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Terry Smith is to close his £319.4mn emerging markets investment trust, in a blow to the star stockpicker and one of the UK’s best-known fund managers after a spell of weak performance.
Fundsmith Emerging Equities Trust plans to place itself in voluntary liquidation, sell off its portfolio and return the cash to investors, subject to shareholder approval, the investment trust said on Wednesday.
The trust’s share price returns have trailed behind the MSCI Emerging and Frontier Markets index in all but one of the past five years.
“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,” said Smith, who added that the performance had “fallen below our expectations”.
The decision comes during a difficult year for emerging markets as fears of a global recession, sharp US interest rate increases and high inflation have prompted foreign investor exits at a record pace.
The retreat is the latest bad news for Smith. His £23.5bn flagship Fundsmith Equity Fund has fallen 12 per cent so far this year, as the sharp sell-off in US tech stocks wrongfooted the fund manager.
Smith has said the main fund does not aim for “short-term gains” and defended his record of long-run performance.
Fundsmith Equity has returned nearly 500 per cent since it launched in 2010, or 16 per cent a year net of fees. It remains the most bought UK fund by retail investors, according to data from investment platforms in August.
However, the emerging market strategy, launched in 2014, has failed to match this performance. It has delivered a net asset value return of 44 per cent since its launch, against a 68 per cent rise in MSCI index tracking emerging markets.
“Unlike other fund managers who might seek to hold on to 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,” Smith said.
Smith stepped back from the day-to-day running of the emerging market portfolio in May 2019. Instead it was overseen by Michael O’Brien.
Analysts at Kepler Trust Intelligence wrote in a recent note that Fundsmith Emerging Equities has suffered from a relative tilt towards India and underexposure to China, technology and ecommerce over the years. Its top holdings in August included Mumbai paints group Asian Paints, Indian supermarket chain Avenue Supermarts and Chinese sauce maker Foshan Haitian.
Shares in Fundsmith Emerging Equities have traded at a discount to the value of the underlying assets in the trust’s portfolio since early 2019.
The discount has increased recently to about 15 per cent, meaning many investors would have to accept a loss to sell their shares. Closing the fund would mean investors would get their money back at close to the underlying value of the portfolio.
Smith and the trust’s board will recommend investors vote in favour of the closure, and will aim to shutter the fund by November.
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