Terry Smith surprised investors this week by announcing the wind-up of his emerging market investment trust. Should this be applauded?
- Smith said the Fundsmith Emerging Equities fund had ‘fallen below our expectations’
- There are 88 open-ended funds that have worse performance over one year
- Terry Smith has shown prescience about market movements in the past
It is rare that a fund manager readily gives up a steady management fee, but Terry Smith has never been an ordinary investor. He took the decision to wind up the Fundsmith Emerging Equities fund, saying it had ‘fallen below our expectations’. Should this be a lesson to other fund managers?
Smith, who has always sought to separate himself from the investment pack, said: “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.”
Performance wasn’t great, but then emerging markets have been a dismal place to invest over the past 12 months and the fund was by no means the worst in its sector. It was still top quartile over three years, even if recent performance had weakened and the discount moved out. It is worth noting that there are 88 open-ended funds that have worse performance over one year.
There is plenty to be welcomed here. It is unusual to find a fund manager willing to admit they can’t add value in a sector and exit, rather than continuing to rake in management fees (not inconsiderable on a £350m trust with an annual charge of 1%). It suggests a focus on client value that eludes many of its peers.
It is not unprecedented in the investment trust sector. Jupiter recently wound up its Emerging and Frontier Income fund. There have been mergers in other under-pressure sectors, such as the equity income sector, where Murray Income merged with Perpetual Income & Growth, previously run by Mark Barnett at Invesco. The difference is that the Jupiter and Invesco funds were struggling and the board took action; for Fundsmith, the impetus seems to have come from the investment manager.
However, there are elements of concern. The trust’s performance had only been weak over the relatively short-term and most asset managers would agree that emerging markets are a long-term asset class. Smith may not have wanted to take the reputational hit of having a dud in his stable, but there was no evidence that would be the case.
Perhaps more worrying is what it says about emerging markets. Terry Smith has shown prescience about market movements in the past and it may be that he sees a rough time ahead for the asset class in which he wants no part. Investors may not want to bet against him.
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