant disclosures with regard to the Modern Slavery Act 2015 in relation to the Company's own operations. The Board considers the Company's supply chains, dealing predominately with professional advisers and service providers in the financial services industry, to be low risk in this regard.

Anti-bribery and Corruption

The Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company's policy and the procedures that implement it are designed to support that commitment. A summary of the Company's anti-bribery and corruption policy can be found on the Company's website at www.smithson.co.uk.

Prevention of the Facilitation of Tax Evasion

In response to the Criminal Finances Act 2017, the Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion. A summary of the Company's policy can be found on the Company's website at www.smithson.co.uk.

Employees, Human Rights and Community Issues

The Board recognises the requirement to provide information about employees, human rights and community issues. As the Company has no employees, all its Directors are non-executive and all its functions are outsourced, there are no disclosures to be made in respect of employees, human rights and community issues. As at the date of this report the Company had three Directors, of whom two are male and one is female. The Board's policy on diversity is contained in the Corporate Governance Report of the Annual Report.

Strategic Report

The Strategic Report set out in the Annual Report was approved by the Board of Directors on the 14 March 2022.

On behalf of the Board

Diana Dyer Bartlett

Chairman

14 March 2022

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that year. In preparing these financial statements, International Accounting Standard 1 require that the Directors have:

·         selected suitable accounting policies and then applied them consistently;

·         made judgements and accounting estimates that are reasonable and prudent;

·         presented information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·         provided additional disclosures when compliance with the specific requirements in IFRS were insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; and

·         prepared the financial statements on a going concern basis.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements are published on the Company's website at www.smithson.co.uk. The Investment Manager has delegated authority for the maintenance and integrity of the website on behalf of the Company. The work carried out by the auditor does not involve consideration of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Each of the Directors confirm that, to the best of their knowledge:

·         the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and net return of the Company for the year ended 31 December 2021; and

·         the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Diana Dyer Bartlett

Chairman

14 March 2022

Independent Auditor's Report

Report on the audit of the financial statements

The financial reporting framework that has been applied in their preparation is applicable law, United Kingdom adopted international accounting standards and IFRSs as issued by the IASB.

2. Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report.

We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's (the 'FRC's') Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that we have not provided any non-audit services prohibited by the FRC's Ethical Standard to the company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

3. Summary of our audit approach

4. Conclusions relating to going concern

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

Our evaluation of the directors' assessment of the company's ability to continue to adopt the going concern basis of accounting included:

●       Obtaining an understanding of relevant controls in place in preparing the revenue projections;

●       Assessing liquidity and the ability of the Managers to trade in the investment portfolio (within the normal spreads) in order to cover operational expenditure as it falls due;

●       Assessing management's revenue account projections for the subsequent 12 month period from the date of signing the financial statements (from March 2022) for reasonableness;

●       Assessing any other market altering factors such as COVID-19 by looking at the operational impact and business continuity plans; and

●       Assessing the going concern disclosures included within the financial statements.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

In relation to the reporting on how the company has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

5. Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

5.1. Valuation and ownership of Investments

6. Our application of materiality

6.1. Materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

6.2. Performance materiality

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Performance materiality was set at 65% of materiality for the 2021 audit (2020: 65%). In determining performance materiality, we considered the following factors:

a.      no significant changes in business structure and operations;

b.      our experience from previous audits has indicated a low number of corrected and uncorrected misstatements identified in prior periods; and

c.      the inherent risk in the Company's operating environment caused by the uncertainty and volatility brought about by the COVID-19 pandemic.

6.3. Error reporting threshold

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.67m (2020: £0.47m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

7. An overview of the scope of our audit

7.1. Scoping

Our audit was scoped by obtaining an understanding of the Company and its environment, including internal control and assessing the risks of material misstatement. Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team.

7.2. Our consideration of the control environment

As part of our risk assessment, we assessed the control environment in place at the fund administrator, Northern Trust to the extent relevant to our audit. As part of this we relied upon the controls report of the administrator and adopted a controls reliance approach with respect to the valuation of investments.

7.3. Our consideration of climate related risks

In planning our audit, we have considered the potential impact of climate change on the Company's business and its financial statements. The Company continues to develop its assessment of the potential impacts of environmental, social and governance ("ESG") related risks, including climate change, as outlined in the Annual Report. As a part of our audit, we held discussions to understand the process of identifying climate-related risks, the determination of mitigating actions and the impact on the Company's financial statements. We performed our own qualitative risk assessment of the potential impact of climate change on the Company's account balances and classes of transactions and did not identify any additional risks of material misstatement.

8. Other information

The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. The directors are responsible for the other information contained within the annual report.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

9. Responsibilities of directors

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

10. Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

11. Extent to which the audit was considered capable of detecting irregularities, including fraud

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.

11.1. Identifying and assessing potential risks related to irregularities

In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:

●       the nature of the industry and sector, control environment and business performance including the design of the company's remuneration policies, key drivers for directors' remuneration, bonus levels and performance targets;

●       results of our enquiries of management and the audit committee about their own identification and assessment of the risks of irregularities;

●       any matters we identified having obtained and reviewed the company's documentation of their policies and procedures relating to:

●       identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;

●       detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;

●       the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;

●       the matters discussed among the audit engagement team regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the valuation and ownership of investments. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.

We also obtained an understanding of the legal and regulatory framework that the company operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules and tax legislation given the company's qualification as an Investment Trust.

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the company's ability to operate or to avoid a material penalty.

11.2. Audit response to risks identified

As a result of performing the above, we identified the valuation and ownership of investments as key audit matter related to the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures we performed in response to the key audit matter.

In addition to the above, our procedures to respond to risks identified included the following:

●       reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;

●enquiring of management and the audit committee concerning actual and potential litigation and claims;

●       performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;

●       reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC and the FCA; and

●       in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Report on other legal and regulatory requirements

12. Opinions on other matters prescribed by the Companies Act 2006

In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

●       the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

●       the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors' report.

13. Corporate Governance Statement

The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:

●       the directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out in the Annual Report;

●       the directors' explanation as to its assessment of the company's prospects, the period this assessment covers and why the period is appropriate set out in the Annual Report;

●       the directors' statement on fair, balanced and understandable set out in the Annual Report;

●       the board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out in the Annual Report;

●       the section of the annual report that describes the review of effectiveness of risk management and internal control systemsset out in the Annual Report ; and

●the section describing the work of the audit committeeset out in the Annual Report.

14. Matters on which we are required to report by exception

14.1. Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

●       we have not received all the information and explanations we require for our audit; or

●       adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

●       the financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters.

14.2. Directors' remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the directors' remuneration report to be audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

15. Other matters which we are required to address

15.1. Auditor tenure

Following the recommendation of the audit committee, we were re-appointed by the Board on 24 July 2019 to audit the financial statements for the year ending 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 3 years, covering the years ending 31 December 2019 to 31 December 2021.

15.2. Consistency of the audit report with the additional report to the audit committee

Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).

16. Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Chris Hunter CA (Senior statutory auditor)

For and on behalf of Deloitte LLP

Statutory Auditor

Edinburgh, United Kingdom

14 March 2022

Statement of Comprehensive Income

The Company does not have any income or expenses which are not included in the profit for the year.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

The "Total" column of this statement represents the Company's Income Statement, prepared in accordance with International Financial Reporting Standards (IFRS). The "Revenue" and "Capital" columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies (AIC).

All items in the above statement derive from continuing operations.

The accompanying notes are an integral part of these financial statements.

Statement of Financial Position

The financial statements were approved by the Board on 14 March 2022 and were signed on its behalf by:

Diana Dyer Bartlett

Chairman

The accompanying notes are an integral part of these financial statements.

Smithson Investment Trust plc - Company Registration Number 11517636 (Registered in England and Wales)

Statement of Changes in Equity

For the year ended 31 December 2021

For the year ended 31 December 2020

* Distributable reserve.

The accompanying notes are an integral part of these financial statements.

Statement of Cash Flows

Dividends and interest received in cash during the year amounted to £22,197,000 and £nil (2020: £15,777,000 and £nil), respectively.

The accompanying notes are an integral part of these financial statements.

Notes to the Financial Statements

1.Accounting policies

Smithson Investment Trust plc is a company incorporated on 14 August 2018 in the United Kingdom under the Companies Act 2006.

The financial statements of the Company have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).

(a) Accounting convention

The financial statements have been prepared under the historical cost convention (modified to include investments at fair value through profit or loss) on a going concern basis and in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as issued by the International Accounting Standards Board (IASB) and with the Statement of Recommended Practice ("SORP") 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies ("AIC") in November 2014 (and updated in April 2021). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The Directors believe that it is appropriate to continue to adopt the going concern basis for preparing the financial statements for the reasons stated in the Annual Report. The Company is a UK listed company with a predominantly UK shareholder base. The results and the financial position of the Company are expressed in sterling, which is the functional and presentational currency of the Company. The accounting policies have been disclosed consistently and in line with Companies Act 2006.

(b) Critical accounting judgements and sources of estimation uncertainty

The Board confirms that no significant accounting judgements or estimates have been applied to the financial statements and therefore there is not a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(c) Presentation of the Statement of Comprehensive Income

In order to better reflect the activities of an investment trust company, and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 1158 of the Corporation Tax Act 2010.

(d) Income

Income from investments (other than capital dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend, or where no ex-dividend date is quoted, when the Company's right to receive payment is established. Special dividends are credited to capital or revenue, according to the circumstances.

Interest receivable and payable is recognised on an accruals basis.

(e) Expenses

All expenses, other than those of a capital nature, are charged to the revenue account. Expenses of a capital nature are charged to the capital account. Revenue and capital expenses are recognised on an accruals basis.

(f) Investments

Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market price. Gains and losses arising from changes in fair value are included in net profit or loss for the year as a capital item in the Statement of Comprehensive Income and are ultimately recognised in the capital reserve.

Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of Comprehensive Income.

The Company derecognises a financial asset only when the contractual right to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been accumulated in equity is recognised in capital on the Statement of Comprehensive Income.

(g) Foreign currencies

Monetary assets and liabilities denominated in foreign currencies are translated into sterling at rates of exchange ruling at the date of the Statement of Financial Position or at the related forward contract rate. Transactions in foreign currency are converted to sterling at the rate ruling at the date of the transaction. Differences in the sterling equivalent value arising between the transaction date and the settlement or payment date are included as exchange gains or losses in the capital account or the revenue account depending on whether the underlying transaction is of a capital or revenue nature.

(h) Cash and cash equivalents

Cash and cash equivalents comprise cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.

(i) Equity dividends

Interim dividends are recognised in the period in which they are paid. Final dividends are not recognised until approved by shareholders in the Annual General Meeting.

(j) Other receivables and other payables

Other receivables and other payables do not carry any interest and are short term in nature and are accordingly stated at their amortised cost, which is the same as fair value.

Financial assets held at amortised cost are reviewed for impairment using the credit loss model. Given the nature of the Company's short-term receivables, no credit losses have occurred to date and no credit losses are currently expected to occur in the future.

(k) Nature and purpose of reserves

Share capital

This represents nominal value of the issued share capital.

Share premium account

This account represents share premium that arose on the issue of new shares.

Capital reserve

This reserve reflects any:

·         gains or losses on the disposal of investments

·         foreign exchange gains and losses of a capital nature;

·         the increases and decreases in the fair value of investments which have been recognised in the capital account; and

·         expenses which are capital in nature.

The capital reserve may be distributed by way of dividends. However, any gains in the fair value of investments that are not readily convertible to cash are treated as unrealised gains in the capital reserve and are non-distributable.

Revenue reserve

This reserve reflects all income and expenditure recognised in the revenue account and is distributable by way of dividend.

(l) Taxation

The charge for taxation is based upon the revenue for the year and is allocated according to the marginal basis between revenue and capital using the Company's effective rate of corporation tax for the accounting year.

Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed, relating to transactions or events that result in an obligation to pay more or a right to pay less tax in future, that have occurred at the Statement of Financial Position date. Deferred tax is measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

(m) Adoption of new and revised standards

At the date of authorisation of these financial statements the following standards and amendments to standards, which have not been applied in these financial statements, were in issue, but not yet effective.

·         IFRS 17, 'Insurance contracts' (effective for accounting periods beginning on or after 1 January 2023).

·         Amendments to IAS1 'Classification of liabilities as current or non-current' (effective for accounting periods beginning on or after 1 January 2023).

·         Amendments to IAS 8 'Definition of Accounting Estimates' (effective for accounting periods on or after 1 January 2023).

·         Amendments to IAS 1 and IFRS Practice Statement 2 'Disclosure of Accounting Policies' (effective for accounting periods on or after 1 January 2023).

·         Amendments to IAS 12 'Deferred Tax related to Assets and Liabilities arising from a Single Transaction' (effective for accounting periods on or after 1 January 2023).

The Company does not believe that there will be a material impact on the financial statements or the amounts reported from the adoption of these standards.

In the current financial year the Company has applied the following amendments to standards:

IFRS 9, IAS 39, IFRS 7, IFRS 16 and IFRS 4: Interest Rate Benchmark Reform - phase 2 (amended) (effective for accounting periods beginning on or after 1 January 2021).

There is no material impact on the financial statements or the amounts reported from the adoption of these amendments to the standards.

2. Dividend income

3.Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business being the investment business. The Company's objective is to be an investment for investors seeking increasing capital growth and income over the long term. The accounting policies of the operating segment, which operates in the UK, are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on total profit before tax, which is shown in the Statement of Comprehensive Income. A geographical split of the portfolio can be seen in the Strategic Report.

4.Investment management fee

As at 31 December 2021, an amount of £2,576,000 (2020: £1,768,000) was payable to the Investment Manager. Details of the terms of the Investment Management Agreement are provided in the Annual Report.

5. Other expenses

* Other expenses include VAT of £56,000 as a net debit amount (2020: £80,000 net credit), which includes £181,000 recovered in relation to 2021. (2020: £109,000 recovered in relation to 2019).

Transaction costs on fair value through profit or loss investments represent such costs incurred on both purchases and sales of those investments. Transaction costs on purchases amounted to £593,000 (2020: £509,000) and on sales amounted to £46,000 (2020: £75,000).

No non-audit fees were paid during the year to Deloitte LLP by the Company (2020: nil).

6. Taxation

(a) Analysis of tax charge in the year

(b) The tax charge for the year is lower than the standard rate of corporation tax in the UK of 19%. The differences are explained below:

As at 31 December 2021, the Company had unrecognised tax losses of £58.9 million (2020: £31.4 million) carried forward. Due to the Company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.

7. Return per share

Return per ordinary share is as follows:

Return per share is calculated based on returns for the year and the weighted average number of 159,284,761 ordinary shares in issue from 1 January 2021 to 31 December 2021. (2020: 125,066,574)

8.Dividends

There are no dividends proposed, declared or payable for the year (2020: nil).

9.Investments held at fair value through profit or loss

All investments are designated as fair value through profit or loss on initial recognition, therefore all gains and losses arise on investments designated as fair value through profit or loss.

The Company received £127,272,000 (2020: £203,569,000) excluding transaction costs from investments sold in the year. The book cost of the investments when they were purchased was £92,593,000 (2020: £154,868,000) excluding transaction costs. These investments have been revalued over time until they were sold and unrealised gains/losses were included in the fair value of the investments.

All investments are listed.

Fair value of financial instruments

Under IFRS 13 'Fair Value Measurement' an entity is required to classify investments using a fair value hierarchy that reflects the significance of the inputs used in making the measurement decision.

The following shows the analysis of financial assets recognised at fair value based on:

·         Level 1 - quoted prices in active markets for identical instruments.

·         Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc.).

·         Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments).

Fair value measurements recognised in the Statement of Financial Position

10. Receivables

The above receivables do not carry any interest and are short term in nature. The Directors consider that the carrying values of these receivables approximate their fair value.

11. Payables

12. Share capital

During the year ended 31 December 2021, the Company issued 30,277,000 (2020: 26,910,000) shares of £0.01 each for a net consideration of £531,406,000 (2020: £398,149,000). Details of the shareholder authorities granted to Directors to issue and buy back shares during the year are provided in the Annual Report.

13. Share premium account

14. Net asset value per share

15.Risk management and financial instruments

The Company's investing activities undertaken in pursuit of its investment objective, as set out in the Strategic Report, involve certain inherent risks. The Board monitors the Company's risk as described in the Strategic Report. The main risks arising from the Company's financial instruments are market price risk, interest rate risk, liquidity risk, credit risk and currency risk. The Board reviews and agrees policies for managing each of these risks as summarised below. These policies have remained substantially unchanged during the current year.

Market price risk

Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets on four scheduled occasions in each year and at each meeting it receives sufficient financial and statistical information to enable it to monitor adequately the investment performance and status of the business. The Board has also established a series of investment parameters, per the Company's investment policy, designed to manage the risk inherent in managing a portfolio of investments.

Interest rate risk

Interest rate risk is the risk of movements in the value of, or income from, cash balances that arise as a result of fluctuations in interest rates. The Company finances its operations through equity and retained profits including capital profits, with no additional financing.

Liquidity risk

The Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of cash balances and short-term bank deposits. All payables are due within three months.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This is mitigated by the Investment Manager reviewing the credit ratings of broker counterparties and key third party service providers. The risk attached to dividend flows is mitigated by the Investment Manager's research of potential investee companies. The Company's custodian bank is responsible for the collection of income on behalf of the Company. Cash is held with Northern Trust Company which has a Fitch rating of AA-.

The carrying amounts of financial assets best represents the maximum credit risk exposure at the Statement of Financial Position date, and the main exposure to credit risk is via the Company's custodian who is responsible for the safeguarding of the Company's investments and cash balances.

At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:

All the assets of the Company which are traded on a recognised exchange are held by Northern Trust, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.

Currency risk

The income and capital value of the Company's investments and liabilities can be affected by exchange rate movements as some of the Company's assets and income are denominated in currencies other than sterling which is the Company's functional currency. The key areas where foreign currency risk could have an impact on the Company are:

·         movements in rates that would affect the value of investments, assets and liabilities; and

·         movements in rates that would affect the income received.

The Company had the following currency exposures, all of which are included in the Statement of Financial Position at fair value based on the exchange rates ruling at the year end.

The Company mitigates the risk of loss due to exposure to a single currency by way of diversification of the portfolio.

Foreign currency sensitivity

At 31 December 2021, an exchange rate move of +/-5% (2020: +/-5%) against sterling which is a reasonable approximation of possible changes would have increased or decreased total net assets and total return by £131,493,000 (2020: £88,823,000).

Interest rate risk

The majority of the Company's financial assets are equity shares and other investments which neither pay interest nor have a maturity date. The Company's cash balance of £32,081,000 (2020: £50,046,000) earns interest, calculated on a tiered basis, depending on the balance held, by reference to the base rate. The level of interest paid fluctuates in line with the base rate. At 31 December 2020 the interest rate was 0% (2020: 0%).

Should the Company earn interest on its cash balances, an increase or decrease in interest rates of 0.5% would have a positive or negative impact respectively on the profit or loss and net assets of the Company equating to £160,000 (2020: £250,000). The calculations are based on the cash balances at the year end date and are not representative of the year as a whole.

No current liabilities incur interest and all are payable within one year.

Other price risk exposure

If the investment valuation had fallen by 20% (2020: 0.05%) at 31 December 2021, the impact on profit or loss and net assets would have been negative £667,830,000 (2020: £455,987,600). An increase of 20% (2020: 20%) would have had an equivalent opposite effect. The calculations are based on the portfolio valuations as at the respective year end date and are not representative of the year as a whole, as well as the assumption that all other variables remained constant.

The Company held the following categories of financial instruments, all of which are included in the Statement of Financial Position at fair value.

Liquidity risk exposure

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. All payables are due within three months.

Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are easily and readily realisable. The Company does not have any borrowing facilities and as at 31 December 2021 held £32,081,000 (2020: £50,046,000) in cash.

Capital management policies and procedures

The Company's capital management objectives are to ensure that it will be able to continue as a going concern, and to provide long-term growth in revenue and capital.

The Company's capital is its equity share capital and reserves that are shown in the Statement of Financial Position at a total of £3,367,070,000 (2020: £2,331,950,000).

The Board, with the assistance of the AIFM, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This includes a review of the planned level of gearing (if any), the need to repurchase or issue equity shares, and the extent to which any revenue in excess of that which is required to be distributed be retained.

16.Contingent liabilities

As at 31 December 2021 there were no contingent liabilities or capital commitments (2020: nil).

17.Related party transactions

IAS 24 'Related party disclosures' requires the disclosure of the details of material transactions between the Company and any related parties. Accordingly, the disclosures required are set out below:

Directors - The remuneration of the Directors totalling £120,000 (2020: £84,000), is set out in the Directors' Remuneration Report in the Annual Report. There were no contracts subsisting during or at the end of the year in which a Director of the Company is or was interested and which are or were significant in relation to the Company's business. There were no other material transactions during the year with the Directors of the Company. The Company has no employees.

AIFM and Investment Manager - Details of the contract including the remuneration due to the AIFM and Investment Manager are set out in the Annual Report.

Terry Smith and other founder partners and key employees of the AIFM and Investment Manager directly or indirectly and in aggregate, held 3,073,866 (2020: 3,063,180) shares in the Company amounting to 1.7% (2020: 2.2%) of the issued share capital of the Company as at 31 December 2021.

18.Events after the reporting period

Since the year end and up to 10 March 2022 (the latest practical date before publication of the Annual Report), the Company has issued 5,235,000 ordinary shares raising net proceeds of £89.8 million.

19. Financial information

This announcement does not constitute the Company's statutory accounts.  The financial information is derived from the statutory accounts for the year ended 31 December 2021, which will be delivered to the Registrar of Companies after being put forward for adoption at the Company's Annual General Meeting. The auditors have reported on the accounts for the year ended 31 December 2021, their report was unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006.

The Annual Report for the year ended 31 December 2021 was approved by the Board on 14 March 2022.  It will be made available on the Company's website at www.smithson.co.uk

The Annual Report will be submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

This announcement contains regulated information under the Disclosure Rules and Transparency Rules of the FCA.

20. Annual general meeting

The Annual General Meeting will be held at 1.00 p.m. on 3 May 2022 at the Guy Whittle Auditorium,The Royal Society of Medicine, 1 Wimpole Street, Westminster, London W1G 0AE. Details of the meeting are available in the Notice of Meeting published on the Company's website www.smithson.co.uk.

14 March 2022

Secretary and registered office:

Sanne Fund Services (UK) Limited

6th Floor

125 London Wall

London

EC2Y 5AS

For further information contact:

Sanne Fund Services (UK) Limited

Tel: 020 3327 9720