Candour: Terry Smith said Fundsmith Emerging Equities Trust had ‘fallen below our expectations’
A strange thing happened on Wednesday. Star money manager Terry Smith announced plans to shut down one of his investment trusts, following a spell of weak performance.
Smith said Fundsmith Emerging Equities Trust had ‘fallen below our expectations’ and as a result it would be wound up and cash returned to investors.
Commentators were stunned. It is quite commonplace for investment funds to do badly – it happens all the time. But what is almost unheard of is for a fund manager to be so honest – and then do something about it.
Jason Hollands, managing director of Bestinvest, called it ‘surprising news’. ‘It is hard to think of a previous example, certainly in recent history, of a fund manager deciding to fire themselves from managing a portfolio earning them fees,’ he said.
I talk to a lot of fund managers, and they all have different ideas about how to invest. Some invest in just a handful of companies, others prefer to spread their risk and invest in scores of them.
Some like to hunt for bargains, others prefer to pay for quality. Some insist on meeting the management team of companies they invest in, while others think doing so clouds their judgment and prefer to evaluate companies from their balance sheets instead.
But while the approach of fund managers varies wildly, they all have one thing in common. All appear to have utter conviction in their own approach.
And many will maintain this confidence even when there is clear evidence that their strategy isn’t working.
All investment funds have to publish an Assessment of Value report each year, which sets out whether their investors are getting a good deal. Some read like they are living in cloud-cuckoo land.
They will unabashedly claim that their fund is providing good value even though it has underperformed over both the short and the long term. They will blame market conditions, or say that their style has fallen out of favour – anything but admit that perhaps it is their approach that is not working.
It is, of course, understandable that fund managers come across as so self-confident. They need to inspire the confidence of investors to entrust them with their hard-earned money. If you don’t have investors’ money, you don’t have a job.
But I think a bit of humility can sometimes inspire more confidence than a display of unwavering conviction.
In the case of Terry Smith, I doubt many investors will withdraw money from his other funds because he has admitted that this particular one was underperforming. On the contrary, investors may be even more willing to entrust him with their savings because he has demonstrated that he will not charge on defiantly if a strategy is not working.
Of course, Smith can admit to failure more easily than most. He oversees another fund – Fundsmith Equity – which is many times as large and incredibly successful. If you had invested £1,000 in the fund when it launched in 2010, you would be sitting on close to £6,000 today. Impressive.
It would take a lot more than the closure of Fundsmith Emerging Equities Trust to blemish Smith’s reputation.
But nonetheless I hope more fund managers in the future have the confidence to display his candour from time to time.
Woodford investors finally getting answers
Last week, we had another reminder of the value of humility to the industry. Three years since Neil Woodford’s flagship fund collapsed, the thousands of savers who lost money are now finally getting some answers.
The City watchdog said it was likely to force Link, the firm responsible for supervising Woodford’s management of his funds, to pay a penalty of up to £306million.
But I wonder if things would have gone so disastrously wrong for Woodford if he’d possessed just a little more humility.
Perhaps because he had enjoyed so many years as a star fund manager, when things started to go awry, he unwaveringly ploughed on.
Woodford’s downfall has shaken investors’ confidence in the industry. When savers lose their money in this way, it takes a long time to rebuild it.
My advice to regain the confidence of us investors? Tell it to us how it really is.
