Trust  

Terry Smith's EM trust to close after it ‘fell below expectations’

Terry Smith's EM trust to close after it ‘fell below expectations’
  Fundsmith’s chief executive and investment officer, Terry Smith

The Fundsmith Emerging Equities Trust will be liquidated after its performance fell below its managers' expectations.

In a note published today (September 14), the board of the trust recommended it was liquidated and cash returned to investors after Fundsmith stepped away as investment manager.

“We have always maintained that we would only run funds where we felt we had a particular edge that would allow us to deliver superior risk-adjusted returns,” said Fundsmith’s chief executive and investment officer, Terry Smith.

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“Whilst the trust has made a positive return since launch in 2014 it has fallen below our expectations.

“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 trust," he said.

If the proposals are approved by shareholders, the trust's assets (most recently valued at £319mn on August 31), will be returned to them in cash.

The trust's net asset value dropped six per cent in the year to August 31, with its share price crashing 11 per cent in the same period, and on August 31 it was trading at a 14.5 per cent discount to NAV.

The trust does not prescribe regional allocations, investing in global emerging market equities based on buying specific companies. 

In the trust’s half year results to June 30 this year, the investment manager highlighted the number of challenges facing emerging markets.

Source: Fundsmith

“Included in these are inflation, rising interest rates, leading to deteriorating terms of trade for a number of emerging market economies, the Russia-Ukraine War, China's Covid-zero policy and the continued dislocation of global supply chains.”

In addition to this, the report said, the interest rate “party” is now coming to an end, and some financial stressed developing countries have seen “fierce” rate rises.

“Capital suddenly has a cost, and current financial liabilities and earnings weighted to the future have a cost. 

“For emerging markets, this has also been exacerbated by the potential rate of increase of US interest rates, leading to capital outflows as investors chase a higher headline 'risk-free' dollar return.”

Finally, inflation is likely to remain an impact in emerging markets for the foreseeable future, the report said.

Director at Fairview Investing, Ben Yearsley, said on Twitter this morning it was good to see managers doing this.

"More managers and boards should do this when trusts fail to meet or beat expectations," he said.

sally.hickey@ft.com & ruby.hinchliffe@ft.com