Smithson 30 October 2019
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 approach as the successful Fundsmith unit trust, Smithson (SSON) differs from the larger fund in focusing on global small and mid-caps, defined as those with market caps between £500m and £15bn.
Smithson owns a concentrated portfolio of just 29 holdings, aiming to buy quality growth companies and hold them for the long run.
The managers seek to only invest in what they deem to be ‘high quality’ companies, typically holding very strong market positions and high brand loyalty. They are also cognisant of ensuring they do not overpay for companies, aim to identify companies they will never want to voluntarily sell, and accordingly seek to keep portfolio turnover very low.
Holdings are not driven by benchmark considerations, and the manager, Simon Barnard has flexibility to buy his preferred companies and own nothing in those he doesn’t rate. US exposure is always likely to be relatively high given the depth of the investment universe in this market, whilst SSON is unlikely to take significant exposure to emerging market shares, though its companies often have significant revenue generated in these markets.
Already the largest investment trust IPO in UK history when it launched in October 2018, at £822.5m, investor demand for shares in SSON has been such that the board has continued to issue further equity, and AUM is now over £1.3bn. Despite significant issuance, the trust has continued to trade at a sizeable premium, though board activity has brought this down somewhat.
Performance has been strong since launch, though recent months have proven slightly more challenging, as we discuss in the performance section.
The Fundsmith franchise is well-established in the UK investor mindset, justified by the strong long-term track record of the headline strategy. And the Smithson trust retains some elements which often lend themselves to longer-term outperformance, such as the concentrated portfolio, disciplined investment approach, and low turnover, whilst adding the small cap factor which means the portfolio should have the ability to generate strong growth. However, we note the already wide profit margins on the portfolio, which could be a concern for underlying future earnings should a more challenging environment for revenue growth occur, as in a recession. On the other hand, these wide margins are generally a feature of the investment process which emphasises businesses with strong market share and the ability to convert this into cash flow and profits.
| bull | bear |
| Offers exposure to long-term growth opportunities | Even after very large share issuance, continues to trade at a premium |
| Fundsmith's backtesting suggests portfolio should be resilient to market drawdown | Concentrated portfolio means more stock-specific risk |
| Concentrated portfolio with little to no benchmark reference | Global allocation can make geographic risk variable and hard to quantify |
Fund History
