Yahoo Finance Star manager Terry Smith shuts down struggling £319m fund
Star investor Terry Smith has announced that his company will shut down its £319m emerging markets investment trust, following a slump in its share price over the past year.
Fundsmith said that it will wind up the Fundsmith Emerging Equities investment trust and delist it from the London Stock Exchange, subject to shareholder approval. It said that cash proceeds arising from the sale of its portfolio will be returned to investors.
The company added that if shareholders approve the decision, liquidation will take place by the end of November.
Shares in the trust, which is managed by Michael O’Brien, shot up 11pc in early trading this morning. Prior to the announcement, the shares had returned 8pc in the past three years, compared with 9pc from its average rival and 34pc across the global stock market. The trust traded at a 14pc discount to the value of its net assets.
Mr Smith said: “We have always maintained that we would only run funds where we felt we had a particular edge that would allow us to deliver superior risk-adjusted returns.
“Whilst Fundsmith Emerging Equities Trust 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.”
Fundsmith Emerging Equities charged investors a fee of 1.3pc, compared with a sector average of 1.08pc, according to data compiled by the Association of Investment Companies, a trade body.
In its last half year report, Mr O’Brien blamed weak performance on problems across emerging markets, including inflation, rising interest rates and the war in Ukraine.
Mr O’Brien wrote last month: “The current emerging market environment is tough, with a number of events which you would not arguably expect to occur more than once in a generation (and in many cases much less frequently).
“These include material interest rate rises, stagflation, a major European war, a pandemic and major supply chain disruption all occurring within a period of a few months.”
Emerging markets have suffered this year, as the rising risk of a global recession and higher borrowing costs have prompted investors to flee the region. The MSCI Emerging Markets index, which tracks the biggest companies in countries such as China, India and Taiwan, has fallen 4pc in the year to date.
A strong American dollar has added to investor concerns, as most emerging market debt is denominated in the US currency.
Jason Hollands, of the broker Bestinvest, said that it was hard to think of an example in recent history of a fund manager deciding to fire themselves from a portfolio that was earning them fee income.
He said: “In the grand scheme of things though, the management of a £319m portfolio looks like a distraction for the firm whose flagship product, the developed market focused Fundsmith Equity fund, towers at £23.5bn.”
Dzmitry Lipski, of the rival broker Interactive Investor, noted it was unusual the trust had decided to liquidate. “We are a little surprised to see, to date, no talk of a potential rollover option,” he said. A rollover would move shareholders over into a different investment trust or open-ended fund. “Structured in the right way, they can be tax efficient and give investors the option to sell at a time of their choosing.”
Analysts at Numis, a broker, also noted that the liquidation of the trust would crystallise capital gains for shareholders.
The Fundsmith investment style has come under strain this year, as richly valued ‘quality’ stocks have fallen and cheap ‘value’ stocks have surged. Investors pulled more than £1bn from the flagship Fundsmith Equity fund in the three months to July 31, according to the data provider FE Fundinfo.
However, the Fundsmith Equity fund has beaten the global stock market by a wide margin over the past decade, up 254pc compared with a 157pc rise in its preferred benchmark, the MSCI World index.
