Fundsmith Launches Fundsmith Emerging Equities Trust ('FEET')

by Fundsmith | May 28, 2014
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Offer Closes Noon 20 June 2014

Fundsmith LLP (‘Fundsmith’), founded by Terry Smith, today announces the launch of the Fundsmith Emerging Equities Trust PLC, an investment trust that it is intended will be listed on the premium segment of the Official List and traded on the London Stock Exchange's Main Market for listed securities. The offer will close at noon on 20 June 2014.

Terry Smith, Founder and Chief Executive of Fundsmith, commented:

“The performance of the vast majority of Emerging Markets funds has not kept up with the developed markets over the last five years*. Our analysis suggests that this is partly as a result of managers investing in poor quality companies and getting the inevitable result. They also often combine illiquid Emerging Market investments with open-ended structures which can have disastrous consequences if faced with high levels of redemptions and fund performance can only suffer from punitive dealing costs of the inevitable cycle of inflows and outflows. For these reasons we have chosen to structure FEET as an investment trust.

“FEET will be invested using the same strategy as the Fundsmith Equity Fund but with one added dimension: all of the companies in FEET will have the majority of their operations in, or revenue derived from, Developing Economies.

“It will avoid the same sectors which the Fundsmith Equity Fund avoids – financials; heavily cyclical sectors such as construction and manufacturing; utilities; resources and transport, and will instead invest exclusively in consumer stocks.

“The companies in which we seek to invest have relatively predictable revenues and low capital intensity, which helps when you are seeking to invest in companies with high returns on capital. They also deliver most or all of their profits in cash. They have defensible and strong market positions, typically derived from a combination of brands, trademarks and control of distribution and supply systems or networks. This combination delivers compound growth in shareholder value over the long term.

“They will also provide direct exposure to the rise of the consumer classes in the developing world. This rise is a well established trend with a predictable pattern of development and has a long way to run.

“Euromonitor forecasts that the consuming class (representing consumers with more than $5,000 in disposable income) in the developing world will grow by approximately one billion individuals between 2010 and 2020.  Further, a recent study by Groningen University, Brookings Institution and McKinsey forecasts consumption in the emerging markets to rise from $12tn in 2010 to $30tn in 2025, an increase of 150%. This compares to a rise, over the same period, from $26tn to $34tn for the developed markets, an increase of 30%. Benefitting directly from this rapid growth is central to the investment strategy of FEET.”

FEET is targeting to raise a minimum of £100 million and a maximum of £250 million, beyond which applications will be scaled down. Full details are available at www.feetplc.co.uk. It is intended that the investment trust will be listed on the premium segment of the Official List and traded on the London Stock Exchange's Main Market for listed securities.  The Company intends shortly to publish a prospectus at which point the placing and offer for subscription will open.  The placing and offer for subscription are due to close at noon on 20 June 2014 with admission expected to commence at 08.00 am on 25 June 2014.

Fundsmith’s selection process is helped by the fact that about a fifth of the companies in the FEET Investable Universe are quoted subsidiaries, associates or franchisees of the multinational companies in the Investable Universe for the Fundsmith Equity Fund. We believe the opportunities available to some of these quoted offshoots are startling. For example, Nestlé India has sales of $1.6bn from a country of 1.2 billion people, less than Nestlé sells in Australia (population 23 million).

Smith adds: “FEET is a natural extension of the Fundsmith Equity Fund as many of our existing investee companies have significant operations in emerging markets which we already research. We have identified 139 companies for the FEET Investable Universe and expect the portfolio to consist of between 35 to 55 of those. I will be investing £5 million in FEET at launch.”