Terry Smith has sold two companies, bought three and is holding back cash for a fourth new position as he seeks to “upgrade” holdings in his Fundsmith Emerging Equity Trust (Feet).
The manager is known for his low-turnover style but has been active on the portfolio in recent weeks, selling top-ten position Indofood, an Indonesian food supplier, as well as South African packaged goods company Tiger Brands.
Mr Smith, who focuses on companies that make high returns on capital, said Tiger Brands’ acquisition of a Nigerian rival had been a “misallocation of capital”.
“[In March] we began a process of pruning some of our weaker performers and upgrading,” the manager said.
The trust, which launched in June 2014, currently has 6 per cent of its assets in cash, most of which is earmarked to purchase a dairy company in Vietnam.
“It’s 50 per cent government owned. Rather ironically, it’s a good business partly owned by a communist government,” Mr Smith said.
“We’ve been refusing to buy the half that is [freely floated] because... you only get sold at a 20 per cent premium [to the quoted price].
“So we’ve been biding our time, waiting for the government to sell its stakes.”
Mr Smith said he was prepared to wait one more month for the government to sell, adding he would otherwise turn his attention elsewhere.
Turnover last year – prior to the period in which the latest changes took place – stood at 10 per cent, according to the manager, which is higher than the 2 per cent rate for his £5.5bn Fundsmith Equity fund.
The manager pointed to two instances in which holdings received bid approaches as a mitigating factor.
His activity in 2016 has involved buying two medical diagnostics firms – India’s Dr Lal PathLabs and Egypt’s Integrated Diagnostics – as well as Chinese food and drink company Dali Foods.
Despite increasing the fund’s allocation to China with this third purchase, Mr Smith said he remained wary of the country, having found it difficult to identify companies that meet his quality requirements.
| Key numbers |
10%, Turnover in Terry Smith’s trust in 2015. 2%, Turnover in Mr Smith’s open-ended fund in 2015 |
Although China is the largest part of the MSCI Emerging Markets index, only 4 per cent of the fund is allocated to the country. Mr Smith said he doesn’t try to imitate the index because it’s “full of garbage”.
“You do have to accept, by and large, when you’re investing in these [Chinese] companies there’s quite likely to be a controlling stake or a large stake held by one of the following: a multinational, a local conglomerate, a local family or the government. And that can help but it’s not always one-sided.
“They have worked out that if you own less than 100 per cent of the equity, extracting as much as you can through a royalty is a good idea. You then have to worry about what a local regime’s about, about voting on related party transactions, because otherwise they will vote their stake in favour of a much higher royalty,” Mr Smith said.
Instead, the manager continues to find better opportunities in India, which is the fund’s largest geographical allocation.
Feet is currently trading at a 5.8 per cent premium to its net asset value, according to the Association of Investment Companies.
Over the past year, the portfolio has lost 5.5 per cent, FE Analytics data shows.
However, year-to-date the fund has benefited from the rally in emerging markets with a 7.3 per cent rise.
