Fundsmith Equity has been granted a reprieve from Square Mile and allowed to keep its top rating despite Terry Smith’s boutique being served a section 166 notice by the Financial Conduct Authority.
Fundsmith was ordered to undertake a skilled person review by the City watchdog in Q1, according to reports. The review, which is carried out by by an independent body, typically one of the ‘Big Four’ accountants or a law firm, is done to assess activities that are a cause for concern or require further analysis. This includes governance, controls or risk management assessments.
No details have been provided about what triggered the section 166 or when it might be completed, and both Fundsmith and the FCA have declined to comment.
With scant information available, Square Mile decided not to boot Fundsmith Equity from its Academy of Funds. The £23.7bn global equity fund currently has a AAA rating.
“While Fundsmith is reported to have been served a section 166 notice by the FCA, as details have not been published by either the FCA or Fundsmith, Square Mile is currently unable to ascertain any ramifications for the Fundsmith Equity fund,” the research house said.
“Square Mile’s analysts remain in dialogue with the group and will continue to monitor the fund closely.”
See also: Fundsmith sells out of Starbucks
Somerset GEM fund booted
However, Square Mile did boot the Somerset Global Emerging Markets fund from its universe of top-rated funds.
Analysts noted it had faced challenges in recent years, resulting in “lacklustre returns”. The £281m fund is loss-making over one, three and five years, and has fallen 21.7% in the last 12 months compared to a 13.5% drop for the average IA Global Emerging Markets fund.
“Although the team has been bolstered through the recruitment of specialist Asian and China fund managers, analysts, and a new head of research, there has not been a material impact on performance, and Square Mile’s conviction in the fund has fallen.”
Elsewhere, the Threadneedle UK Social Bond fund’s rating was downgraded from Responsible AA to Responsible Positive Prospect, following the departure of lead manager Simon Bond.
While Square Mile said many of the strategy’s strengths, including its “well-considered social impact methodology and reporting”, remain intact under new lead Tammie Tang, it was unsure how the “loss of the fund’s key architect” would play out.
“The analysts also note that there may be further team changes that could impact this fund given the ongoing integration of the BMO Gam (Emea) business into Columbia Threadneedle Investments and they will continue to monitor any developments,” it added.
