The innovative charging structure of the latest Fundsmith trust has been dubbed complex and could create the wrong incentives for the fund managers, according to an adviser.
Terry Smith announced Fundsmith is to launch an investment trust, focused on mid and small cap companies, in a statement to the stock exchange yesterday morning (4 September).
The charging structure for the new trust, called the Smithson, is different to the norm. The costs of launching the trust are being met by Fundsmith, while the 0.9 per cent annual charge will be levied on the market cap of the trust, not the net asset value. It is usually the other way around.
Adrian Lowcock, head of personal investing at Willis Owen, said this could lead to the managers being paid more because of market sentiment not because they are adding value.
He said: "It separates the link between manager skills and the underlying performance of the trusts investments.
"Investment trusts often trade at a premium especially to begin with when star managers are associated, but that doesn’t last forever and periods of weak performance do get punished eventually.
"Fundsmith Emerging Equity Trust (Feet) for example is only on a 1.2 per cent discount that is narrow for that sector especially when it is out of favour. Ultimately the managers could be paid more because of market sentiment and not because they are adding value themselves."
The market cap is the total value of all of the shares in the trust, while the net asset value (Nav) is the total value of the investments.
This means that if the market capitalisation of the trust is lower, or 'at a discount', to the value of the underlying assets, then Fundsmith will receive a lower fee. But if it is higher than the value of the assets, or at a premium, then Fundsmith will receIve more in fees.
Although a discount would usually be regarded as a function of poor investment performance, the average investment trust listed on the London Stock Exchange trades at a discount.
Mr Lowcock said trusts run by high profile fund managers such as Mr Smith have historically tended to trade at a premium. Feet, for instance, despite underperforming its sector since launch, has traded at a premium for much of that time.
Mr Lowcock also said the focus on the market cap of the trust was likely to act as an incentive for the trust to manage the discount, although buying back any shares could reduce the market cap of the trust.
The overall effect could create a complex conflict to no material gain for either investors or, indeed, Fundsmith, he said.
He said: "The charging structure is aligning the charges with what investors actually experience, so if the trust trades at a premium they get more in fees and if the trust drops to a discount then the earn less in fees than they would if the charges were linked to Nav."
But he welcomed the trust waiving the upfront costs of the launch. He said: "[It] is sensible as they only ever act as a disincentive to buy at launch, why pay £1 for 97p, albeit you often avoid platform transactions costs."
Alan Steel, who runs Alan Steel Asset Management in Linlithgow, said he was a fan of the new trust. He said: "I think it will be worth a follow after the next correction and once the initial demand passes, that will probably push this to a premium. But I like Terry. Big supporters of Fundsmith from early doors, as opposed to all those rushing to buy it this last couple of years."
He said he did not care about the costs. "It’s what is delivered after costs that matters to real investors. We don’t get anybody complaining about Fundsmith costs. Only academics who go on about 'cheap trackers'."
In its launch statement, Fundsmith said the fee structure was about "aligning the interests of the Investment manager with shareholders".
The trust will aim to raise £250m at launch, with £30m coming from Mr Smith and his partners.
david.thorpe@ft.com
