Shares - Turn to Fundsmith to play emerging markets

by James Crux | Mar 14, 2019
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FEET offers defensive and disciplined exposure to the globe’s fastest growing markets 

Emerging economies are faring better than their developed market counterparts despite the US/China trade spat. We believe the best way to get exposure is via an actively-managed fund rather than picking stocks individually as you can lean on the expertise of a fund manager who has the right resources to properly research these markets. 

Emerging markets can be quite volatile and so nervous individuals should seek a more defensive fund with a disciplined approach to avoid too many ups and downs with their investment. 

Terry Smith-managed Fundsmith Emerging Equities Trust (FEET) looks ideal in this situation. It follows the same proven investment strategy that has made the global fund Fundsmith Equity (B41YBW7) so popular with investors. 

‘FEET’ applies Fundsmith’s three step investment process – ‘only invest in good companies’, ‘don’t overpay’ and ‘do nothing’ – to the world’s faster growing economies. Doing as little dealing as possible minimises expenses and lets the returns from the underlying portfolio compound over time. 

The investment trust invests in companies which have the majority of operations in or revenue derived from developing economies, and which provide direct exposure to the rise of the emerging market consumer classes. 

It likes companies which make their money by a large number of everyday, repeat transactions. Such firms have relatively predictable revenues and low capital intensity as well as high returns on capital. 

The fund eschews banks and heavily cyclical sectors such as construction and manufacturing. Instead, it puts money to work with established, well-managed companies with cash generative brands of consumer staple products which should deliver compound growth in shareholder value over the long term. 

‘FEET’ leans heavily towards markets in India for investments and only has a small exposure to China because of general concerns about corporate quality and disclosure. 

Leading portfolio holdings include soymilk, tea and tofu maker Vitasoy, Indian packaged food maker Britannia Industries and Chinese airline reservation business Travelsky. 

‘FEET’ will sell a stock if management makes bad capital allocation decisions, the investment case fundamentally changes, the valuation becomes indefensible, or (involuntarily) if a company gets taken over. 

Its performance since launch in 2014 hasn’t been as good as some other emerging market funds and it is worth noting its portfolio is extremely different to the MSCI emerging markets index – which many funds in this field use as a benchmark. 

However, we would expect ‘FEET’ to be less volatile than many of its peers over the coming years and it is for this reason, alongside the proven investment strategy, that we are happy to give it a ‘buy’ rating.