Bargain hunter: Terry Smith’s FEET slips to rare discount

Terry Smith’s emerging market trust’s performance has lagged rivals since launch – but those buying today can pick up shares on the cheap.

These are still early days, but just over three years since launch, Terry Smith’s emerging market trust has not so far replicated the success of his Fundsmith Equity fund.

Fundsmith Emerging Equities Trust (Feet) has produced a total net asset value (NAV) return of 19 per cent over the past three years, according to broker Winterflood, which lags significantly behind other emerging market focused investment trusts – JPM Emerging Markets (up 52 per cent), Aberdeen Emerging Markets (39 per cent),  Utilico Emerging Markets (38 per cent), Templeton Emerging Markets (35 per cent) and Genesis Emerging Markets (32 per cent).

Feet’s share price total return, however, is just 6 per cent. In contrast JPM Emerging Markets has gained 52 per cent, Aberdeen Emerging Markets 38 per cent, Templeton Emerging Markets 34 per cent, Utilico Emerging Markets 32 per cent and Genesis Emerging Markets 23 per cent.   

The slow start to Feet’s life has dampened investor enthusiasm. When the trust launched in June 2014, Feet shot onto an instant 10 per cent premium as Smith’s strong retail investor following snapped up shares in the new venture.

But for around the past two years the premium has cooled, and Feet has typically traded just a couple of percentage points above net asset value (NAV). It has, however, seldom fallen onto a discount apart from on a couple of rare occasions, such as now.

At the time of writing (29 August) Feet is trading on a discount of 2.2 per cent, offering one of the cheapest entry points since launch. Over the past year Feet has on average traded on a premium of 1.4 per cent.

Bigger discounts, however, can be found elsewhere: for example from Genesis Emerging Markets (13 per cent discount), JPM Emerging Markets (11 per cent), Utilico Emerging Markets (10.8 per cent) and Templeton Emerging Markets (10.6 per cent). 

 Last week in a note to clients, Killiik, the wealth manager, highlighted Genesis Emerging Markets (GSS) as offering a cheap entry point.

‘The fund achieved strong NAV returns over the last 12 months, broadly in line with that of the index and benefiting from the translation impact of weakening sterling against overseas currencies following the EU referendum. Despite these strong returns, the team remains optimistic on expected returns from the EM region as economic growth has finally begun to stabilise after five years of sequential declines,’ said Killik.

‘The GSS share price has lagged the NAV returns seen so far this year, causing the discount to widen to the bottom end of medium-term trading ranges.’

- Terry Smith on why FEET will outperform Fundsmith Equity

Why has FEET underperformed fund rivals? 

Smith bided his time when Feet launched in June 2014, running a high cash weighting. A year on from launch 15 per cent of the trust’s assets was still in cash, and it was not until six months or so later that the trust was fully invested.

Smith explained that India and more specifically the election of reformist prime minister Narendra Modi, was the reason behind the initial caution, as this caused India’s stock market to soar on euphoria. 

Ahead of Feet’s launch, Smith said India would be a prime investment target in his hunt for the consumer goods companies that would make up the bulk of the portfolio - 77 per cent at the end of July. This high level of concentration will result in Feet performing differently from the benchmark and indeed from peers, who have significantly less exposure to the sector.

Over the past three years a broader-based emerging market approach has generated higher returns. But those who believe Smith’s strategy will shine through over a longer time horizon now have the chance to pick up shares while adhering to one of the manager’s key investment philosophies – to not overpay. 

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