Terry Smith: I Will Learn from Anthony Bolton's Mistakes

As another high profile fund manager with no experience running money in emerging markets launches an trust doing just that, we find out why he says this one won't fail

Emma Wall 12 August, 2014 | 8:50AM
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Emma Wall: Hello and welcome to the Morningstar series 'Why Should I Invest with You?' I'm Emma Wall and here with me today is Terry Smith, chief executive of Fundsmith. Hello, Terry.

Terry Smith: Hi.

Wall: So we are here today to talk about the six week old Fundsmith Emerging Equity Trust, (FEET). I remember when you launched Fundsmith Equity four years ago and you said in your beautiful colourful bumf. That this was going to be the only fund that anybody ever needed to hold. And now you are launching a second, so what's changed in the last four years?

Smith: Mainly our response to a question that a lot of investors have asked us. Which is they asked us over the last four years: Do you like exposure to emerging markets in the companies that you invested in the Fundsmith Equity Fund? The answer is, yes, by and large. I mean there is a more complex answer, that depends which markets or which products – I’m fairly critical if we think about emerging markets in blanket terms. But yes is the short answer. Then the logical supplementary that they usually ask is, well if you like it that much why don’t own any of the companies that operate directly in emerging markets. Why don’t you own Hindustan Uniever (500696) in India rather than Unilever (ULVR) for example.

And the short answer for that is liquidity. The emerging markets companies are ones that are in the same industries, but in emerging markets that are much less liquid than the ones that are multinationals that we invested in the main Fundsmith Equity fund. The Fundsmith Equity fund is a daily dealing open ended fund. I think if we are to put these much less liquid companies. There is always the risk that either an inflow of funds or even worse an outflow of funds would occur that we couldn’t satisfy. So we just needed a new structure. It's exactly the same strategy. But we needed a new fund to do it because we couldn't have handled liquidity otherwise.

Wall: You are not the only high profile fund manager in recent history to go from running an open ended successful performance wise global or non-emerging market fund to launching an emerging market trust. I mean Anthony Bolton did fantastically with Fidelity Special Sits and then did extremely poorly when he went to China. What's to stop you being Anthony Bolton mark II?

Smith: I think probably the main thing is we've seen Anthony Bolton mark I and thought about it quite a bit. I mean Anthony went from running a fund which basically concentrated on U.K. mid-cap in special situations. And then went to run a fund totally focused on one country China. And I think that, that was quite a big leap. We are actually taking the same strategy; so in Fundsmith Equity Fund. Investing companies would supply your everyday necessities and luxuries. Your food and your drink and your snacks, your cosmetics your toiletries your household cleaning products and so on. Your small ticket medical equipment syringes and shots and catheters and tubes and buying exactly the same companies in emerging markets.

Secondly we're doing of course a wide range of emerging markets. We are doing it across Latin America and Africa and Asia we're not doing it in a single country and finally. Some of the companies that we are investing in the new Fundsmith Emerging Equity Trust are basically offshoots of the companies in the Fundsmith Equity Funds. They are, the local call it subsidiaries and associates and franchises of those company. So we think we know quite a lot about them.

Wall: By your own admission getting into Fundsmith Equity is quite a difficult tasks for companies you have only managed to find 65 companies globally that pass that stringent testing system. Emerging markets is a smaller pool, you are reducing the universe. So what's to say you are going to be able to find enough stocks to invest in?

Smith: We can do stocks of a smaller size in the new Fundsmith Emerging Equity Trust. Basically if you look at the main Fundsmith Equity Fund the average market value, market capitalization of the stocks is about £55 billion. We actually have a universe for the new fund. Which is £3.5 billion. So we can actually look further down the size scale which we can afford to do because it's a closed end fund the Trust. So at the moment I think last on my count we've found 36 companies to invest in and I'm absolutely certain we'll find more.

Wall: Terry, thank you very much.

Smith: Okay.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Fidelity Special Situations5,335.39 GBP0.86Rating
Fundsmith Equity R Acc6.43 GBP-0.70Rating
Hindustan Unilever Ltd2,621.00 INR-0.05
Unilever PLC4,443.00 GBX0.20Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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