Smithson Investment Trust: buy now or never

When Fundsmith launched the Smithson investment trust in 2018, scepticism was rife. But it has been a big success, says Max King.

When markets are down, it’s a good idea to snap up the shares that seemed too expensive when markets were riding high and will, assuming that their prospects remain undiminished, go on to be unaffordable again. On that reckoning, Smithson Investment Trust (LSE: SSONis a buy.

At its flotation in autumn 2018 it seemed sensible to be cautious. Smithson raised a record £822m, yet popular flotations often presage trouble. Terry Smith, Fundsmith’s founder, had recruited a duo from Goldman Sachs, Simon Barnard and Will Morgan, to run Smithson, which was pitched as “son of Fundsmith”. 

But Goldman Sachs is better known for making money for itself than for clients. Fundsmith’s first investment trust, investing in emerging markets, had been a disappointment.

An impressive start...

Nonetheless, in the period from flotation to the end of 2019 it returned 25.5% against the benchmark index’s 11.8%, while the shares continued to trade at a premium to net asset value (NAV). The benchmark MSCI small and mid-cap index reflects Smithson’s mandate of investing in a concentrated portfolio of 25-40 high quality small and mid-cap companies around the world, with market values between £500m and £15bn. This quality is mirrored in portfolio characteristics similar to the Fundsmith Equity Fund: the return on capital is 28%, compared with 11% for the MSCI small and mid-cap index. 

The operating profit margin of 32% is four times higher than the index’s, while cash generation is higher and debt lower. As at Fundsmith, the strategy is “buy good companies, don’t overpay, do nothing”. The portfolio had just 29 holdings at the end of 2019, heavily weighted towards information technology (40%), industrials (21%) and healthcare (16%), but just 3% in financials and zero in energy. Around 45% of the portfolio is listed in the US, a surprisingly high 24% in the UK, 20% in Europe and 8% in Australasia. As with Warren Buffett, “our ideal holding period is forever”, though there was “voluntary turnover” – ie, not the result of a takeover, of 6% last year. 

Notable among these was last year’s biggest loser, CDK Global. The reasons Barnard gives for the sale of this provider of software for car dealers was “firstly a new chief executive who changed strategy adversely, secondly that the core business wasn’t quite as good as we had previously thought”. 

This is as close as a Goldman Sachs alumnus ever gets to admitting a mistake. Other poor performers, including Chr. Hansen (food ingredients) and Fever-Tree (soft drinks) are still held. Barnard believes that while Fever-Tree’s UK business is mature, strong growth will continue elsewhere.

... and a promising outlook 

The winners far outweigh the losers. Ansys, a leading company in the field of engineering simulation software, rose 80% last year. Halma, a provider of safety and healthcare equipment, is “a very rare breed in the corporate world: a good acquirer”. 

Fisher & Paykel Healthcare designs and manufactures equipment for respiratory and acute care and has seen a surge in demand, while Ambu has seen demand for its disposable endoscopes rise 70% year-on-year. 

These and the other companies in the portfolio are growth businesses and appropriately priced; “reassuringly expensive”, as an advertising slogan once quipped. 

In the first quarter, the net asset value dropped by 9%, much less than the 28% fall in the MSCI index. The share price fell by 11%. There are days when the shares trade at a small discount to NAV. This is as good as it gets; if you don’t buy now, you never will.

Recommended

Changpeng Zhao: Binance founder undaunted by the crypto winter
Bitcoin & crypto

Changpeng Zhao: Binance founder undaunted by the crypto winter

Changpeng Zhao, the founder of controversial cryptocurrency exchange Binance, has been severely battered by carnage in the sector. But the future is b…
3 Jul 2022
Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
Just how powerful is artificial intelligence becoming?
Tech stocks

Just how powerful is artificial intelligence becoming?

An uncannily human response from an artificial intelligence program sparked a minor panic last month. But just how powerful are machines getting – and…
2 Jul 2022
Persimmon yields 12.3%, but can you trust the company to deliver?
Share tips

Persimmon yields 12.3%, but can you trust the company to deliver?

With a dividend yield of 12.3%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate compa…
1 Jul 2022

Most Popular

Five dividend stocks to beat inflation
Share tips

Five dividend stocks to beat inflation

During periods of high inflation, dividend stocks tend to do better than the wider market. Here, Rupert Hargreaves pick five dividend stocks for incom…
30 Jun 2022
Don’t try to time the bottom – start buying good companies now
Investment strategy

Don’t try to time the bottom – start buying good companies now

Markets are having a rough time, so you may be tempted to wait to try to call the bottom and pick up some bargains. But that would be a mistake, says …
1 Jul 2022
UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022