Smithson makes changes ahead of continuation vote

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

It has been another difficult year for the Smithson Investment Trust, which has recently announced that it has refined its approach in an effort to improve the performance. The £1.9bn fund is a popular option amongst retail investors, but will hold a continuation vote at the AGM in April after the shares traded at an average discount above the 10% threshold to trigger the motion.

A similar thing happened in 2024 and although the resolution was passed fairly comfortably, around 10% of the votes cast went against the Board. The broker Numis thinks the result will be the same this time around, despite the manager describing the performance in 2024 as mediocre.¹

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Change in emphasis

Smithson provides exposure to a concentrated portfolio of small and mid-sized companies from around the world that is best characterised as quality growth. Manager Simon Barnard looks for stocks that he thinks can compound in value over many years by selecting businesses that have built up a successful track record, either through having a dominant market share in their niche area, or via brands or patents that others would find difficult to replicate.

It is a similar strategy to the large-cap Fundsmith Equity Fund that is managed by the same firm. Both are based on a buy and hold mentality, yet the poor recent performance has forced Barnard to revise his approach.

The process is now more focused on stocks that should generate the best returns, with the attention shifting to the lower half of the £500m-£15bn market cap range. Within this they are going to concentrate on companies that are improving their profitability by serving long-term growth areas such as: the electrification of industry and transport, space and aerospace industry suppliers, AI deployment and data centre construction, as well as healthcare diagnostics.²

The underlying portfolio

At the end of February the 32 stocks had a median market cap of £8.5bn with the 10 largest positions including names such as Diploma, Verisign, Moncler and Rational. The largest geographic allocation was the US at 51.5%, followed by the UK 14% and Italy 10.6%.³

Things were more evenly divided at the sector level with the main weightings being: industrials 39.8%, information technology 21.4%, health care 14.7% and consumer discretionary 12.2%. Despite the buy and hold mentality, the manager has been forced to make changes that have resulted in a very high portfolio turnover of 35.9% in 2024.⁴

Performance

Smithson’s NAV total return for the 12 months to the end of December was 2.1%, which was well behind the 11.5% increase in the MSCI World SMID Index. The manager described it as a "mediocre" year and said that it was a lack of outstanding performance from any of the holdings that was the problem.⁵ Please remember past performance is not a reliable indicator of future returns.

Unfortunately the longer term picture isn’t very encouraging either. Since the global peak in the relative performance of small and mid-sized stocks in March 2021, the trust’s NAV return is just 7.5% versus 25.8% from the benchmark and 60.2% from the global large cap universe⁶.

Will things improve?

The broker Numis says that poor sentiment towards small-cap companies and stock selection errors have challenged the fund's track record, but they believe that positive lessons have been learnt by the manager, while maintaining the core of the investment process⁷.

“We continue to believe that Smithson is potentially an attractive investment opportunity, having added it to our Equity Investment Companies Recommended List in early 2024. We believe that the portfolio has sound fundamentals that place it in a strong position to outperform over the long run and that the shares offer value on a circa 12% discount, supported by buybacks and the Board's commitment to offer continuation votes should the discount average greater than 10% over the year.”⁸

Discount and buybacks

The shares are currently trading around 11% below NAV, despite an active programme of buybacks that trebled in size after last year’s continuation vote. During 2024 the average discount was 11.5%.⁹

How do the costs stack up?

The ongoing charges figure for the period to the end of June 2024 was 0.9%, which is fairly typical for an actively managed global small-cap trust.

More on the Smithson Investment Trust

Source

^1,5,9 Deutsche Numis, Investment Companies Research, 6 March 2025
^2,7,8 Deutsche Numis, Investment Companies Research, 27 January 2025
^3,4,6 Smithson Investment Trust, 7 February 2025