The Fundsmith Emerging Equities Trust (Feet) has launched its first ever share buyback three months after its chairman criticised the discount control mechanism in the investment trust’s interim results.
The £340m investment trust purchased 15,684 shares on Tuesday at a price of £12.75, according to a regulatory filing published on Wednesday. The purchase was worth £199,990.
The purchase comes three months after chairman Martin Bralsford said share buybacks were not always in the best interests of shareholders “as they reduce the size of the company and therefore increase the ongoing charges ratio”. Feet’s current ongoing charge is 1.37%, according to Association of Investment Companies data.
Covid volatility was also a concern for Bralsford, who said share buybacks may be futile in such market conditions and as such the board would focus on marketing activities in the interim. Nevertheless, he said the board’s position on buybacks was “under continuous review”.
Bralsford’s comments came as Feet’s share price failed to keep pace with the strong outperformance of its net asset value during H1 2020. The former rose just 0.3% while the latter returned 4.3% compared to losses of 3.4% in the MSCI Emerging and Frontier Markets index.
QuotedData head of investment trusts James Carthew was surprised Feet initiated a buyback so soon after the chairman’s comments. He also noted the discount had narrowed from nearly 15% in August, when Bralsford’s comments were published in the interim results, to around 5% at the start of November.
The investment trust is currently trading at a 7.8% discount, according to AIC data.
Carthew said he disagreed with Bralsford that share buybacks would have an overly negative affect on fees.
“A trust with a market cap well in excess of £300m could easily buy in 10% of its stock without that having a meaningful impact on the ratio. Let’s say at worst that this pushed the ratio from 1.3/1.4% to 1.5%. The detrimental impact that this would have on investors is swamped by a discount narrowing of say 5%.”
Nevertheless, he described Feet’s charges as on the high side compared to some its peers in the AIC Global Emerging Markets sector. The similarly sized Aberdeen Emerging Markets investment trust charges 1.07%.
The Feet board has authority from shareholders to buy back up to 14.99% of the investment trust’s issued share capital.
See also: Fundsmith trust board frustrated as share price lags Covid outperformance in NAV
