Terry Smith’s successors on the Fundsmith Emerging Equities Trust have dialled up concentration since they took over the portfolio, as well as slicing frontier markets exposure and increasing sector weightings in healthcare and technology.
Fund manager Michael O’Brien revealed four new portfolio themes he and assistant manager Sandip Patodia had identified and put into practice since taking over for Smith (pictured) as the lead manager on the £249.4m trust last May, at the trust’s “virtual” AGM on Wednesday.
They include portfolio concentration, governance, sector diversity and macro and political risk.
O’Brien said the themes represent areas “where we hope we can improve performance of the fund” and stressed they are “evolutionary rather than revolutionary”.
In 2019 the trust had what O’Brien admitted was a “disappointing” year, losing investors –7.4% compared with the MSCI EM index which was up 13.9%.
Terry Smith successors slash frontier markets exposure
Among the changes, O’Brien said the pair had reduced the trust’s exposure to macro and political risk by slashing its frontier markets holdings from 12% to 9% in 2019. Nigerian companies in the portfolio have been reduced from three to one and the pair has sold out of Ghana and Pakistan completely.
The trust’s sector diversification was increased by growing healthcare assets from 14% to 17% and doubling the exposure to tech companies from 5% to 11%, while reducing exposure to consumer staples from 81% to 72%. O’Brien said this was done to ensure performance was better in ‘up markets’ while still maintaining defensive qualities.
The pair has also increased the exposure to companies run or controlled by founders or families with high standards of corporate governance and made increased the level of concentration in the portfolio by allowing the number of stocks in the portfolio to be between 35 and 40 instead of 35 to 55. Currently there are 38 names in the trust.
Last month, Smith suggested income investors look to family-controlled businesses during the coronavirus as family members will be keen to keep paying out the dividends.
Feet bounces back amid coronavirus crisis
The trust has already benefited from the tweaks that have taken place, O’Brien said, with Feet outperforming its benchmark the MSCI EM index amid the coronavirus sell-off.
In the four months to the end of April, O’Brien said the fund had been “remarkably resilient” with net asset value down 6.3% against the index’s losses of 12.5%. On a share price view the fund was down 11.1% over the period, according to FE Fundinfo, compared with the IT Global Emerging Markets average of –21.4%.
The trust is currently trading at a 13% discount, according to data from the Association of Investment Companies, down from an all time high of 20% on 18 March. The average discount in the IT Global Emerging Markets sector is around 11%.
O’Brien reiterated that Feet was well placed to weather the Covid storm, noting its relatively high allocation to defensive sectors like consumer staples and groceries, net cash positions across its investment companies and lower exposure to higher risk countries, travel and leisure companies and firms that sell discretionary consumer products.
>See also: Fundsmith EM trust adds two names on coronavirus share price falls
