Terry Smith’s FEET considers boosting India exposure above 40% threshold

Respected investor Terry Smith said when he launched his emerging-market focused investment trust that India would be a prime investment target in his hunt for the consumer goods companies that would make up the bulk of the portfolio.

He has stayed true to his word. At present 38 per cent of the portfolio is invested in shares located in world’s seventh largest economy – just shy of the 40 per cent maximum threshold that can be held in a single country.

The board, however, is considering tweaking this restriction to give Smith the flexibility of boosting exposure to India further.

In the half year results for Fundsmith Emerging Equities Trust (FEET), released last week (3 August), the trust’s chairman Martin Bralsford said: ‘As shareholders may be aware, the Board reviews the Company's Investment Policy at every meeting. The board has noted that approximately 38 per cent of the portfolio is currently comprised of companies which generate their profits and cash flows from the Indian economy. 

‘This means we are approaching the limit which states that not more than 40 per cent of the company's gross assets (at the time each investment is made) can be invested in shares issued by companies domiciled in any single jurisdiction.

‘As your investment manager continues to evaluate a number of compelling investment opportunities in India (notwithstanding the risks association with the jurisdiction), the board is considering whether it may be appropriate to increase the single jurisdiction limit to provide greater flexibility to take advantage of such opportunities. Should any material change to the limits in the investment policy subsequently be proposed, they would be subject to the approval of shareholders.’

Four of the five biggest holdings of the trust are listed in India – an economy that, thanks in large part to its youthful population, has enormous potential. This means plenty of taxpayers and spenders, and the theory is that this will translate into healthy stock market returns over the long term.

Reforms being put in place by India’s prime minister Narendra Modi have helped boost investor sentiment. Modi is pro-business and his various ongoing reforms have been given the thumbs-up by foreign investors, although tax reforms and deregulation have not yet lived up to their expected success in moving the economy forward.

In addition, a sceptic would points out that India’s economy has also been helped by the low oil price – the country is a big importer.

At the start of July a nationwide goods and services tax (GTA) was implemented, in order to curb corruption and increase tax revenues. But Smith argues that ‘there is plenty to worry about with this development’.

He adds: ‘It is not as simple as we might wish, with four main tax bands plus special rates for precious and semi-precious stones, a separate rate for gold and a surcharge on top of the top rate band for carbonated drinks, luxury cars and tobacco products. It has led to tussles between producers and distributors and retailers about who will bear any impact on profit margins, as well as some destocking in advance of the change.

‘It would be reasonable to expect disruption will affect our Indian companies as a result. Moreover, this comes shortly after the disruption caused by the demonetisation move last November, so that the current and near-term sales numbers from this largest segment of our portfolio will be difficult or impossible to interpret, but probably not good.’

FEET reported an NAV return of 9.2 per cent in the six months to 30 June, and a share price total return of 9.6 per cent.

Overall, investors who backed Smith on day one when the trust launched in July 2014 will be up 6.9 per cent. In April, at an investor meeting, Smith asked investors for patience, and explained why the principles he is applying to his Fundsmith Equity fund will pay off for FEET in the long run.

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