Terry Smith to Launch Emerging Market Equities Trust

Three years after Terry Smith's Bronze rated long-term equity fund Fundsmith was born, the controversial manager is launching an emerging markets equivalent

Emma Wall 24 January, 2014 | 3:03PM

Buy a stock and hold it forever. It seems an idealistic view of the market, but it is a strategy that City stalwart Terry Smith aims for. 

Although the former Collins Stewart employee made his millions managing other people's portfolios, some time during the financial crisis Smith saw the light and committed to running low-cost money for the masses.

Smith launched the Fundsmith Equity fund in November 2010 and in its first three years the fund returned an impressive 61% to investors - and earned a Morningstar analyst Bronze rating.

As he advocated a buy and hold strategy Smith did not reveal his top 10 holdings at launch for fear of copy-cats, although these were later published and revealed he favoured high-quality large companies. These are best in class stocks, with large economic moats and the clout to dominate their competitors in the future. 

"In many ways the fund is as characterised by what it won’t own as by what it will. The overriding philosophy is that Smith looks to invest in companies that are compoundable earners, which, in an ideal world, he could own forever," says Morningstar analyst Ruli Vilijoen. 

Smith employs a process which screens out companies that require leverage, are cyclical, or have a high degree of obsolescence.

He also positive screens for stocks that achieve an operating return and a spread of more than 3% above their cost of capital as well as those that achieve consistent growth.

It is this same methodology that he will apply to the new Fundsmith Emerging Equities Trust, due to be launched this year. 

Smith says he has identified an investable universe of over more than 150 companies for FEET, many are already known to us as they are quoted subsidiaries, associates or franchisees of companies which he already researches for the Fundsmith Equity Fund.

Smith has chosen to adopt closed-ended investment trust strategy for this fund, due to concerns about liquidity when investing in emerging markets. The flagship Fundsmith Equity fund is an open-ended fund.

"As an investment trust, FEET will overcome the issue of combining an open-ended fund with stocks which have limited liquidity in the underlying investments since it will raise an initial fixed amount of capital, to which I will subscribe," said Smith.

This is the first time Smith has run an emerging market mandate.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Fundsmith Equity R Acc4.12 GBP0.00

About Author

Emma Wall

Emma Wall  is Web Editor for Morningstar.co.uk.

Audience Confirmation

By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites