While the likes of Aberdeen and First State have a selection of established open-ended emerging markets funds that are popular with retail investors, Mark Mobius’ £1.8bn Templeton Emerging Markets IT is completely dominant in the closed-ended universe.
With First State and Aberdeen soft-closing many of their largest portfolios recently, and Mobius suffering significant underperformance in recent years, Smith’s launch is timely.
Performance of trust and indices over 3yrs
Source: FE Analytics
Emerging markets have had a difficult time of late, but Hargreaves Lansdown’s Adrian Lowcock thinks it could be a good time to invest for anyone who is in for the long-term.
“Terry Smith has had very good performance managing the Fundsmith Equity fund, and the closed-ended structure definitely suits his style,” Lowcock said.
Performance of fund, sector and benchmark since launch
Source: FE Analytics
“He’s very much buy and hold, and so running an investment trust makes sense as it means that he won’t have to contend with inflows and outflows. It might affect the share price if it goes on to a big discount, but it won’t impact his running of the portfolio.”
“He’ll be focusing on consumer stocks which have had a bit of a bad time recently, so it could be quite an interesting time to buy. It’s quite a timely launch.”
Jason Hollands, managing director of business and communications at Bestinvest, is a little more cautious however. While he thinks it’s always positive to have competition, he thinks Smith’s inexperience in emerging markets investing is a big drawback.
“The fund management houses that have done particularly well in this area have a lot of bodies on the ground and a huge pool of resources to draw on,” he said.
“If you look at someone like Hugh Young at Aberdeen or Angus Tulloch at First State, they are heads of teams but have a huge number of people working behind them.”
“For me, I think [Terry Smith’s launch] is a bit of a leap into the dark.”
Hollands rates the JPM Emerging Markets trust, run by Austin Forey and Richard Titherington. The £600m portfolio is ahead of its MSCI EM benchmark over three, five and 10 years.
Performance of trust and index over 10yrs
Source: FE Analytics
Commenting on the launch of the trust, Smith (pictured) says he has gained experience of investing in emerging markets through running his Fundsmith Equity fund, even though it focuses on developed markets.
He emphasises that the closed-ended structure suits his investment style. “Although all of our portfolio companies are headquartered and listed in Europe and North America, some 32 per cent of their underlying revenues are from emerging markets,” he said.
“We are often asked why we do not invest directly in emerging markets if we like exposure to their superior growth. The reasons are complex, but one of the main ones is liquidity.”
“Fundsmith Equity is an open-ended fund with daily liquidity. We hope that if you invest with us you will be a long-term investor, because we believe that this delivers the best results, but you can redeem your investment on any business day.”
“This would be incompatible with direct investment in the companies of the sort we seek but that are headquartered and listed in emerging markets. Although some of these companies are not small, there is not enough liquidity in their shares in local markets to hold them responsibly through an open-ended fund.”
“In order to overcome this problem, we have decided to launch a new fund, the Fundsmith Emerging Equities Trust, in 2014. This will be an investment trust investing in the same strategy as our existing fund but mostly in companies which are listed in emerging markets.”
Smith says the trust will focus on companies benefiting from the boom in the emerging markets consumer, similar to Anthony Bolton’s Fidelity China Special Situations trust. This area of the market has been hit particularly hard in recent times, and stocks are currently at a significant discount to their historic average.
Smith recently told FE Trustnet that there are only 75 companies worth investing in for his Fundsmith Equity fund, but for his emerging markets trust he says he has an investable universe of 150 stocks.
Fundsmith is not the only group that has plans to launch an emerging markets trust this year. Somerset, which has a handful of highly rated open-ended funds including the Emerging Markets Dividend Growth portfolio, says it is considering a move into the closed-ended space in the near future.
Oliver Crawley, partner and head of European marketing at the firm, says that the advantages of the closed-ended structure, particularly when investing in smaller and less liquid markets, make an investment trust launch attractive.
