Procter & Gamble

We won’t be buying shares in companies simply because they are large and dominate the index weightings and performance unless we become convinced that they are good businesses of the sort we wish to own which have long term relatively predictable sources of growth and more than adequate returns on the capital they invest. Whilst we are going to stick to our investment strategy we will of course seek to do it better. We are fans of many of the late Charlie Munger’s pronouncements but the one which best applies here is ‘Any year that you don't destroy one of your best-loved ideas is probably a wasted year.’ More to follow. Looking at individual stock contribution to performance in 2025 as usual I prefer to start with the problems. The bottom five detractors from the Fund’s performance in 2025 were: Stock Attribution Novo Nordisk -2.0% Greggs -1.7% Church & Dwight -1.5% Zoetis -1.2% Procter & Gamble -1.0% Source: State Street Novo Nordisk managed to reaffirm my belief that you should never say ‘Things can’t get any worse’. The company has parlayed a market leading position in what is probably the most exciting drug development for about three decades into a secondary position and has failed to prevent illegal generic competition in its core US market. One of our mantras has been that we should always invest in businesses which could be run by an idiot so that performance is not heavily reliant upon management.

Church & Dwight, the consumer staples business, seems to be suffering from the fact that the mixed fortunes of different groups of consumers in the US economy, far from driving consumers towards its discount products, is instead impoverishing those consumers who naturally gravitate towards them. Zoetis is the leading maker of veterinary pharmaceuticals. We began buying after concerns had surfaced about side effects from its drug for pain in osteoarthritis in dogs. The shares have continued to be weak but we feel sure that the secular tailwinds from increased spending on pets’ medical care will support the business. Procter & Gamble was caught up in the general malaise surrounding consumer staples which have been adversely affected as the air has been sucked out of the room by the race to invest in AI. In an age in which analysts rely on spoon fed forecasts in the form of ‘guidance’ and there is limited liquidity as the NBER paper suggests, results which fall short of optimistic guidance can produce spectacularly bad share price movements. For the year, the top five contributors to the Fund’s performance were: Stock Attribution Alphabet +2.3% IDEXX +2.1% L’Oréal +0.9% Microsoft +0.6% Mettler-Toledo +0.4% Source: State Street Alphabet makes its third appearance.

1% during the period, a little higher than usual. It is perhaps more helpful to know that we spent a total of just 0.008% (just under one basis point) of the Fund’s average value over the year on voluntary dealing (which excludes dealing costs associated with subscriptions and redemptions as these are involuntary). We sold our stakes in Adobe, Amazon and Estée Lauder and purchased stakes in Procter & Gamble, Marriott and Fortinet. As last year this may seem a lot of names for what is not a lot of turnover as in some cases the size of the holding sold or bought was small. We have held ten of our companies for more than 10 years, five of which since inception in 2010. Why is this important? It helps to minimise costs and minimising the costs of investment is a vital contribution to achieving a satisfactory outcome as an investor. Too often investors, commentators and advisers focus on, or in some cases obsess about, the Annual Management Charge (‘AMC’) or the Ongoing Charges Figure (‘OCF’), which includes some costs over and above the AMC, which are charged to the Fund. The OCF for 2023 for the T Class Accumulation shares was 1.04%.does

Where we have seen him involved in companies we have owned we have sometimes agreed with and admired his contribution — as in the operational improvements which accompanied his time at Procter & Gamble — and sometimes not — as when he promoted the idea of splitting PepsiCo into separate drinks and snacks businesses. What I find questionable is that companies mouth platitudes about wanting to attract long-term shareholders yet based on our experience, we tend to get ignored, whereas an activist who has held shares for fewer months than we have held in years gets invited to board meetings. One example may just represent an outlier. But what about PayPal? We had held PayPal shares since it was spun out from eBay in 2015. We tried to engage with PayPal as we identified, seemingly long before the management, that their lack of engagement with new customers was a problem as was cost control and that their acquisitions were value destroying. In particular, we pointed out that the value destroying acquisitions might be avoided if the management remuneration incentives included some measure of return on capital. A representative of the board kindly told us they would think about that. Whilst they were allegedly thinking about it Elliott Management bought a stake which led to them being given a board seat and an information sharing agreement.

However, in both cases whilst they face a difficult situation, we are pleased that management has spent its time and effort managing liquidity and costs in an effort to ensure that they survive these events rather than pointlessly speculating about the likely timescale and course of recovery. In both cases we believe that they should not only survive but also strengthen their competitive position. We sold our stakes in Clorox and Reckitt Benckiser and one as yet undisclosed position and purchased stakes in Starbucks, Colgate, Zoetis, Procter & Gamble and an as yet undisclosed position.purchase

increased quantities of household cleaning products, personal cleaning products and OTC medicines. We felt that in both cases the ratings achieved did not reflect the pedestrian nature of these businesses in more normal circumstances or the issues they face which may come back into focus if or when the COVID related boost fades. Moreover, at the same time as these two stocks were enjoying an unusually good performance, Starbucks, which we admire, saw share price falls of over 40% at the height of the panic over COVID. They are probably familiar to you as the world’s leading coffee shop brand. Starbucks has high returns on capital and a good growth rate — two characteristics which we seek. Whilst it is easy to see the challenge to the lockdowns for Starbucks’s urban outlets which partly rely on seating and coffee collected on the way to the office, this is far from their only format. The sometimes spectacular queues and resulting traffic jams at Starbucks drive-through outlets both illustrate another format and testify to the continued loyalty to the brand as does the rise in loyalty club members in 2020. During this period Starbucks’s main competitor in its second largest market — Luckin Coffee in China — was exposed as a fraud in yet another illustration of the rule that it is only when the tide goes out that you find out who has been swimming naked. After the COVID lockdowns we also purchased a stake in Colgate- Palmolive, Procter & Gamble and Zoetis.

Colgate-Palmolive is the leader in oral care and liquid soap and has a speciality pet food business (Hills Scientific). Procter & Gamble is the world’s largest Fast Moving Consumer Goods (‘FMCG’) business with leading positons in laundry and cleaning products, baby and feminine care, beauty and grooming. Zoetis is the leading animal drug company which is also developing a business in diagnostic testing. We continue to apply a simple three step investment strategy: • Buy good companies • Don’t overpay • Do nothing I will review how we are doing against each of those in turn. As usual we seek to give some insight into the first and most important of these — whether we own good companies — by giving you the following table which shows what Fundsmith would be like if instead of being a fund it was a company and accounted for the stakes which it owns in the portfolio on a ‘look through’ basis, and compares this with the market, in this case the FTSE 100 and the S&P 500 Index (‘S&P 500’). This shows you how the portfolio compares with the major indices and how it has evolved over time.

But in aggregate, on a pre-tax basis, the portfolio of Nifty 50 stocks earned an average return of 12.4%, compared to 11.7% for the overall stock market, a positive margin of 0.7%. This relative advantage grows on an after-tax basis, as the spread between the two returns increases to fully 2% (9.8% vs. 7.8%). This example of long-term returns on a "static portfolio," oriented to growth but bought at a high price, is surely reassuring. There is, Ecclesiastes tells us, nothing new under the sun. And that ancient maxim is in a sense true of my "new" idea. 1 may be one of a tiny handful of mutual fund historians who retain the memory of a similar fund formed in 1938, which provides further confIrmation of the buy-and-hold idea. Structured as a fIxed trust, Founders Mutual Fund originally picked an equal-weighted portfolio of 36 of the blue-chip stocks of the day, which it held, as it happens, until 1983, when the fund abandoned the strategy. And in fact, at the end of that 45 year period, the fimd held the same thirty-six stocks it had owned at the outset, including IBM, Procter & Gamble, duPont, Union PacifIc, and Eastman Kodak-not only durable (by defInition), but successful, enterprises. Prior to the change in its strategy (1 couldn't locate a record of its fIrst fIve years), the Fund earned an average annual return of 10.3% pre-tax, less than the return of 11.6% on the Standard & Poor's 500 Index, a gap predictably engendered in part by the Fund's operating costs of 0.5%.

however, the CEO Mark Schneider should probably not be criticised for this as he is new in the role so he can’t be blamed for any past dilatoriness. To date Third Point’s approach to Nestlé has not lead to anything we are required to vote on which may be just as well. Procter & Gamble (‘P&G’) / Trian Trian is a fund run by Nelson Peltz whom I have already mentioned in the context of PepsiCo. Although we don’t directly have a dog in this particular fight, as we do not have any P&G in our portfolio, it still resides in our Investable Universe and so an investment is still regularly considered by us, and as we sold our stake because of concerns about P&G’s strategy we are interested in what Mr. Peltz had to say. Trian’s plan for P&G was detailed on 6th September. It called for ‘organizing P&G in a way that promotes accountability, faster decisions and responsiveness to local preferences’; ‘ensuring management’s $12–13bn productivity plan actually delivers’; ‘fixing the innovation machine’; ‘improving development of small, mid-size and local brands, both organically and through M&A’; ‘winning in digital’; ‘addressing P&G’s insular culture’; ‘improving corporate governance, including aligning management compensation with market share gains’. The page after these proposals—i.e. very much to the fore of the piece—details what Trian is ‘NOT’ (they wrote the word in capital letters) recommending.

For the year, the top five contributors to the Fund’s performance were: IDEXX Laboratories +3.10% Stryker +2.54% CR Bard +2.06% InterContinental Hotels +1.71% Johnson & Johnson +1.68% The bottom five were: Estée Lauder - 0.06% Procter & Gamble - 0.02% Novo Nordisk +0.07% Colgate Palmolive +0.23% Imperial Brands +0.37% The largest contributor, IDEXX, is a company which we began buying in 2015. It is the world’s largest maker of veterinary testing equipment. In contrast, we have held stakes in Stryker, InterContinental Hotels and Johnson & Johnson since inception. Of the bottom five performers we sold our stake in Procter & Gamble in January 2016. You may note that out of the five worst contributors to our performance last year, four were consumer stocks and at least three are regularly cited as “bond proxies”. It seems strange to be accused of having benefitted from the popularity of these stocks when in fact they have underperformed. We only recently began buying stakes in Estée Lauder, the US cosmetics business and even more recently in Novo Nordisk, a Danish company, which is the world’s leading supplier of insulins. Turning to the third leg of our strategy which we succinctly describe as “do nothing”, minimising portfolio turnover remains one of our objectives and this was again achieved with a portfolio turnover of -15.6%* during the period.

7%* during the year which was a much more significant contribution to performance. This 4.3% FCF yield compares with a median FCF yield for the non-financial stocks in the S&P 500 Index of 4.4%+ and a mean of 2.7%+ or a median for the non-financial stocks in the FTSE 100 Index of 3.8%+ and a mean of 3.9%+. Our stocks do not look bad value in comparison to the market especially when their relatively high quality is taken into account. Although of course, both may be expensive, but then both may continue to be so or even become more expensive. For the year, the top five contributors to the Fund’s performance were: Dr Pepper Snapple + 1.94% Imperial Tobacco + 1.79% Microsoft + 1.69% Sage + 1.36% Reckitt Benckiser + 1.05% The bottom five were: Procter & Gamble - 0.22% PayPal - 0.15% 3M - 0.02% Kone + 0.02% Colgate Palmolive + 0.05% Of the bottom five performers, the only one which gives us significant cause for concern is Procter & Gamble which is on its third internally sourced CEO in as many years. We sold our holding in Domino’s Pizza during the year since it had reached a valuation which we felt was only justifiable if the current rapid rate of growth is sustainable, which we would doubt. However, we sold it with some regret and trepidation.is

The main positive contributors to that performance in 2012 were: Intercontinental Hotels, L’Oreal, Reckitt Benckiser, Kone and Diageo. The main detractors from the Fund’s performance were: Procter & Gamble, McDonald’s, Imperial Tobacco, Becton Dickinson, and a Consumer Company which we are in the course of buying a position in and so would prefer not to name at this point. McDonald’s is a small position as it has only recently come within valuation range for us after reporting a number of periods with poor sales performance. We believe it is a business of the quality which we seek and therefore are willing to use this as an opportunity to buy stock. It might be worth thinking about the implications when a business which sells some meals for one dollar is struggling to grow sales. Clearly this is not because consumers are feeling flush and trading up. Portfolio turnover in the Fund in 2012 was 0.48%. This figure is flattered by the inflow of funds over the period which is not included in the calculation otherwise a new fund would have 100% turnover from investing cash inflows, but even so it is exceptionally low. Our only outright sale during the year was of SGS, the Swiss testing company. We remain convinced that it and the sector are good quality businesses, but the shares had reached the point at which they were one of the most highly rated within our Investable Universe and so we thought that there was better value to be found elsewhere.

66 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,528 8.22 39,068 5.49 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,884 3.78 20,676 2.90 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,211 .17 1,198 .17 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏÏÏÏÏÏ 246 .03 5,233 .73 92,033 12.93 77,973 10.95 Realized investment gains (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 216,606 30.42 Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $92,033 $12.93 $294,579 $41.37 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. (4) Includes $216,112,000 ($30.35 per share) from the tax-free exchange of Wesco's common shares in The Gillette Company for common shares in The Procter & Gamble Company in connection with the merger of Gillette with Procter & Gamble. Although no cash was received, generally accepted accounting principles required that the gain be recorded. Because Wesco's balance sheet reÖects investments carried at market value, with unrealized gains, after applicable income tax eÅect, included in shareholders' equity, the transaction did not aÅect Wesco's shareholders' equity.

9 million recorded in 2005, other operating earnings would have been $.3 million in 2005. The sources of the $.2 million of other operating earnings in 2006 were (1) rents ($3.7 million gross in 2006) principally from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Investment Gains There were no realized investment gains in 2006. Wesco's 2005 earnings contained investment gains of $216.6 million, after income taxes. Only $.5 million was realized through the sale of investments; the balance, $216.1 million, resulted from the tax-free exchange of common shares of The Gillette Company (""Gillette'') owned by Wesco, for common shares of The Procter & Gamble Company (""PG'') in the fourth quarter of 2005 in connection with the merger of Gillette with PG. Accounting standards promulgated by the Financial Accounting Standards Board require that the fair (market) value of shares received in such an exchange be recorded as the new cost basis as of the date of the exchange, with the diÅerence between the new basis and the historical cost realized in the audited Ñnancial statements as an investment gain.

49 26,302 3.69 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,676 2.90 5,022 .71 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,198 .17 1,094 .15 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏÏÏÏÏÏ 5,233 .73 391 .06 77,973 10.95 47,427 6.66 Realized investment gains (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 216,606 30.42 Ì Ì Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $294,579 $41.37 $47,427 $6.66 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. (4) Includes $216,112,000 ($30.35 per share) from the tax-free exchange of Wesco's common shares in The Gillette Company for common shares in The Procter & Gamble Company in connection with the merger of Gillette with Procter & Gamble. Although no cash was received, generally accepted accounting principles require that the gain be recorded. Because Wesco's balance sheet reÖects investments carried at market value, with unrealized gains, after applicable income tax eÅect, included in shareholders' equity, the transaction did not aÅect Wesco's shareholders' equity.

Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $5.2 million in 2005, up from the $.4 million earned in 2004. Ignoring favorable income tax adjustments of $4.9 million, the sources of the $.3 million of earnings in 2005 were (1) rents ($3.5 million gross in 2005) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Investment Gains Wesco's 2005 earnings contained investment gains of $216.6 million, after income taxes. There were no realized investment gains in 2004. Of the 2005 gains, only $.5 million was realized through the sale of investments; the balance, $216.1 million, resulted from the tax-free exchange of common shares of The Gillette Company (""Gillette'') owned by Wesco, for common shares of The Procter & Gamble Company (""P&G'') in the fourth quarter of 2005 in connection with the merger of Gillette with P&G.

Lynch sorted companies into six boxes — slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds — and treated each category with a different set of expectations. Slow growers, in his framing, are businesses whose earnings growth has settled into the low single digits; the only reason to own them is the dividend, so the question becomes whether the payout is safe and rising. Stalwarts are the ten-to-twelve percent growers — solid multinationals like Coca-Cola or Procter & Gamble that are rarely cheap but rarely mispriced by much; their role in a portfolio is to compound through boring years. Fast growers were Lynch's preferred habitat: small, aggressive companies growing earnings at twenty to twenty-five percent a year. The mathematics of compounding turns a twenty percent grower into a five-bagger in nine years and a ten-bagger in thirteen. Lynch's edge came from finding such growers while they still had years of runway left, often in industries the institutional consensus considered unfashionable. The risk is that growth decelerates — when a fast grower slips to a slow grower, the multiple collapses twice, once for the slower growth and once for the disappointment. The discipline is to sell the moment the story breaks, not the moment the price falls. Cyclicals, asset plays, and turnarounds each demand a different lens. Cyclical stocks — aluminium, autos, chemicals — rise and fall with the cycle, and timing matters more than quality. The classic mistake is buying a cyclical at peak earnings when the price looks 'cheap' on a trailing P/E. Asset plays are companies whose real value sits in land, timber, oil reserves, or a hidden subsidiary that the market is ignoring; the catalyst is a sale, a spin-off, or a buyout. Turnarounds are businesses in trouble that can be saved — the classic being Chrysler in the early eighties. Each requires a different sell discipline: cyclicals get sold when capacity is being added, asset plays get sold when the hidden value is realised, turnarounds get sold when the rescue is complete.