Smithson Investment Trust: April 2021 Update

• Simon Barnard hunts for quality small and medium-sized companies around the globe
• He uses the same process as other Fundsmith strategies; buy good companies, don’t overpay, and do nothing
• Performance has been strong since launch with healthcare names boosting returns in 2020

How it fits in a portfolio

Smithson Investment Trust aims to grow capital over the longer term by investing in small and medium-sized companies. Whilst small in size, these companies have lots of potential to outperform larger, more established businesses but they carry more risk. The manager invests in high-quality companies, mostly from developed markets. The trust could work well alongside ‘value’ trusts investing in unloved companies or trusts focused on larger businesses. More broadly it could be used as a way to diversify a more adventurous long-term investment portfolio focused on growth.

Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV.

Manager

Simon Barnard joined Fundsmith in September 2017 and has been the trust’s manager since launch. After graduating from Cambridge University, Barnard joined Goldman Sachs Asset Management in 2003 as a research analyst before moving into portfolio management.

Will Morgan is assistant portfolio manager, a role he’s held since launch. He joined Fundsmith in July 2017 having previously worked at Goldman Sachs for 17 years. He started in equity sales before moving into research and has experience covering the insurance, construction & building materials, autos and industrials sectors.

Terry Smith, the founder of Fundsmith and manager of the flagship Fundsmith Equity fund, is also on hand to provide advice and support where required.

Process

Smithson Investment Trust adopts a buy and hold approach, which is similar to Fundsmith Equity. The main difference is the size of companies they invest in – Smithson invests in smaller businesses, those between £500m and £15bn in size. The average is currently £9.6bn. The manager has the flexibility to invest in unquoted companies and borrow to invest, known as ‘gearing’, although it currently does neither. If used, this increases risk.

The manager hunts for high-quality businesses which can efficiently generate profits and dominate within their market niche. Companies with intangible assets are favoured, such as brand power, intellectual property, or a product or service that customers can’t do without and would struggle to replace. Sustainable growth over the longer term is a key focus which is why they tend to avoid companies with lots of debt like banks and real estate. The manager also tries to avoid timing the market, which is why they often steer clear of more economically sensitive sectors, such as financials, utilities, resources and transport.

Barnard is mindful of valuation and will only buy companies he believes he can buy at a fair share price. Once a company has been purchased, he simply ‘does nothing’. As a long-term investor his ideal holding period is forever which means turnover which means changes are made infrequently. That said, there are a number of reasons which may prompt them to sell a holding. For example, if the company’s valuation becomes too expensive, the management team makes poor decisions, or they find a better idea elsewhere.

Using the strict criteria, the universe of around 5,000 stocks is whittled down to a concentrated portfolio of between 25-40 names, currently they own just over 30. This is a high conviction approach which means each holding can have a significant impact on performance, both positively and negatively, which increases risk.

The trust mostly invests in developed markets with just under half in the US. Barnard also finds plenty of ideas in European countries such as the UK, Switzerland and Denmark. Sector-wise, almost 45% of the trust invests in technology companies, with a further 21% in industrials.

As Covid-19 started to spread around the world at the start of last year, stock markets fell sharply, but some sectors were more impacted than others. Healthcare was a stronger performer, and the manager took profits from companies in this area, using them to top-up existing travel, leisure and industrial holdings whose share prices suffered. It also provided an attractive entry point for new holdings. These included German oven manufacturer Rational, a business the manager thinks will be a long-term winner given its market-leading technology, research and development capabilities and strong financial position. Two new cybersecurity companies were also added, Qualys and Fortinet, funded by the sale of Check Point, another cybersecurity company which the managers felt was losing market share to its competitors.

Culture

Fundsmith is a boutique fund group with offices in Mauritius, London and the US. It was founded by Terry Smith in 2010 with the launch of Fundsmith Equity and has expanded to include a small stable of funds and investment trusts, most of which are run along the same lines. This dedication to the founding investment philosophy is attractive.

The business is employee-owned, with Smith owning the largest stake, and managers all investing significantly in the funds. This means both the business and the funds are run with the long term in mind, and managers’ interests are aligned with investors.

Managers at Fundsmith typically invest in companies with good ESG (Environmental, Social and Governance) credentials, though they do not follow a strict ESG approach. Corporate governance and engagement are a key part of the investment process, which includes analysing a company’s ownership structure and the way management is compensated.

Cost

The ongoing annual charge over the trust’s financial year to 31 December 2020 was 1.0%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Performance

The trust’s delivered strong returns since launch in October 2018. The share price rose 62.5%*. Remember past performance isn’t a guide to the future. Investments can fall as well as rise and you may not get back as much as you originally invest.

2020 was a year of extremes and provided an opportunity for active managers to demonstrate their value. Simon Barnard did exactly that. Over the 12 months to the end of March the trust’s net asset value (NAV) grew 41.8% while the share price rose 43.4%. At the time of writing the trust trades at a premium of 1.4% to its NAV.

Healthcare companies Ambu and Masimo were the trust’s best performers last year as Covid-19 drastically increased demand. Premium drinks maker Fevertree also boosted performance with consumers opting for more luxury drinks at home as lockdown restrictions kept bars and restaurants closed for much of 2020. Other notable performers included Australian firm Domino’s Pizza Enterprises and fiber laser manufacturer IPG Photonics.

There were only a handful of companies that detracted from performance last year, the largest being travel technology company Sabre. Its fortunes are tied to the number of people travelling, which fell significantly as a result of Covid-19. The company’s management team acted swiftly to mitigate the situation by cutting costs and borrowing to cover short-term liabilities. The manager had enough conviction in its future prospects to invest more at a lower share price. Swiss software company Temenos and UK real estate company Rightmove also held back returns.

N/A - means performance for this time period is not available.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021.

Find out more about Smithson Investment Trust including charges

Smithson Investment Trust Investment Company Key Investor Information