Fundsmith Emerging Equities Trust 2019 AGM

Terry Smith presents the full Fundsmith Emerging Equities Trust 2019 Annual Shareholders’ Meeting from the Barber Surgens’ Hall.

Fundsmith Emerging Equities Trust 2019 Annual General Meeting

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Just to say you know I think it's important to very briefly back up over what we're trying to do here because reminding ourselves is what the general idea I think is quite a good discipline. You know this is the same strategy as our main fund Smith investment fund in terms is that the three planks of it. Try to buy good companies try not to overpay try to do as little as possible thereafter. It's got differences however it's focused on the what we think are attractive Democratic s demographics and growing purchasing power of middle class consumers as that class of consumers a rise in and in the developing world. And the reason that we basically put this into this particular structure is we think that it's a fact that there is much lower liquidity and much higher volatility in shares that are listed in those markets. They're much smaller than the than the the ones in our main fund and the liquidity of the local markets is lower and most of them have a dominant shareholder as well as sometimes a multinational sometimes a family sometimes a conglomerate so you have much more limited liquidity than we've got in our open ended main fund. And as you've seen with other fund managers from time to time the idea of getting limited liquidity things in an open ended vehicle can only lead to a problem. See that's why it's in a separate vehicle of this sort. As I touched upon earlier.

The strategy is the same as the one that we employ on the on the main fund buy good companies try not to overpay do nothing. I'll just touch upon each of those and say a little bit about it to test where we are in relation to that. What do we mean by a good company. We think the good company has a combination of these factors. Basically it makes high returns on capital employed. I've talked about this ad nauseum. If any of you have ever listened to me about it me present on this the world's greatest investor. For the last 50 years Mr. Buffett is someone whose wax lyrical on the subject it's necessary. It's a necessity in a business that it makes a high return on capital. If it is actually to grow in value over time. But it also needs growth. The second part it's no good having a high return without any growth. So if you got a wonderful return on capital but you can't grow the business then there's no way to deploy the capital you're generating. Equally there's no point having growth without high return.

Anyone can grow a business with very poor returns. I always say if you set up a business to give power floats away for 90 P you have a very fast growing business on your hands. It just won't make a very good return. That's the problem. So those two things in combination. We also think you need other things predictability. It's no good having a business which makes high returns and growth for periods and then you don't know whether it will in the future that it might again. So things that are very hit and miss things like the movie industry the major construction project industry people who are basically dependent upon single inventions such as the biotechnology industry and so on are very difficult to predict the outcome. They may be great for a period and then they're not. And sustainability in the you know the the widest sense we're looking at people who in particular can sustain those high returns and that high growth not just the usual box ticking approach that people take to sustainability but you know what is it our companies have got they got powerful brands control of distribution. Are they spending enough on product development and R and D and innovation and so on. So in the widest sense we're looking for that. So those are the things that we we seek to find in good companies. Looking at those first two that I touched upon the two that are easiest to measure with no which is the return on capital employed and the and the growth rate. There's a chart which looks at in the in those bars the red bars are the bars for the return on capital employed and the five year compound annual growth rate in cash flows here for these companies. And the red bars are subsidiaries locally incorporated and listed subsidiaries of major multinationals in the developed markets and the grey bars are the parent companies.

So these are the major and multinational parents companies so that would be British American Tobacco. That one is British American Tobacco Bangladesh. That's Colgate-Palmolive. That's Colgate-Palmolive India. And as you can see in every case the return on capital employed is very much higher than the than the parent companies return on capital employed.

So we think these companies tick that box they make much higher returns on capital employed and you can see over here they also have much much higher growth rates. My calculation from that slide is that on average the return on capital employed for the ones we got up on the slide their average is 60 percent on a weighted basis versus 18 percent for the parents now 18 is pretty good return on capital 60 is a lot better. Okay. And in terms of growth rate these are averaging a growth rate if took the average of though Basel about 9 percent. So about where that one is raise the average for the for the parent companies is around about 4 percent. So that one there which is BHP is pretty typical isn't nearly as big deal. I think it's pretty typical these companies on average are definitely making much higher returns.