Fundsmith, the fund management business set up by veteran City stockpicker Terry Smith, says it will absorb all of the launch costs of its new £250m investment trust in a move that will reignite the debate over investment fees charged to retail investors.
The Smithson Investment Trust will target small and mid-cap global companies, and is intended to be the “son of” Fundsmith’s £17bn equity fund, which has grown rapidly since its launch nearly eight years ago to become one of Europe’s 20 largest actively management funds.
Fundsmith said it would “bear all of the costs” associated with the planned launch of Smithson next month, meaning that for every £10 invested in the issue, shareholders “will receive £10 of value on day one of trading”.
“We’ve never seen another example of this in the market,” said Mr Smith. “Presumably that means some people in the investment trust world might be upset, to which I say ‘oh dear’.”
As the investment manager, Fundsmith will charge an annual management fee of 0.9 per cent based on Smithson’s market capitalisation, not the commonly used measure of net asset value.
“We think funding the upfront costs is the reasonable thing to do, as we are going to get fees over the years for managing this. Assuming the fund is successful, we will recoup our investment,” said Mr Smith, who is personally investing £25m into the new vehicle.
Active managers have come under fire for charging retail investors high investment fees when, in many cases, the performance of their funds has been beaten by low-cost passive funds which merely track an index. Since its launch in 2010, Fundsmith’s equity fund has beaten its benchmark, returning more than 20.3 per cent on an annualised basis compared with 14.4 per cent for the MSCI world index.
Mr Smith said that at launch, Smithson would target a portfolio of 25 to 40 global companies with a market capitalisation between £500m to £15bn which could “compound in value over many years, if not decades”. He highlighted the consumer goods sector, healthcare and IT as sectors where investments would be particularly targeted.
“When Fundsmith made its first investment in Domino’s Pizza, it was a £1.8bn company, but today it’s worth £12.5bn,” Mr Smith said. “We could still buy it — but how about the next Domino’s?”
He mentioned Wingstop, the $2bn Nasdaq-listed fast-food chain, as a possible contender but said the sheer size of Fundsmith’s £17bn equity fund meant that “we would have to buy a third of the company, a road to ruin in terms of liquidity”. Such issues prompted the launch of the new vehicle.
Other smaller stocks that Mr Smith said could meet the new trust’s investment criteria included Fevertree, the upmarket UK tonic brand; Ambu, the Danish healthcare company that is the world’s biggest manufacturer of disposable endoscopes; and Sabre, the US airline and travel reservations business.
Smithson will be led by two fund managers Fundsmith hired from Goldman Sachs last year — Simon Barnard, the trust’s investment manager, and Will Morgan, its assistant investment manager. Mr Smith will provide “advice and support” to the management team in his capacity as chief investment officer of Fundsmith, the company said.