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Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
SSON's concentrated small-cap portfolio has combined strong diversification potential with historic outperformance...
Overview

Smithson Investment Trust (SSON) offers investors a concentrated portfolio of global small- and mid-cap companies. Run by lead portfolio manager Simon Barnard and assistant portfolio manager Will Morgan, SSON follows a similar investment philosophy to many of the strategies managed by Fundsmith, focussing on companies that demonstrate strong returns on capital, and which through their sustainable long-term earnings growth and profitability can reliably convert these into cash. The trust’s small-cap focus means it will target companies with a market cap of £500m to £15bn, intending to capitalise on the benefits of a closed-ended structure. The team’s investment process lends SSON to having a clear preference towards quality growth stocks, particularly in the technology and industrial sectors, as we outline in our Portfolio section.

SSON has been able to generate strong returns since its inception in 2018, handily beating both its benchmark and peers. While the trust saw particularly strong returns over 2020, it has also been able to sustain its outperformance over the last 12 months, despite the apparent headwinds its style has faced. We describe SSON’s recent performance as well as its risk/return profile in more detail in our Performance section.

SSON has also traded at a premium almost consistently since its inception, barring the impact of the pandemic (see Discount section). We note that SSON utilises no gearing as the managers do not wish to enhance volatility, and nor does it pay a dividend, given the low yields of its holdings. SSON does score well for ESG, however, as its large weighting to software and high-end industrials leads it to naturally avoid poor ESG companies.

Analyst's View

In our view, SSON offers investors a potential source for added alpha in their portfolio, given the team’s highly concentrated approach to global small caps, something seldom found within the wider sector given the enhanced risk of small-cap investing. While SSON’s highly concentrated portfolio can also offer a potential source of diversification, we note that its high allocation to technology may limit its diversification potential to investors with an already high pre-existing tech exposure. While the threat of rising inflation may be a future headwind for the trust, we note that SSON’s high allocation to software companies may allow it to capitalise on the increasing levels of COVID-19 infections, as those companies’ services may once again be in demand if we enter another lockdown.

SSON’s three-year track record has demonstrated the benefits of the management team’s disciplined process, and though the last 12 months have been difficult, their outperformance is still admirable given the headwinds their style has faced. SSON’s enhanced volatility may make its risk/return profile unpalatable for cautious investors despite its overall attractive profile, although its returns have more than compensated for its increased risk.

We believe it may be a moot point for prospective investors that SSON currently trades on a premium, as the strong following that the Fundsmith brand commands means the trust could continue to trade at a premium into the future anyway. We note that SSON’s above-average ESG rating may also make it an attractive option for sustainability-minded investors seeking small-cap exposure.

Bull bear
Highly concentrated portfolio may offer a source of diversification
Enhanced risk profile may make it unsuitable for cautious investors
Disciplined approach to small- and mid-cap growth investing with a strong track record
Pays no dividend
Historically low downside capture versus benchmark
Strong tech bias may hinder diversification benefits for growth investors
Continue to Portfolio

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