Terry Smith steps back from investment trust: should investors vote with their FEET?

Since its launch in 2014, the trust has lagged both the emerging market indices and its sector peers.

Funds and Investment Trusts May 22, 2019 by Tom Bailey

Star fund manager Terry Smith has announced that he will “stepping back” from managing his Fundsmith Emerging Equities Trust (FEET).

Day-to-day running of the trust will be handled by Michael O'Brien and Sandip Patodia as portfolio manager and assistant portfolio manager, respectively. Both O’Brien and Patodia have been handed internal promotions.

Smith will still provide advice to the two managers in his role as chief investment officer.

Smith’s decision to step back from running FEET comes after a sustained period of underperformance for the trust.

Since its launch in 2014, the trust has lagged both emerging market indices and its sector peers. While the average investment trust in the global emerging market sector has returned 39% over the past three years, FEET has failed to keep up, returning 26%.

This is the result of the trust’s particular approach to emerging market investing, meaning FEET’s portfolio deviates widely from the benchmark and contains companies very different to those found in other emerging market fund portfolios.

For instance, FEET is hugely underweight in China, with the country accounting for around 5%. In contrast, China accounts for over 30% of the MSCI Emerging and Frontier Markets index. Meanwhile, the trust has 38.4% in India, which accounts for less than 9% of the index.

At the same time, Smith has been sceptical of many companies that have become emerging market favourites in recent years, citing concerns over cyclicality, high debt, opaque accounting and lack of clear ownership rights.

This has meant the trust has stayed away from China’s fast-growing tech companies – such as Tencent, Alibaba and Hikvision - which often account for some of the largest holdings for emerging market focused trusts. Instead, FEET’s largest holdings are primarily Indian consumer staples companies. Consumer staples account for 68.9% of the trust's portfolio, compared to just 6.5% of the MSCI Emerging and Frontier Markets index. 

While this approach may work out in the longer term, in recent years it has acted as a drag on performance as investors have piled into the companies FEET has avoided.

Smith’s decision to “step back” from the running of the trust, however, is unlikely to change this approach.

Ryan Hughes, head of active portfolios at AJ Bell, argues: “The reality is this is likely to mean no change to how the portfolio is run with the exact same philosophy and process being followed by O’Brien and Patodia.”

Hughes points out that both managers have been involved in the trust since it was first launched and are “fully versed with the current holdings”.

Those who still believe in FEET’s approach to investing emerging markets should have little reason to sell out of the trust.

FEET has also announced that it is cutting its management fee by 0.25% to 1%, a welcomed move.

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