Fundsmith Emerging Markets Trust shares up as Smith says it will close

Fundsmith Emerging Equities Trust is to be wound up because performance has fallen below expections, says the star boss of its management team Terry Smith.

The share price peaked at around  1,510p in early 2021, but has tumbled 15 per cent in the past year and trades at around 1,340p today.

The trust has always been tiny in comparison to the £23.5billion behemoth, the Fundsmith Equity Fund, but the move to liquidate it by the end of November took investment experts by surprise. 

Shares jumped 10 per cent this morning, narrowing their discount to the trust’s net asset value, as the sum of its holdings’ value is known. At last night’s close FEET shares had been trading at a 15 per cent discount to NAV, according to the AIC.

Terry Smith, chief executive of Fundsmith LLP, says: ‘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 Fundsmith Emerging Equities Trust 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 will seek approval at a general meeting and is recommending shareholders vote for the decision. 

It will vote its 0.43 per cent of the stock in favour of liquidation, and adds it has received indications from Fundsmith that partners and staff at the firm, which hold a 5.25 per cent stake, will do the same.

Martin Bralsford, chairman of the board, says: ‘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.’

Emerging markets have taken a hit as rising US interest rates suck cash out of riskier investments, and fears of recession make investors jittery. 

The bulk of the trust’s investments were in the consumer defensive sector, and top holdings included China’s Foshan Haitian Flavouring and Food, Asian Paints and Nestle India. 

Share price peaked at around 1,500p but has struggled in the past year

Jason Hollands, managing director of Bestinvest, says: ‘It was very surprising news this morning to see the announcement below from the Board of Fundsmith Emerging Equities Trust that Terry Smith’s team have given notice that they intend to terminate their investment management agreement.

‘It is hard to think of a previous example, certainly in recent history, of a fund manager deciding to fire themselves from managing a portfolio earning them fees.

‘In the grand scheme of things though, the management of the £319million portfolio looks like a distraction for the firm whose flagship product, the developed market focused Fundsmith Equity fund, towers at £23.5billion.

But Hollands noted that while the board has stated it intends to seek a voluntary liquidation, it could be approached by other asset managers pitching to take over as managers, or investment trusts looking to explore a merger.

AJ Bell investment director, Russ Mould, says: Terry Smith is arguably one of the country’s most famous fund managers thanks to the success of his Fundsmith Equity Fund which has returned 487 per cent since inception in November 2010 versus 270 per cent from the MSCI World index, a key benchmark for global equities.

‘However, not everything he touches turns to gold. The Fundsmith Emerging Equities Trust has long been the black sheep of the Fundsmith family, failing to deliver the type of returns enjoyed by the asset manager’s flagship product.

‘Now it is time to bring the trust to a close, with a proposal to liquidate it.

‘Affectionately known as “FEET”, the trust invested in quite a few emerging market subsidiaries of well-known Western companies including Unilever and Nestle.’

Mould says the trust followed the same investment process as its sister fund, but unfortunately, performance was sluggish.

‘It’s probably better to consign this experience to history and not have the trust tarnish the reputation of Fundsmith as an asset manager rather than let it limp along in the hope things will eventually come good.’