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FEET investors stop Terry Smith lifting 40% India limit

9 March 2018

Leading shareholders in Fundsmith Emerging Equities Trust (FEET) object to proposal to let its star fund manager up his already big holdings in India.

Leading shareholders in Fundsmith Emerging Equities Trust (FEET) have objected to a proposal to let star fund manager Terry Smith invest more than 40% of its assets in India.

Chairman Martin Bralsford floated the idea in the trust’s interim results last year but in its latest annual report indicated the suggestion had been knocked back by investors.

‘Following further consideration of this matter and consultation with major shareholders, the board has decided not to seek shareholder approval for such a change in policy at this time,’ he said.

FEET’s biggest individual shareholders are Moneysupermarket co-founders Simon Nixon and Duncan Cameron who together own nearly 12% of the shares. At the time of publication, Fundsmith had not responded to a question whether they had objected.

Like the Citywire AAA-rated manager’s Fundsmith Equity fund, FEET is largely backed by private investors through dealing platforms such as Hargreaves Lansdown and Alliance Trust Savings.

After a slow start from its 2014 launch, FEET picked up speed last year, generating a 21.2% total return on net assets and a 24.5% gain for shareholders, up from respective figures of 12% and 10.5% in 2016. However, both NAV and share price returns lagged the 25.3% from the MSCI Emerging and Frontier Markets index.

Surprisingly strong

While welcoming the improvement, Smith said it fell short of his aim to beat the benchmark and left the £312 million trust with considerable ground to catch up against the index. Since FEET’s launch the MSCI index has grown just over 50%, well ahead of the total shareholder return from FEET of 31.4%.

Nevertheless, he expressed surprise the trust had come close to matching the MSCI benchmark last year given it held none of the 10 biggest stocks – many of them Chinese internet providers and banks – which account for a quarter of the index.

‘These companies bring with them risks of cyclicality, leverage, opaque accounting, lack of clear ownership rights and inadequate financial returns,’ he said in his annual statement.

Despite the rebuff from investors, Smith remains enthusiastic about India which he said had recovered from the disruption of demonetisation – the withdrawal of large notes from circulation – and the introduction of a goods and services tax.

India, which accounted for 39.6% of FEET at the end of December, had undertaken two other important reforms in recent years, which he said could be classified as ‘digitisation’.

Aadhaar, which means ‘foundation’ in Hindi, was an eight-year old programme that had nearly completed the task of biometrically identifying the country’s 1.3 billion population. ‘It is hard to over-estimate the scale of this achievement or its implications,’ Terry said.

‘The aim is to bring hundreds of millions of Indians who could not prove their identity into modern society with the ability to make payments digitally, open bank accounts and own land,’ he said.

Secondly, a ‘Jan Dhan’ initiative to give almost every household in India access to a bank account had seen 285 million accounts opened in the past three years. Using the advances under Aadhaar it would be possible to offer payment systems over mobile phones, avoiding the need for costly infrastructure, and to enable financial services firms to complete ‘know your customer’ forms electronically.

‘We hope and expect that the combination of these reforms will help to transform India’s economy to the benefit of our investee companies as well as ordinary Indians,’ Smith said.

IT stocks added, healthcare doubled

Smith doubled FEET’s exposure to healthcare stocks to 15% last year, confident they will benefit from rising spending on healthcare. This included the purchase of stakes in several Indian companies: branded generic drugs providers Ajanta Pharmaceuticals and Eris Lifesciences and diagnostic lab business Thyrocare. An existing position in Dr Lal Pathlabs was retained after it suffered from an influx of private equity funded rivals.

Pharmacy retailers Raia Drogasil and Clicks and Brazil and South Africa were also added.

Taking a leaf out of rival Templeton Emerging Markets, Smith has for the first time added two IT stocks to the portfolio which fit his criteria. They are Mercadolibre, an Argentia-based e-commerce business, and TravelSky Technology, a Chinese airline reservation business

Food and beverage and fast moving consumer stocks remain FEET’s biggest sectors but were reduced to 30% from 39% and 23% from 25%.

The changes saw over a third of the portfolio turn over, a high figure for a manager who likes to buy and hold stocks in order to maximise returns and keep down costs. Overall investment and trading costs were calculated to be 1.8% of assets, although Smith pointed out most of these were caused by the need to invest the inflow of money from new investors. The trust issued 1.7 million new shares raising £19.2 million last year.

Smith is well known being prepared to pay up for high quality growth stocks making high returns on capital. Analysing the portfolio, the manager said stocks in FEET were about 14% more expensive than their counterparts in Fundsmith Equity but generated bigger returns and better revenue growth.

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