Terry Smith’s emerging market investment trust wants to be able to invest in a wider range of companies.
Fundsmith Emerging Equities Trust (LSE:FEET) has proposed several changes to its investment objective in its latest end of financial year results.
The emerging market-focused investment trust is proposing to expand the type of companies it can invest in. According to its current investment mandate, it invests in emerging market companies “which provide direct exposure to the rise of the consumer classes in those countries”. The trust’s managers are proposing that this be broadened to include “the broader social and/or economic development” of developing economies.
The trust has also proposed reducing the expected number of shares in FEET’s portfolio to a range of 25 to 40 stocks, from the current 35 to 55 stocks. This would allow the managers to run a more concentrated and ‘high conviction’ portfolio.
These changes are still subject to shareholder approval and will be voted on at FEET’s Annual General Meeting on 26 May 2021.
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A strict focus on the consumer growth story in emerging markets has been the core feature of FEET. As portfolio manager Michael O’Brien told interactive investor in early 2020: “The approach [of the trust] is to invest in good businesses that have exposure to the rise of the consumer in emerging economies.” At the end of February 2021, consumer staples accounted for just over 50% of the trust’s portfolio, with consumer discretionary contributing a further 9%. In contrast, the MSCI Emerging and Frontier Market index (FEET’s benchmark) is 18% consumer staples and 5.5% consumer discretionary.
According to the trust, the proposed changes reflect the development of emerging market economies since the trust was first launched. In these economies, they argue, there are now “new investment opportunities in sectors which lie near the boundaries of our current investment remit”. The trust’s managers say they have identified a small number of businesses which have the superior financial characteristics but are currently uninvestable under the current investment objectives.
FEET’s managers say that in the short term this objective change would only increase the trust’s investable universe by around half a dozen stocks. Longer term, it says it will give the trust a “broader range of potential investments over time as countries and their economic infrastructures develop”.
FEET was launched in 2014 and initially managed by Terry Smith. In 2019, Smith announced that he would be stepping back from the day-to-day running of the trust with O’Brien taking over as manager and Sandip Patodia as assistant portfolio manager. Smith still provides advice to the two managers in his role as chief investment officer.
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Since its launch, FEET has underperformed both its benchmark and AIC sector average. FEET has returned 30.6%, total return in sterling terms (according to FE Analytics) since 24 June 2014. In contrast, the MSCI Emerging + Frontier Markets index has returned 81.2% and the average return of the global emerging market investment trust sector stands at 41.8%.
However, performance was stronger in 2020. Its annual results (published on 31 March 2021) show its net asset value (NAV) per share total return for the year was 20.7% and its share price total return was 29.1%. Both comfortably outpaced the Emerging and Frontier Markets Index, which rose by 14.4% over the same period.
The fund managers note that in 2020 performance was helped by holding companies with a “high level of resilience” in the Covid-19 pandemic, as well the portfolio being underweight frontier markets and overweight healthcare and technology.
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