Here’s another refresher on some of the investment trusts I featured in the early days of this blog. One has its problems but the other two still have appeal.
I reviewed Schiehallion, Tetragon, Mobius, and Hipgnosis in an earlier article. This time, I’m checking in on Mssrs Smith, Ward, and Knott.
Let’s kick off with FEET…
For those that think everything that Terry Smith touches turns to gold, of which I am occasionally guilty, here’s a fund that provides a big splash of cold water.
Fundsmith Emerging Equities was the first investment trust launched by Fundsmith back in June 2014. The main Fundsmith Equity had been going some three and a half years by then and it had already established a healthy lead over most other global funds.
FEET has failed to make a similar impact, producing a share price return of just 14% over nearly five and a half years.
On a net asset basis, things look a little healthier at 28%. But it’s a paltry return next to the 163% return the main Fundsmith Equity fund has delivered over the same period.
What’s more, it’s far behind popular emerging market investment trusts from JPMorgan (JMG: 86%, JEMI: 38%) and Templeton (TEM: 48%).
FEET’s preferred benchmark is the MSCI Emerging and Frontiers Markets Index measured in sterling. This returned 51% in the five years to June 2019 versus 20% for the trust’s share price.
I was fairly upbeat on FEET’s long-term prospects when I first looked at this trust back in July 2018, thinking that the combination of Fundsmith-esque metrics (high return on capital employed, profit margins, and cash flow) and the attractive demographics of emerging markets would be a winner.
Indeed, FEET’s investments have a much higher return on capital and cash flow conversion numbers than the main Fundsmith vehicle. Their profit margins are a little lower, but still highly respectable.
Sadly, investing is rarely that simple.
Other commentators like Andrew at Fund Hunter have been much less enthusiastic, pointing out that rather than buying a bucketload of emerging-market-listed consumer goods companies, a simple investment in Unilever would have fared much better.
To Fundsmith’s credit, it’s looking to shake things up. Terry Smith is now taking a back seat, although I’m sure he’s still regularly shouting directions. Michael O’Brien and Sandip Patodi (both part of the team since launch) are taking more of a leadership role.
There hasn’t been a big change in the trust’s portfolio as far as I can tell, although we probably need to wait for the 2019 results for more information. At the half-year stage, two companies had been bought and seven sold, although three of those sold were among the tiniest positions.
It’s not clear if these moves were before or after the management change, but it seems more than the usual level of buying and selling you see at a Fundsmith fund.
The fund management charge has been reduced from 1.25% to 1.0%. It’s a little on the high side for a £300m trust I’d say, but comparable to other emerging market investment trusts.
And Terry Smith has increased his shareholding from 580,000 shares to 847,000, meaning he now has £10m out of his estimated £300m net worth invested in FEET. Other Fundsmith employees, including Michael O’Brien, have also bought shares recently.
FEET’s portfolio is still heavily weighted toward India (41%) and consumer staples (62%), although less so than it was earlier in the year.
China/Hong Kong is just 15%, about half the weighting you’d expect in an emerging markets tracker. Taiwan, South Korea, and Brazil are also smaller positions than you’d get with a passive approach.
I was also a bit surprised to see technology was just 3% of FEET’s portfolio. It’s about 17% in your bog-standard emerging market tracker.
The number of companies in FEET’s portfolio has reduced significantly. It was 47 last summer when I first looked at it. Now it’s just 35.
For a while now, Fundsmith has highlighted that a lot of the money coming into emerging markets has been via ETFs, which have largely been investing in places where FEET has feared to tread.
This seemed a plausible excuse for a little while, but it’s wearing a little thin these days. Five and a half years should be long enough for superior fundamental characteristics to assert themselves.
FEET may yet pull through but I think Smithson, which seems closer to the original Fundsmith model, looks like a better place for my cash for now.
Independent has also seen somewhat of a fall from grace over the last year or so, but looks it much better shape than FEET.
In early 2018, it commanded a premium of up to 20%. Like Lindsell Train Investment Trust, its directors were always at pains to say a large premium seemed inappropriate.
Independent has now fallen to a small discount, with the likes of Fever-tree and Blue Prism coming off the boil.
And what was a spectacular track record has now become just a very good one. It’s up 107% over the last 5 years and 283% over the last 10.
It remains a pretty concentrated portfolio. The last full list, as of 31 May 2019, consisted of 31 positions and 15% in cash.
There have been quite a few struggling performers, too, such as LoopUp, Quiz, Eddie Stobart Logistics, Zoo Digital, and Seeing Machines. Quiz has been sold, but the rest remain in the portfolio although they were among the trust’s smallest positions before they ran into problems.
Independent has also been moved, against its wishes, from the AIC’s Global sector to the UK. Nearly all of its current portfolio is UK-listed but along with funds like Oryx International Growth, it’s one of those trusts that has a flexible remit and doesn’t always fit in a neat pigeon hole.
Max Ward, the fund’s manager, turned 70 a few months ago and owns 7% of its shares. Three other directors own another 18%, with its Chairman owning the bulk.
And Independent remains one of the lowest charging funds around. Its ongoing charges figure was just 0.21% last year making it cheaper than many Vanguard index trackers! Its total expenses were just £0.75m to manage some £300m of assets.
I continue to like this fund and it’s good to see that Max Ward has said he wants to run it for as long as he can. But when he does eventually retire it seems Independent will be wound down or rolled over into another trust chosen by its Board.
Rights & Issues is another low-cost, one-man-band fund with very low charges. Like Independent, it fishes in small-cap waters, but is even more UK-focused.
Simon Knott has run this fund since 1984 and is now 61.
It’s another low turnover fund with a concentrated list of positions. The top 20 holdings amount to £161m, making up 99% of its portfolio.
In the last six months, Rights & Issues spent £2.8m adding about 30% to one position and it realised £0.8m from selling 7% of another. Not a single share was bought or sold across the rest of its top 20.
Rights & Issues had total expenses of £0.9m last year, so a little bit more than Independent. But its assets are just £170m compared to Independent’s £300m or so. That means Rights & Issues’ ongoing charges figure comes to 0.46% but that’s still highly commendable of course.
This trust’s share price hasn’t made any progress for two and half years now. It first crossed to £20 mark in May 2019 and it’s just below that level as I type this.
It seems a lot less liquid than Independent as well, with some 200 trades in the average month compared to around 500 for Independent.
Lastly, Independent’s portfolio is decidely racier, with a collection of fancy technology-focused companies.
Not really much has changed with either Rights & Issues or Independent since I last looked at them, apart from the fact they both look just a little bit cheaper.
Holding both of them appeals, as it would give you a new balance of old and new economy businesses, plus the added comfort factor that Knott and Ward probably won’t retire at the same time.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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The problem with FEET is quite simple I think. They didn't follow their own rules.
1: OK, they bought good companies
2: But they overpaid.
3: And then they didn't 'do nothing'.
It's more interesting now that there's a discount, and a more concentrated portfolio, but I still have a slight worry that it is a type of EM 'Nifty 50' portfolio - and that even wonderful companies can underperform for a while if they're too pricey.
I also was never sure about how in-depth the analysis was - the initial portfolio made it look like they'd just lifted it from Arisaig, who have so much experience and knowledge of their companies. It's unclear if the FEET managers know the companies well enough to spot if things start going wrong.
Separately, the RIII performance is confusing to me. I think it's a great trust, though it's a shame you can only really find out what he thinks once a year at the AGM.
You could be right about FEET. I've stopped short of delving into their individual investments but at a sector and country level it seems like an odd mix.
And RIII's management certainly will never be accused of being verbose. But given its portfolio changes so little, perhaps they feel they have little new to add these days!!!