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: SSON) is 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.
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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.
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