Fundsmith has announced the closure of its Emerging Equities Trust after a streak of underperformance.
The asset management firm proposed a voluntary liquidation which would mean all investments be returned to shareholders in the form of cash.
Since launching in July 2014, the trust is up 22.3%, but returns were 20.3 percentage points lower than its peer group in the IT Global Emerging Markets sector and 45.32 percentage points below the MSCI Emerging Markets benchmark.
Total return of trust vs benchmark and sector since launch
.png)
Source: FE Analytics
Terry Smith, chief executive of Fundsmith, said that returns had “fallen below our expectations” and it was more beneficial for shareholders to return their investment rather than “hold onto the fund for the sake of the fee income”.
The liquidation is expected to complete by the end of November, after Fundsmith publishes a circular outlining the wind-down process in detail and conducts a shareholder vote.
Onlookers were generally surprised by the proposal, with Jason Hollands, managing director of Bestinvest, stating: “It is hard to think of a previous example, certainly in recent history, of a fund manager deciding to fire themselves from managing a portfolio earning them fees.”
Although unusual, Hollands added that the voluntary liquidation is understandable considering the Fundsmith Emerging Equities Trust is “a distraction from the firm’s flagship product”.
The emerging markets portfolio’s £319m in assets under management (AUM) is dwarfed in comparison to the more renowned Fundsmith Equity fund, which runs over £24bn.
Following today’s news, Hollands said that he expects other asset manager groups will probably approach Fundsmith to explore a merger deal.
Dzmitry Lipski, head of funds research at interactive investor, added that the surprise announcement should not be interpreted as a defeat – he said that its far better to close an underperforming fund than “seeing a failing strategy linger on”.
“We agree that it can be far better to wind an investment trust up and return money to shareholders, than to limp on for years while taking fees from investors,” he added.