Terry Smith fails to buoy trust enough to avoid buybacks

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25 July 2019

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The widening discount on Fundsmith Emerging Equities Trust (Feet) since Terry Smith stepped back from the helm has prompted the attention of the board, as Mark Mobius’s star power keeps his eponymous trust in premium territory despite delivering relatively worse performance over the last six-month period, which both trusts reported on this week.

Feet’s discount has moved from 2.6% at the end of December to 4.8% by the end of June 2019, even as Smith ups his stake in the closed-ended fund, according to its half-year results. Its current discount is 7.2%, according to data from Trustnet, narrower than the 8.3% discount it was trading at earlier this month.

The widening discount comes even as Feet produced a share price total return of 0.6% over the six months to 30 June 2019, compared with this time last year when returns were down 5.3%. The NAV rose by 2.9% but this trailed the MSCI Emerging and Frontier Equities Index which was up 10.9% on a net sterling adjusted basis.

Buybacks not always in shareholders’ best interests

Feet chairman Martin Bralsford said Smith’s purchases had relieved some of the pressure on the share price.

But the board continues to monitor the “deterioration of the premium” closely and is considering ways to address it, including launching share buybacks as a last resort.

“The board is of the opinion that share buy backs are not always in the best interests of shareholders as they reduce the size of the company and increase the ongoing charges ratio, and has thus far not taken action. However, we will continue to monitor the share price and should a sustained and material discount emerge, the board has authority from shareholders to buy back up to 14.99% of the issued share capital in the market.”

Mobius trust at a loss since launch

In contrast, the £104m Mobius Investment Trust, which posted interim results on Wednesday, was trading at a slight premium of 0.8% despite producing weaker returns over the period.

Since Mobius’ vehicle listed on 1 October 2018 it has produced a share price total return of -5.1% closing at 94.9p on 31 May 2019.

The trust’s net asset value shrunk by 3.9% during the interim, compared with the the MSCI Emerging Markets Index fell by 1.6% adjusted in sterling terms, while the MSCI Frontier Markets Index rose 5.2%.

Feet discount not excessive

Willis Owen head of personal investing Adrian Lowcock said it was little surprise that Mobius’ trust was trading at a premium given his reputation as a “well-regarded high profile and experienced” EM manager. But he said the trust’s premium could fade if performance does not show quickly enough.

Mobius Investment Trust has lost investors 2.5% since it floated on the London Stock Exchange, worse than Feet which is only down 0.5% over the same nine-month period.

Lowcock said the discount on Feet is “natural” given the change in manager, with Fundsmith duo Michael O’Brien and Sandip Patodia replacing Smith on the mandate, and its recent bout of poor performance.

He agreed with the board’s decision to wait to see if the share price recovers before launching a share buyback programme as the current discount is “not excessive”.

‘Strong skew to the emerging markets consumer’

Tilney managing director Jason Hollands notes that both Smith’s and Mobius’ trusts have a “strong skew to the emerging markets consumer,” particularly Feet which has two thirds of the portfolio in consumer staples, but said they are very different strategies.

He said: “The Mobius Emerging Markets trust has a more conventional regional spread with its largest exposure to China, followed by South Korea and India in third place, but it does have a really high cash pile currently (over 20%).

“In contrast, Fundsmith Emerging Equities is pretty much fully invested and has a massive 38% weighting to Indian companies and just 6% invested in Chinese stocks.”

Smith’s trust has trailed peers in the IT Global Emerging Markets sector over one, three and five years, as well as its benchmark the MSCI Emerging + Frontier Markets index.