Terry Smith exits Fundsmith Emerging Equities Trust: What now for investors?
Fundsmith LLP has given notice to the board of FEET (£350m market cap) that it wants to end its agreement to manage the fund.
In response, the board announced its intention to place the company into voluntary liquidation, with the cash proceeds returned to shareholders.
Terry Smith, CEO and CIO of Fundsmith LLP, said: “We have always maintained 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.”
The board confirmed it had sought the views of its largest shareholders and professional advisers, with the next steps including a general meeting to approve the liquidation, delist the company and return cash to investors. If approved, it is anticipated the company will be placed into voluntary liquidation by the end of November.
Martin Bralsford, chairman of the board, said: “We would like to thank Terry and his team for the diligent effort they have made over the last eight years as investment manager. We believe it to be in the best interests of shareholders as a whole to liquidate the portfolio and return their cash to them.”
As an example, investment platform Interactive Investor said cash will go into customer II accounts where they will then be able to reinvest or withdraw cash to bank accounts.
‘No nonsense style’
Darius McDermott, managing director of Chelsea Financial Services and FundCalibre, said: “This is just Terry’s typical no-nonsense style, really. The bottom line is, the fund hasn’t performed well enough and Fundsmith and the board have decided that the best thing for investors is to return the capital, even if this means Fundsmith itself will no longer own a fee on the trust. It’s a shame more asset managers don’t behave like this in their clients’ interests. This sort of thing happens too rarely.”
He explained that for large periods of time since the launch, “the NAV has consistently underperformed and the share price even more so”, adding that if shareholders now get back NAV instead of a discounted share price, “they will be happier too”.
“It’s not a small trust but neither the investment manager nor the board obviously think things are going to improve so they have taken this decision,” he said.
McDermott added: “We should also remember that Terry has not actually been a manager on this fund for quite a while now (he stepped back in May 2019). I don’t see this having any impact on his reputation as a manager, as by far the main focus of investors will be on the main Fundsmith equity fund where most client money is held.”
This is echoed by Jason Hollands, managing director at Bestinvest, who said: “In the grand scheme of things though, the management of the portfolio looks like a distraction for the firm whose flagship product, the developed market focused Fundsmith Equity fund, towers at £23.5bn.”
A surprise move
Elsewhere, investment analysts have remarked about the surprise move not to bring in a new fund manager or bring in a rollover option for the trust’s DIY investors.
Ben Yearsley, investment director at Shore Financial Planning, said: “Terry has sacked himself and rather than the board trying to find a new manager they have decided to sell all the investments and return the proceeds to investors. It is a bit of a surprise they didn’t look for a new manager as the trust was of a reasonable size.”
However, Hollands said that while the board has stated it intends to seek a voluntary liquidation, “it would not surprise me if in light of this surprising news they were approached by other asset managers who would readily pitch to manage the portfolio or other investment trusts who might be willing to explore a merger.”
Dzmitry Lipski, head of funds research at Interactive Investor, said: “The board have sought the views of large shareholders and are proposing a voluntary liquidation. While this is absolutely no bad thing, we are a little surprised to see, to date, no talk of a potential rollover option (with either investment trust or fund options). 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.”
Details of exactly how and when investors will have their money returned (whether they invest directly or via a platform) will be provided by the board in due course.
Time to buy emerging markets?
For Yearsley, a trust winding up “isn’t that common”, though it did happen last month with another emerging market trust – Jupiter Emerging and Frontier Income Trust – which he said was “simply too small”.
However, he added: “Two going in a short space of time probably indicates it’s time to buy emerging markets. Funds and trusts closing is a sign of investors losing patience which is normally a buying signal.”
For investors who will see their cash returned but who want to keep investing in emerging markets, he lists Fidelity Emerging Markets Limited for the long-term mainly growth style, as well as Stewart Investors Global Emerging Markets Sustainability Fund or Future World Fund – Alquity for the quality of fund managers. “All have long-term growth styles which I think you need in emerging markets as it’s one of the long-term growth stories. The latter two do well on ESG, something which is harder to do with EM.”
McDermott lists these fund picks and the reason behind his choices:
JPMorgan Emerging Markets Investment Trust: “Backed by one of the largest emerging market research teams, manager Austin Forey has delivered excellent returns on this trust for more than two decades, emphatically demonstrating his long-term approach to stock picking has been successful, whilst also being able to evolve this portfolio to meet changing trends. Austin’s experience is also a significant advantage for the portfolio, having managed the vehicle through numerous crises in the region.”
GQG Partners Emerging Markets Equity: “GQG Partners Emerging Markets Equity is a concentrated portfolio of high quality companies with durable earnings. The emphasis is on future quality, rather than companies which have simply done well historically. This fund and business has a very clear and well thought out approach and the manager is extremely experienced. We think the well-designed process and flat structure of the team puts the GQG Partners Emerging Markets Equity fund in a strong position to outperform in the future. We like the investment they’ve made in research and the use of former investigative journalists and specialist accountants to help give them an edge.”
Federated Hermes Global Emerging Markets SMID Equity: “The small and mid-cap opportunities in emerging markets are enormous, but also carry significant risk. The comprehensive process of the Federated Hermes Global Emerging Markets SMID Equity fund helps to manage the potential pitfalls. It is a concentrated fund focusing on small and medium-sized companies across global emerging markets. The fund was originally launched in 2018 under veteran fund manager Gary Greenberg. Co-manager Kunjal Gala took on sole responsibility for the fund in 2022 when Gary retired. The investment approach the fund employs remains unchanged.”