Smithson 01 April 2020
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Utilising the same investment approach as the well-known Fundsmith Equity OEIC, Smithson Investment Trust (SSON) focusses on opportunities in small and mid-caps across the globe. The trust targets companies with market caps of between £500m to £15bn, utilising the closed-ended structure to allow them to better access less liquid companies that an open-ended fund might struggle to hold at acceptable levels of portfolio liquidity.
The lead manager of SSON, Simon Barnard, looks to build a concentrated portfolio of between 25-40 companies (presently the portfolio contains 29). As with the Fundsmith Equity Fund, SSON is primarily invested in ‘high quality’ companies; as we discuss in the Portfolio section, such companies tend to exhibit certain characteristics, and are held with a long-term outlook.
Whilst the managers are primarily focussed on identifying high-quality businesses with strong future prospects, they are also wary of overpaying for such companies, and assess valuations as part of their investment process. Portfolio turnover is kept low, with one new entry and one position exited over the whole of 2019; the managers’ investment philosophy can be defined as ‘buy good companies, then do nothing’.
Gearing will not be employed other than in exceptional circumstances, as we detail in the Gearing section.
Performance has been strong since launch on a relative basis, though the challenging market conditions of early 2020 have impacted absolute returns. Share-price returns have also been negatively affected by the trust moving to a discount, having previously traded consistently on a premium since launch. This discount remains very volatile, likely a reflection of the trust’s large and diverse shareholder base reacting to fractious market conditions.
SSON has made a strong start to life over roughly the past year and a half There are elements embedded into the investment process which historically lent themselves to structural outperformance over the long term. These include a low-turnover approach, a concentrated portfolio and a consistent process. However, the premium has not proven quite as sticky as might have been expected and, as the past weeks have shown, the strong retail following means the trust is vulnerable to a deterioration in risk sentiment.
Much as the managers of SSON would likely dislike such an analysis, the probable evolution of macro conditions in the coming months should be considered. Expansionary fiscal and monetary policies from the authorities across the globe in the wake of the coronavirus pandemic may prove a mild relative headwind to SSON, as assets likely to perform well in a ‘reflationary’ environment will not meet the non-cyclical characteristics the managers prefer. However, governments will likely rely on rolling out support through existing logistical frameworks and networks; existing market leaders will therefore likely be the beneficiaries of any government largesse.
Longer-term, unless we see significant changes to global regulatory and economic models, SSON should continue to offer long-term potential. Whilst the dividend policy is perhaps understandable, it might perhaps be preferable for shareholders to see some of the plentiful cash being generated by the underlying companies returned to them, affording the opportunity to utilise this as they deem appropriate.
| bull | bear |
| Investment philosophy has demonstrated strong long-term returns | Large retail following leaves share price vulnerable to wider risk aversion |
| Underlying business models should be resilient to ongoing economic turmoil | Disciplined approach could be vulnerable if we see regime change in financial markets |
| Risk should be primarily a product of stock selection | No dividend at present |
Fund History
