‘Fallen below our expectations’: Fundsmith emerging markets trust to close

The trust, which launched in June 2014, did not successfully translate Terry Smith’s successful stock picking formula into the emerging markets.

Terry Smith has called time on Fundsmith Emerging Equities Trust (LSE:FEET), conceding that performance has “fallen below our expectations”.

The trust, which launched in June 2014, attempts to replicate Smith’s successful stock picking formula in developed markets to the emerging market region. However, performance has not lived up to its billing, which has led Smith to act.

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In a stock exchange announcement this morning, the board of Fundsmith Emerging Equities Trust said it had been notified by Fundsmith that it intends to give notice to no longer be the fund manager. In light of this, proposals will be put forward to liquidate the trust, with cash being returned to shareholders.

The board said it “sought the views of its largest shareholders and its professional advisors and believes that the proposals are in the best interests of shareholders as a whole.”

The proposed liquidation will be put to a shareholder vote, and if approved it is expected that Fundsmith Emerging Equities Trust will be placed into voluntary liquidation by the end of November.

There's no rollover option, which does come as a surprise as usually this is offered. 

Terry Smith, chief executive officer and chief investment officer of Fundsmith, said: "We have always maintained that we would only run funds where we felt we had a particular edge that would allow us to deliver superior risk-adjusted returns.

“Whilst FEET has made a positive return since launch in 2014 it has fallen below our expectations and, unlike other fund managers who might seek to hold onto the fund for the sake of the fee income, we feel it would be in the best interests of shareholders to receive their investment back in cash through a liquidation of the portfolio and wind-up of the company."

As Smith points it out it is rare that a fund management firm moves to close down a fund or an investment trust on performance grounds, especially when FEET has total assets of £377 million, so is no minnow. Largely due to investor inertia, many funds that do not deliver market-beating performance remain open with sticky assets. Whether or not the fund outperforms, the annual fee is still taken. Smith’s move to act is, in my view, refreshing.

Dzmitry Lipski, head of funds research at interactive investor, expressed his surprise at no potential rollover option (with either investment trust or fund options).

He points out: "Structured in the right way, they can be tax efficient and give investors the option to sell at a time of their choosing.

“Even so, we do agree that it can be far better to wind an investment trust up and return money to shareholders, than to limp on for years while taking fees from investors.”

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Why it couldn’t find its FEET

Terry Smith is one of the UK’s most well-known fund managers. His open-ended Fundsmith Equity fund has been a blinding success. In short, Smith’s approach is to “buy good companies, don’t overpay, do nothing”.

The jury is still out on Smithson Investment Trust (LSE:SSON), an investment trust that aims to take the Fundsmith investment philosophy and apply it to global smaller companies.

Launched in October 2018, the trust got off to a strong start, but has in line with other smaller company focused funds struggled in 2022, with its share price down 35.2%. Over three years its share price total return is 3.1% versus 9% for the average global smaller companies trust (of which there are only five in the sector). Since launch it has outperformed rivals, up 29.5% compared to a 22% return for the average global smaller company trust. It is managed by Simon Barnard. 

However, the same cannot be said for FEET. Since launch the trust’s share price total return is 22.3% versus 42.6% for the average global emerging market trust. Over one and three years it is ahead of the average trust, but this was presumably not enough to convince Smith to keep running it.

In May 2019, Smith stepped down from the day-to-day running of the trust. It was handed over to Michael O’Brien and Sandip Patodia as portfolio manager and assistant portfolio manager, respectively. Smith is chief investment officer.

At the time, Smith apologised to investors who felt disappointed by his move away from being the trust’s lead manager.

FEET’s portfolio barely resembles most emerging market trusts or open-ended funds. Its approach is to invest in good businesses that have exposure to the rise of the consumer in emerging economies.

As a result, consumer staple companies are well-represented, accounting for 44.4% of assets. In contrast, the MSCI Emerging and Frontier Market index (FEET’s benchmark) has a weighting to the sector of just 6.3%.

Meanwhile, the trust is underweight several of the region’s most prominent sectors. For example, financials are the largest sector in the MSCI Emerging and Frontier Market index, with a weighting of 21.9%. FEET has just 2% in financials.

Technology is also an underweight position in FEET, with the trust owning 13.4% versus 19.2% for its benchmark.

The emphasis on consumer staple companies has seen FEET build up a portfolio that is heavily overweight India. The country accounts for 44.9% versus 14.3% for the index.