Smithson Investment Trust: May 2024 update

• Simon Barnard hunts for quality small and medium-sized companies around the globe

• He uses the same investment process as other Fundsmith strategies - buy good companies, don’t overpay, and do nothing

• The trust has performed well since launch, it faced headwinds in 2022 but did better than peers in 2023

How it fits in a portfolio

Smithson Investment Trust aims to grow capital over the long term by investing in small and medium-sized companies. These companies have 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 to diversify an 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 Net Asset Value (NAV).

Manager

Simon Barnard joined Fundsmith in September 2017 and has managed the trust since launch in October 2018. 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 uses a buy-and-hold approach, which is similar to the open-ended Fundsmith Equity fund. 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 size is currently around £8bn. The manager doesn’t have the flexibility to invest in unquoted companies, which are not listed on a stock market, unlike most trusts which can. However, he can borrow to invest, known as ‘gearing’. This isn’t currently used however if used, this increases risk.

Barnard and his team hunt for high-quality businesses which can efficiently make 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. Long-term sustainable growth is key, which is why the team tends to avoid companies with lots of debt, which can be common in sectors such as banks and real estate. The manager also tends to avoid more economically sensitive sectors, such as financials, utilities, resources and transport.

The trust invests in 25-40 companies, and it currently holds 33. This is a high-conviction approach which means each holding can have a significant impact on performance, both positively and negatively, which increases risk.

At the end of April 2024, the trust invested mostly in developed markets with 46% held in the US. Barnard also finds plenty of ideas in European countries such as the UK, Italy and Switzerland. In terms of sectors, 38% of the trust was invested in industrial companies, with a further 24% in technology. The rest is mainly made up of consumer and healthcare companies.

Barnard is mindful of valuation and only buys companies he believes he can buy at a fair share price. Once invested, he simply ‘does nothing’. As a long-term investor his ideal holding period is forever which means changes are made infrequently. That said, he may sell a holding if the company’s share price no longer looks good value compared with its prospects, the management team makes poor decisions, or he finds a better idea elsewhere.

During 2023 Barnard added a few companies to the trust. He invested in US industrial company Graco after its share price fell. Barnard believes it’s a market leader for the management of fluids and coating in both industrial and commercial applications. UK chemical company Croda was also added to the trust. It provides ingredients for life science companies, including being the number one provider of a key component of mRNA delivery systems. US consumer staples company Clorox and engineering and scientific consulting company Exponent were also added.

Barnard also invested in the initial public offering (IPO – the first time a company lists on the stock market) of Oddity. This is the first IPO he’s invested in, so he took plenty of time to get comfortable with the management team and business prior to it listing on the stock exchange. Oddity is a beauty and wellness company which creates its own brands and products to sell directly to the consumer. It currently has two brands and they have both been the fastest growing online brands in history.

To buy these new investments Barnard sold a number of companies as well. Rightmove was sold due to increased competitor threat. Competitor OnTheMarket was acquired by American company CoStar, which has a history of competing aggressively in new markets and could disrupt Rightmove’s dominance. Domino’s Pizza Group was also sold. Barnard had some concerns with the amount of senior management change, and performance wasn’t as expected. US company Masimo was also sold.

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. It’s since expanded to include a small range 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.

ESG Integration

The team at Fundsmith aims to invest in high quality companies that are in control of their own destiny with the potential to generate a high return on capital. This generally discounts companies in areas like oil & gas producers, mining, airlines, biotechnology and banks, but this trust does not have any specific exclusions. While the team considers material Environmental, Social and Governance (ESG) issues as part of the wider investment case for each company they invest in, their ESG integration approach isn’t as formalised as that implemented by some other companies.

In 2020, the firm formed a Stewardship & Sustainability Committee to centralise discussions around their stewardship and responsible investment-related policies, processes, and activities. While we feel Fundsmith has well thought out positions on many ESG topics, transparency on its ESG-related activities could be improved. That said, it’s clear that analysing corporate governance and company engagement are key parts of the investment process.

Cost

The ongoing annual charge over the trust’s financial year to 31 December 2023 was 0.87% a marginal decrease from last year where the annual charge was 0.91%. 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 or Junior ISA.

Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL HL share dealing charges.

Performance

Since launch in October 2018, the trust has performed better than the average global smaller company investment trust. Over this period its share price has grown 30.34%* vs 16.63% for the AIC sector average. However, it’s lagged its benchmark, the MSCI All Country World SMID Cap Index, which returned 56.14%. The trust’s Net Asset Value (NAV) rose 53.84% though. Remember past performance is not a guide to the future.

Over the trust’s latest financial year to the end of 2023 the trust outperformed the sector returning 8.18% in share price terms and 13.34% in NAV terms vs 1.52%. The MSCI All Country World SMID cap Index returned 10.01%.

Danish asset management company Simcorp was the best performing investment throughout 2023. It received a takeover offer by Deutsche Börse which went through in October and this led to a significant rise in the share price. Another strong performer was Swiss bank software company Temenos. It struggled in 2022 but has recovered well after increasing new contracts being signed with large international bank customers.

There were also some companies that didn’t perform as well. Travel software company Sabre was the largest detractor. The amount of travel increased in 2023 but not as much as in 2021 and 2022 following Covid-19. Sabre also took on a large amount of debt during Covid and higher interest rates means it costs more to pay off which impacts profitability. US human resources company Paycom also underperformed as revenue growth is expected to fall. Global fast food company Dominos detracted as it reported weaker sales after having to raise prices to offset the cost of inflation.

At the time of writing the trust trades on a -10.70% discount. This is in line with the average for 2023 but the average discount since launch is -2.28%.