“Terry Smith is perennially popular with investors, with his Fundsmith Equity Fund consistently topping the list of the most-bought funds. His no-nonsense approach and buy-and-hold strategy with a concentrated portfolio of stocks has attracted investors in their hoards, with the flagship fund reaching £17bn since its launch in 2010.
“He has also handed investors impressive returns, delivering 19.7% a year annualised return since that fund was launched eight years ago, compared to 12.8% from the MSCI World index.
“However, the Fundsmith Emerging Equities Trust, launched more recently in 2014, has not performed as well, significantly underperforming the market: it has returned 28.8% since inception compared to 47.6% from the MSCI Emerging and Frontier Markets index.
“Despite this underperformance investors continue to buy, with the trust consistently trading on a premium. Investors in the new trust should be aware of this, as demand could well be high, driving the trust to a premium, and they should ensure they don’t overpay for the new fund.
“The market conditions could be right for the launch of a small and mid-cap trust. The market rally in the past couple of years has been narrow and focused around a few sectors, which potentially creates an opportunity to gain access to high-quality small and medium sized companies at attractive prices.
“However, investors should note that Smith will not be directly running the new small and mid-cap focused trust, handing day-to-day responsibility to Simon Barnard and Will Morgan, who joined last year from Goldman Sachs. While Smith will undoubtedly be heavily involved in the fund, as CIO of Fundsmith, it perhaps marks sensible succession planning that he is drafting in other managers.
“The proposed charging structure of the new trust reflects the focus of investors on fees that are aligned with managers. Smith is footing the bill for the initial set-up costs, and will base annual management fees of 0.9% on the market capitalisation of the trust, not the net asset value.
“Smith and other Fundsmith staff will also be collectively investing £30m in the trust at launch, which marks significant ‘skin in the game’ at the targeted fundraise of £250m. This should be applauded and is another way of aligning investors’ interest with those of the management of the trust.”
