Bargain hunter: Terry Smith trust slips to rare discount

Terry Smith's emerging market trust's performance has lagged rivals since launch - but those buying today can pick up shares on the cheap.

These are still early days, but just over three years since launch, Smith's emerging market trust has not so far replicated the success of his Fundsmith Equity Fund.

Fundsmith Emerging Equities Trust has produced a total net asset value (NAV) return of 19% over the past three years, according to broker Winterflood, which lags significantly behind other emerging market focused investment trusts - JPM Emerging Markets (up 52%), Aberdeen Emerging Markets (39%),  Utilico Emerging Markets (38%), Templeton Emerging Markets (35%) and Genesis Emerging Markets (32%).

Feet's share price total return, however, is just 6%. In contrast JPM Emerging Markets has gained 52%, Aberdeen Emerging Markets 38%, Templeton Emerging Markets 34%, Utilico Emerging Markets 32% and Genesis Emerging Markets 23%.

The slow start to Feet's life has dampened investor enthusiasm. When the trust launched in June 2014, Feet shot onto an instant 10% premium as Smith's strong retail investor following snapped up shares in the new venture.

But for around the past two years the premium has cooled, and Feet has typically traded just a couple of percentage points above net asset value (NAV). It has, however, seldom fallen onto a discount apart from on a couple of rare occasions, such as now.

At the time of writing (29 August) Feet is trading on a discount of 2.2%, offering one of the cheapest entry points since launch. Over the past year Feet has on average traded on a premium of 1.4%.

Bigger discounts, however, can be found elsewhere: for example from Genesis Emerging Markets (13% discount), JPM Emerging Markets (11%), Utilico Emerging Markets (10.8%) and Templeton Emerging Markets (10.6%).

Last week, in a note to clients, Killik, the wealth manager, highlighted Genesis Emerging Markets as offering a cheap entry point.

"The fund achieved strong NAV returns over the last 12 months, broadly in line with that of the index and benefiting from the translation impact of weakening sterling against overseas currencies following the EU referendum. Despite these strong returns, the team remains optimistic on expected returns from the EM region as economic growth has finally begun to stabilise after five years of sequential declines," said Killik.

"The GSS share price has lagged the NAV returns seen so far this year, causing the discount to widen to the bottom end of medium-term trading ranges."

Why has FEET underperformed fund rivals?

Smith bided his time when Feet launched in June 2014, running a high cash weighting. A year on from launch 15% of the trust's assets was still in cash, and it was not until six months or so later that the trust was fully invested.

Smith explained that India and more specifically the election of reformist prime minister Narendra Modi, was the reason behind the initial caution, as this caused India's stockmarket to soar on euphoria.

Ahead of Feet's launch, Smith said India would be a prime investment target in his hunt for the consumer goods companies that would make up the bulk of the portfolio - 77% at the end of July. This high level of concentration will result in Feet performing differently from the benchmark and indeed from peers, who have significantly less exposure to the sector.

Over the past three years a broader-based emerging market approach has generated higher returns. But those who believe Smith's strategy will shine through over a longer time horizon now have the chance to pick up shares while adhering to one of the manager's key investment philosophies - to not overpay.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.