A "dull" start to life for the Fundsmith Emerging Equities Trust (FEET) has left its shares offering “significant contrarian value, with a strong fundamental investment case enhanced by the current discount”, according to analysts at Investec Securities.
FEET launched in 2014, as the first investment company offered from Terry Smith's Fundsmith investment management firm to much fanfare, reaching a 12% premium rating within three months of IPO.
However, returns in the trust's first six years have been "dull", Investec's Alan Brierley noted in a recent initiation note. FEET has returned 11.5% in that time, just shy of its wider AIC Global Emerging Market sector peers' 14% gain, and well short of its MSCI Emerging Markets benchmark index's 58.3%, according to data from FE fundinfo.
Today, FEET trades at a 12% discount, in contrast to its global stablemate Smithson's 3% premium. The underperformance has been exacerbated by what Brierley said was a "marked polarisation in fund flows". He noted significant net inflows into exchange traded funds investing in emerging markets and net outflows from their active counterparts since 2014.
In addition, Brierley continued, "there has been a focus on a handful of very large companies, which have been a key driver of returns" for ETFs. FEET's "clear and distinctive investment philosophy" has led to a markedly different portfolio from the benchmark, with an active share of 95%.
"These dynamics have represented significant headwinds for the company and its philosophy, and the rating coming under pressure has compounded matters," said Brierley.
However, the analyst said management, led by portfolio manager Michael O'Brien, have made a number of changes aimed at reinvigorating performance. O'Brien's team have increased their weighting to both healthcare and technology, while reducing exposure to more economically challenged countries.
Elsewhere, exposure to companies controlled by a family or founder has increased further, along with portfolio concentration, while O'Brien has acknowledged that local subsidiaries of multinational companies often lack the agility of their rivals.
Brierley believes these changes could be a catalyst for improved performance, slapping a ‘buy' rating on the trust in its initiation note.
"Although the Fundsmith investment philosophy has delivered exceptional long-term returns in developed markets, the historical performance of FEET has been dull," he explained.
"Meanwhile, sentiment towards emerging markets is poor, with the asset class increasingly over-shadowed by five US mega-caps.
"However, looking forward, we see grounds for optimism. The focus on quality represents a solid bedrock, and we believe the portfolio is well placed. The shares offer significant contrarian value, with a strong fundamental investment case enhanced by the current discount."