Terry Smith hands over reins of emerging equities trust

Michael O’Brien and Sandip Patodia to take over as fees are slashed


The board of Fundsmith Emerging Equities Trust plc (Feet) has announced that Terry Smith will be handing over control of the trust to Michael O’Brien and Sandip Patodia, which some have argued is part of his “succession planning”.

The duo, who both joined Fundsmith ahead of the launch in 2014, have been part of the core team running the trust and will take over at the end of this month with O’Brien as portfolio manager and Patodia as assistant portfolio manager, respectively.

The board said in an RNS announcement on Wednesday that Smith will continue to provide advice and support to the pair in his capacity as chief investment officer. Jonathan Imlah and Tom Boles will continue to assist as research analysts.

Future proofing

Ryan Hughes, head of active portfolios at AJ Bell, said the moves may be part of Smith’s long-term succession planning.

“To a certain degree, I think this could be considered as sensible succession planning for Terry Smith. He remains very much at the helm of the firm in his position as CIO and will continue to drive the investment philosophy through the different products at the firm.

“However, there is clearly a drive to bring forward other fund managers at the firm both with this change and the fact that the Smithson trust launched last year doesn’t have Terry Smith as a named manager.”

But Hughes said that while news that Smith is stepping back as the named manager of Feet “will no doubt make investors ears prick up”, in reality it is likely to mean no change to how the portfolio is run.

“Both managers have been intrinsically involved with the running of the trust since its inception alongside Terry Smith.

“In reality, we all know that Terry is not the one meeting the companies and doing the heavy lifting of company research and therefore it is clear that both of these managers stepping up brings a high level of continuity to the management of the trust.”

Fees cut but trust still looks expensive

Meanwhile, the update also outlined that the board is set to announce at the AGM later on Wednesday that the annual management fee on the trust will be cut to 1% from 1.25% with effect from 31 May 2019.

Hughes regards the drop in fees as even bigger news than Smith stepping down from the helm of the trust.

However he said that Feet still looks expensive with ongoing costs of 1.27% particularly considering its “lacklustre performance over the past five years”.

“Investors should be aware that the current positioning of the trust is vastly different to the benchmark with a huge underweight to China and overweight to India at a country level while the trust has nearly 70% in consumer staples companies. This may well explain the significant underperformance vs the index over the past five years and investors should understand that this trust is highly likely to continue to behave very differently to the benchmark.”

He added that the trust has traded reasonably close to NAV over the last few years which is surprising given its underperformance, but shows just how “powerful the pull of the Terry Smith name has been”.

“For investors who want something a little more mainstream, I’d look at the JP Morgan Emerging Markets Trust which offers significantly more diversification at a country and sector level and is run by a very experienced manager in Austin Forey, backed by a large team and sits at an attractive discount to NAV,” he said.

“It will be interesting to see if there is any move in this given the manager change, however, investors should remember that the underlying investment philosophy and process will not be changing.”

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