Smithson Investment Trust: May 2023 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 however has performed strongly so far 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 £7bn. The manager does not 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 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. 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 32. 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 March 2023, the trust was invested mostly in developed markets with 40% held in the US. Barnard also finds plenty of ideas in European countries such as the UK, Italy and Switzerland. In terms of sectors, 34% of the trust was invested in technology companies, with a further 25% in industrials. 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.

New investments in 2022 include Italian clothing company Moncler, Swedish industrial company Addtech and US Industrial company IDEX. Elsewhere, AO Smith, which provides water heating and treatment solutions, Wingstop, the international restaurant chain and Ansys, a US simulation software company were all 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 is clear that analysing corporate governance and company engagement are a key parts of the investment process.

Cost

The ongoing annual charge over the trust’s financial year to 31 December 2022 was 0.9%. 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.

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

Performance

Since launch in 2018, the trust has outpaced other global smaller company focussed investment trusts. Over this period its share price has grown 35.63%* vs 7.53% for the AIC sector. Its Net Asset Value (NAV) also rose 56.77%. Remember past performance is not a guide to the future.

Over the trust’s last financial year to the end of 2022, its NAV decreased 28.1%. The trust’s quality growth style of investing that had previously helped performance fell out of favour in 2022 and created a headwind for the trust. Rising inflation and higher interest rates are expected to erode the value of companies’ future cashflows, which has a negative impact on these types of companies’ share prices.

In addition, energy and utilities have been some of the strongest performing sectors in the broader global market to the end of 2022. However, companies in these sectors don’t typically meet the team’s quality investment criteria, which means the trust has missed out on the gains made.

On the other hand, consumer, healthcare and technology companies, to which the trust is biased, have fallen in value. Weaker performers this year include Fevertree Drinks, they struggled from rising costs of transporting products from UK and Europe into the US. They have seen strong growth in the US market and decided not to increase prices to potentially slowdown this momentum however, this led to decreased margins on their products. Software company Temenos also performed poorly after switching from a long-term license model to a software subscription model.

There were some positive performers over 2022. The US pest control company Rollins was the best performer. Much of the revenue they receive is being paid on subscription and therefore proved a very reliable stream of income despite an uncertain market. US software company TechnologyOne also performed strongly as sales continued to grow throughout the year. The majority of the TechnologyOne’s customers include governments and universities which are less affected by changes to the macro environment.

At the time of writing the trust trades on an 8.46% discount.

N/A** performance for this period is not availiable as the trust was launched later in 2018.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2023

FIND OUT MORE ABOUT THE SMITHSON INVESTMENT TRUST INCLUDING CHARGES

VIEW SMITHSON INVESTMENT TRUST KEY INFORMATION DOCUMENT

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