Famed investor Terry Smith (pictured) has decided to step down from running the Fundsmith Emerging Equities Trust. The fund has been under-performing its benchmark for the last five years but with its construction is very different from its underlying index.
Ryan Hughes, head of active portfolios at AJ Bell, said that while news that Terry Smith is stepping back as the named manager of Emerging Equities Trust will no doubt make investors ears prick up, in reality this is likely to mean no change to how the portfolio is run with the exact same philosophy and process being followed by his colleagues O’Brien and Patodia.
He added that the annual fee is being trimmed by 25 basis points although the trust still looks expensive at 1.27 percent ongoing annual fees. This is especially glaring in light of its lacklustre performance over the last five years.
Unlike the benchmark, this trust is massively underweight China in favour of India and concentrates on consumer staples companies. This variance from the index means that when the benchmark is not doing so well, this trust has the capacity to outperform due to the difference in its construction.
Co-CEO of HANetf Hector McNeil said in a statement: ““The difficulty of consistently outperforming a benchmark has been well reported and the performance of Fundsmith Emerging Equities Trust shows the risks for investors relying solely on ‘star managers.’
“It’s all very well for managers like Terry Smith to point the finger at passive products, but the fact is the investment landscape has changed profoundly and investor expectations have changed with it.
“ETFs have become the wrapper of choice for investors, and it will become increasingly problematic for active managers who don’t embrace this landscape.”
Mr McNeil added that using passive products doesn’t necessarily equate to slavishly following a market cap index. He said: “this isn’t about mindlessly being exposed to the biggest names in an index. For us, via products such as the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF - which tracks an index of leading internet and Ecommerce companies that serve emerging markets - there are plenty of options for investors which don’t merely shoehorn them into the largest companies in a region.”
For ‘star managers’ as McNeil dubbed them, there are always going to be periods of relative underperformance. This has been seen with Neil Woodford and now Terry Smith. But if you look at their respective records over the long-term, ‘star’ doesn’t appear to be mere hyperbole.
