This is independent research. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Fundsmith Emerging Equities Trust (FEET) employs the same strategy as the highly successful Fundsmith Equity open-ended fund, but applies it within the emerging and frontier markets regions. The three core rules as described by Fundsmith founding partner Terry Smith are to buy good companies, avoid overpaying, and “do nothing”.
This has led to a concentrated portfolio of 39 holdings with a strong bias to the ‘quality’ style: companies with high levels of cash generation, high and sustainable (in the manager’s view) return on capital employed, and management that acts in shareholders’ interests.
The fund is also concentrated in terms of geographical and sector exposures. The portfolio has 43% in Indian stocks, which is a passive breach of its 40% maximum in one country, and 66% in consumer staples companies. This latter bias has been unhelpful since late 2016, as staples have underperformed since then and more cyclical areas of the market have done best (technology, consumer discretionary and financial services).
The trust has underperformed its sector and index since launch, returning 29.3% in NAV total return terms, compared with gains of 54% for the MSCI Emerging Markets index and 55.4% for the average AIC Global Emerging Markets trust. The defensive positioning hasn’t helped in a bull market, while the trust has also not employed any gearing.
Terry has taken a step back from day-to-day management of the trust, handing over the reins to Michael O’Brien and his deputy, Sandip Patodia, in May of this year, but he remains CIO and controlling partner of Fundsmith. Since this decision, the shares have slipped onto an 8.8% discount, having traded on a premium for most of the trust’s life.
The company’s objectives are to maximise capital growth, so dividends are paid only to retain investment trust status. Last year the first dividend was paid of 2p, so the historical yield is just 0.2% and there is no guarantee dividends will be paid in future.
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