Fundsmith has chosen an opportune time to launch an investment trust with an investible universe that has fallen from favour over the last decade, although investors have been advised to note the fund will not be managed by star fund manager Terry Smith (pictured).
The Smithson Investment Trust aims to raise £250m at launch, including £25m seed funding from Smith and a further £5m from the management team. It will target companies with a market cap between £500m and £15bn and an average of £7bn.
Simon Barnard will be investment manager and Will Morgan will be assistant investment manager. The pair joined from Goldman Sachs Asset Management last year. A regulatory filing said Smith would provide advice and support in his role as chief investment officer.
Back testing on the Smithson Investment Trust’s investible universe showed returns of 251.8% over five years compared to 107.7% in the S&P 500 and 85.3% in the MSCI World SMID index.
The planned IPO would take place in October.
Lack of global SMID investment trusts
There are few other closed-ended products targeting the same investible universe.
“At one stage there were a number of small and mid-cap global equity funds in the investment trust universe going back a few years,” said Winterflood Investment Trusts head of research Simon Elliott.
The category was popular around 15 years ago but products had a high UK allocation, Elliott said. “Then investors just started buying UK small cap directly.”
He thought now was an opportune time for an investment trust launch in the space, noting the closed-ended structure would be suitable for less liquid companies. “Global equity markets have been strong over a period of time and people are looking to diversify away from the UK.”
AMC and launch fees against the norm
Smith has touted the fact the investment trust’s annual management charge will be based on market cap rather than net asset value and that Fundsmith will absorb launch costs. The AMC will be 0.9%.
“With market cap if your trust is trading on a discount then obviously you’re paying less than the NAV, if it’s trading on a big premium then you’re paying more,” said Association of Investment Companies (AIC) communications director Annabel Brodie-Smith.
There are 38 investment trusts that use market cap as the basis for their AMC, according to AIC data. Ten of those charge based on the lower of market cap or net asset value, including the Lindsell Train Investment Trust, which trades at a staggering premium of 50%.
Fundsmith confirmed its AMC will be based solely on market cap arguing this aligns the interests of the investment manager and shareholders. An independent board will ensure that the NAV and share price do not get too far out of kilter with the ability to launch new shares to keep the premium under control, Fundsmith said.
Investment trusts that have absorbed launch costs in the past have typically been esoteric products, such as hedge funds, said Elliott. Typically investment managers would have a longer contract to compensate for absorbing these fees, he said. Fundsmith told Portfolio Adviser that the initial contract is set to last four years with an annual renewal thereafter.
Star fund manager demand
The Fundsmith Emerging Equities Trust trades at a premium of 2.7% highlighting the demand a star fund manager like Smith can generate.
AJ Bell personal finance analyst Laura Suter said this is despite poor performance from the trust, which has returned 28.8% since inception compared to 47.6% from the MSCI Emerging and Frontier Markets index.
“Despite this underperformance investors continue to buy, with the trust consistently trading on a premium,” Suter said. “Investors in the new trust should be aware of this, as demand could well be high, driving the trust to a premium, and they should ensure they don’t overpay for the new fund.”
GSAM team to manage fund
The GS Goldman Sachs Global Millennials Equity fund Barnard managed from January 2016 to July 2017 had a strong growth bias and a large-cap tilt, according to Morningstar senior analyst Peter Brunt.
It had Microsoft and Intuit in common with Fundsmith Equity out of a portfolio of approximately 50 stocks.
Smithson would represent a new opportunity set for both managers, including Morgan, who did not have prior experience running money and had been an analyst at GSAM focused on industrials, construction and building materials and insurance, Brunt said.
Tilney managing director Jason Hollands said they would be meeting the managers shortly as part of their due diligence. “At this stage I couldn’t say whether this is trust is one we will end up supporting. It is, though, fair to say that Fundsmith is a small business with Terry Smith as the central figure, who has a very clear view on how to manage money, and he will also be investing £25m of his own cash in this trust, so I think it is self-evident that the team are going to get plenty of engagement from him.”
Potential rivals to Smithson
Potential rivals to the new investment trust include F&C Global Smaller Companies, Law Debenture and Edinburgh Worldwide, said Morningstar senior analyst David Holder.
Smithson will launch with 25 to 40 portfolio companies from an investible universe of 83.
The Smithson Investment Trust would be in similar territory to Edinburgh Worldwide if it employs the growth bias of Smith’s flagship Fundsmith Equity fund, Holder said. However, Edinburgh Worldwide diverges in its holding of pre-profit companies. Smithson will not invest in unquoted companies.
F&C Global Smaller Companies and Law Debenture had less of a growth bias than Fundsmith Equity. The Independent Investment Trust is more similar in terms of its style and market cap, but is very UK centric, Holder said.
Smith said the investment trust was named Smithson for the fact it will apply the Fundsmith Equity fund’s investment process to companies further down the market cap and is therefore like a son of the open-ended product. The Fundsmith investment strategy focuses on three points: buy good companies; don’t overpay; do nothing.
