Terry Smith Steps Back from Emerging Markets Trust

The veteran investor is handing over the reins of Fundsmith Emerging Equities Trust

Holly Black 22 May, 2019 | 12:03AM
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Terry Smith

Terry Smith is to step down from running his emerging markets investment trust.

The Fundsmith Emerging Trusts (FEET) will be run by Michael O' Brien and Sandip Patodia from the end of May.

The pair have been on the investment management team of the trust since it was launched in 2014 and will be supported by research analysts Jonathan Imlah and Tom Boles.

Investors will also see the annual fee on the trust cut from 1.25% to 1% of its net asset value from May 31. Smith will continue to provide “advice and support”.

The one-star rated Emerging Equities Trust was launched with the aim of replicating the Fundsmith Equity fund approach of buying shares in quality companies but focusing on opportunities in emerging markets.

Smith is known for his buy-and-hold approach to investing and focus on firms with strong barriers to competition. He favours strong consumer brands and top holdings in the trust include Nestle, Hindustan Unielver and Eastern Tobacco. Some 27% of assets are invested in India, with other investments in China, Hong Kong, South Africa and Brazil. But the £328 million trust has not managed to replicate the excellent performance of the open-ended fund. It has returned 26% over three years compared with a sector average of 39.3%.

Ryan Hughes, head of active portfolios at fund supermarket AJ Bell, said: “In reality, this is likely to mean no change to how the portfolio is run, with the exact same philosophy and process being followed by O’Brien and Patodia. Both have been involved in the management of the trust since inception and are fully versed with the current holdings.

Hughes said the news of the cut to the annual fee was a more welcome announcement but added: “Even with this cut the trust still looks expensive with ongoing costs of 1.27%, particularly with such lacklustre performance.”

Analysts at Investec have retained their “buy” rating on the trust after the announcement. They say maintaining the Fundsmith approach to managing the trust and cutting the fee are positive moves.

Smith Will Still Run Fundsmith

Smith famously moved to Mauritius in 2014 to run the emerging markets trust. He said working from the island in the Indian Ocean would help give him the peace and quiet to make investment decisions.

At the time he said: “Mauritius is much more convenient in terms of its time zone than London for dealing in Asian markets and I find being away from the ‘noise’ of London helpful.”

It is understood that Smith has no plans to return to the UK despite no longer running the emerging markets fund.

Smith will continue to run his £18 billion Fundsmith Equity fund. The Gold-rated fund has been a top performer, delivering an annualised return of 21.6% over five years. The fund scores positively on all the Morningstar investment pillars except for price (its annual fee is 0.95%).

Smith also launched the Smithson Investment Trust (SSON) last year, which focuses on smaller companies across the globe. This was the first Fundsmith product to launch that was not run by the star manager.

Smith said: “The initial success of [Smithson] has made me realise that my oversight as chief investment officer, with dedicated fund managers doing the day-to-day work, has worked extremely well and I believe the changes we are announcing today will help deliver the long-term outperformance that we seek.”

He added: “The fee reduction also brings the charges closer into line with our other funds, while recognising the greater geographical research coverage that we have to maintain on FEET.”

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Holly Black  is Senior Editor, Morningstar.co.uk