Terry Smith (pictured) has made a virtue of standing apart from the investment pack, but he has surprised the market once again by admitting defeat on the Fundsmith Emerging Equities Trust (Feet). He announced the wind-up of the investment trust, admitting the group couldn’t find the ‘edge’ it was looking for. Does the move say more about the trust, Smith or the asset class?
In his announcement Smith said: “While Feet has made a positive return since launch in 2014 it has fallen below our expectations and, unlike other fund managers who might seek to hold onto the fund for the sake of the fee income, we feel it would be in the best interests of shareholders to receive their investment back in cash through a liquidation of the portfolio and wind-up of the company.”
Certainly, performance wasn’t great. Numis said: “The fund’s relative performance was weak for the first few years after launch, partly driven by lack of exposure to China and high growth technology stocks. Despite this, its rating was steadfast, consistently trading at a premium.
“Terry Smith stepped back as lead manager in May 2019 moving to an oversight role, replaced by Michael O’Brien (manager) and Sandip Patodia (assistant manager), who both joined Fundsmith ahead of the launch of Feet in 2014. The fund has had fleeting periods with strong relative performance, such as during the onset of the Covid-19 pandemic in 2020, and through mid-2021, although these have been few and far between.”
However, there was no obvious pressure from shareholders to wind the trust up. Most recognise that emerging markets have been a tough place to invest. The trust is still in positive territory over three years and top quartile in its sector. It is worth noting that there are over 100 funds in the IA Emerging Market sector with worse performance over three years.
Natural attrition?
Jock Glover, strategic relationships director, Square Mile Investment Consulting and Research, says Morningstar data suggests that less than 5% of the universe is closed every year. He adds that fund closures tend to be driven by size considerations, the merger or acquisition of parent asset managers or persistent poor performance. There are also a range of older, legacy funds that haven’t been marketed for years, shrinking as investors retire and reallocate to lower risk assets or pass on their assets through inheritance.
He adds: “There is also a growing trend of repurposing funds, where the asset managers are looking to take an existing vehicle and modify the objective and name to repurpose as a sustainable or responsible fund. This has the advantage that the vehicle is already in existence and has assets under management on day one.”
Equally, the move is not unprecedented in the investment trust sector. Jupiter recently wound up its Emerging and Frontier Income fund. There have been mergers in other under-pressure sectors, such as the equity income sector, where Murray Income merged with Perpetual Income & Growth, previously run by Mark Barnett at Invesco.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says: “This year there have been four liquidations, with the recent announcement of the liquidation of Feet bringing it to five. Two of these companies invested in emerging markets which have suffered recently, but liquidated companies come from a number of sectors from Private Equity to Global Smaller Companies. This liquidation activity is on track to be in line with previous years, where there is a trend of six-to-seven wind ups a year.”
Client value
Fundsmith’s move is unusual because it appears to come from Smith rather than the board. As such, some have welcomed it, saying it shows some integrity to give up management fees of 1% a year on a £350m trust voluntarily.
It suggests a focus on client value that eludes many of its peers. Glover points out that in the first round of value assessments, most asset managers announced they were putting underperforming funds on watch, or taking steps to improve the value for money—such as cutting fees, but very few appear to have been wound up as a result.
Glover says it is generally a good thing for poor funds to be wound up and there may be more closures ahead: “Under the new Consumer Duty regulations, there will be a bigger onus on asset managers to put the customer at the centre of their decision-making and assess whether keeping a customer in a poorly performing fund is a good thing.
“It should mean further refinement of the universe, but the regulator needs to show that it is serious, otherwise we may end up in a similar situation as we have with value assessments, where the managers are marking their own homework and not being held accountable.”
Brodie-Smith agrees that fund closures can be welcome: “Boards recommend winding up an investment company when they have come to the end of their useful life. This Darwinian process keeps the industry healthy – the better performing investment companies thrive, and poorly performing companies leave the sector.
“In addition to liquidations, we’ve also seen many recent examples of boards proactively working in shareholders’ interests, for example by negotiating fee reductions or switching managers after disappointing performance.”
However, others have questioned why the fund was wound up, rather than transferred to an alternative manager. This may say more about emerging markets than it does about Fundsmith.
The board concluded investors would rather have their money back than an alternative investment option, which says something about its view on the ongoing demand for emerging markets investment. Smith has shown some foresight about market movements in the past. Emerging market investors may want to take note.
