India the key for Fundsmith Emerging Equities – Fundsmith Emerging Equities (FEET), which predominantly owns companies that manufacture consumer staple products in emerging and frontier markets, has reported results for the year-end to December 31, 2018. A NAV fall of 3% outpaced the benchmark Index by over 5%, though the share price tracked the Index fall as the premium to NAV at which the shares traded was eroded during the year in what was generally a difficult year for emerging markets.
Popularity of ETFs in EMs a challenge for active strategies
Commenting on the results, Terry Smith, the fund’s manager, said: “whilst this performance is obviously not as good in some respects as outperforming the Index when it is rising, it is nonetheless a welcome indication that our strategy may be capable of delivering an essential characteristic which is the preservation of value in a downturn.”
In some respects, I remain surprised that the performance over the past year has been that good for two related reasons. First, as we have discussed before, is the fact that more than 100% of the inflows into emerging markets since 2015 have gone into ETFs. This trend continued in 2018.
The obvious issue is that the composition of the MSCI emerging and frontier Markets index is very different to our company, so these ETF flows are mostly going into stocks and sectors which we do not and will not own.
Secondly, to compound the problem and probably linked to the first point about ETF inflows, the best performing emerging market last year was Qatar (+38%), a stock market dominated by banks and property companies, in which FEET has no holdings.”
FEET invests in companies that have the majority of their operations in, or revenue derived from, developing economies and which provide direct exposure to the rise of the consumer classes in those countries. The manager intends to find companies which create value through a number of everyday, repeat, relatively predictable transactions. As a result, financial services companies do not qualify.
India the key
Discussing India, Terry further notes: “India remains by far the largest single country exposure and is over 40% of the portfolio. This is not a breach of our country limits as it arose because of the relatively strong performance of our Indian stocks and not as a result of additional purchases.
In India we are now experiencing strong company results as the disruptive effects of the goods & services tax implementation have waned and its benefits have become apparent. This is in spite of some deterioration in the macro economic situation caused by rising input costs and political uncertainty ahead of the general election due this year.
As we have pointed out several times before, markets do not deliver their performance evenly. FEET’s shares rose 25% in 2017. 2018’s performance has been about minimising losses. Who knows what 2019 holds? We certainly have a general election in the country to which we have the largest exposure – India – which seems certain to bring some nervousness. However, ultimately we hope for an outcome which will allow the country and our companies to continue to progress.”
FEET: India the key for Fundsmith Emerging Equities