Should you invest in Terry Smith’s new investment trust?

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Should you invest in Terry Smith’s new investment trust?
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Terry Smith has recently announced that he is planning to launch a new investment trust that will provide exposure to a global portfolio of small and mid-cap companies. Smith is a controversial figure in the industry – you may remember his book, Accounting for Growth, which was about creative accounting practices – so the new fund is bound to attract a lot of attention, but should you invest?

The Smithson Investment Trust hopes to raise £250 million when it lists on the London Stock Exchange on October 19. It has an unusual remit, as the managers have the freedom to invest in companies worth between £500 million and £15 billion with the average being £7 billion, which sounds more large-cap than the small and mid-cap description would suggest.

Unlike Smith’s other funds he will not be directly involved in the day-to-day management, but will leave that to Simon Barnard, who was hired from Goldman Sachs to research the opportunity. Barnard was a portfolio manager at Goldman Sachs from 2012 until he left to join Fundsmith last year. Latterly, Simon was the portfolio manager of the Global Millennials Fund, a concentrated global equity growth fund.

Barnard will use the same methodology as the firm’s flagship Fundsmith Equity Fund, which is often pithily summarised as ‘buy good companies, don’t overpay and then do nothing’. Terry Smith, in his capacity as Chief Investment Officer of Fundsmith, will also provide advice and support to Smithson’s portfolio managers, Simon Barnard and Will Morgan.

Investible universe of 83 ‘compelling companies’

The fund will focus on stocks that are typically smaller than the mega caps in Fundsmith Equity, with Barnard identifying an investible universe of 83 ‘compelling companies’ from which he will select between 25 and 40 to include in the portfolio. History shows that these smaller businesses have the potential to generate higher returns that their larger counterparts.

Smith’s other funds have experienced mixed fortunes. Fundsmith Equity is the third best performer in the Global Sector over the last five years with the high returns helping to attract £17 billion of assets under management. It is a very different story for the Fundsmith Emerging Equities Trust (LON:FEET), which is towards the bottom of the Emerging Market investment trust table over three years.  

The success of Fundsmith Equity will guarantee that the new launch gets a lot of publicity, so there is a chance that Smithson will move to an early premium, although £250 million is an ambitious target and the general mood of the market does not feel as bullish as it did last year. 

A good one-stop diversifier

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Most Smaller Companies funds are country or region specific, so a global remit can be a good one-stop diversifier, but the stocks that it invests in are much bigger than the small-cap description implies, and the concentrated nature of the portfolio is unusual for this part of the market. It is also worth bearing in mind that Barnard is a relatively untried manager and Smith will not be directly involved in the day-to-day running, so it is a big ask.

A more established alternative is the £585 million Edinburgh Worldwide Investment Trust (LON:EWI), which has built up a successful track record by investing in innovative companies that have an initial valuation of less than £5 billion. It is more diversified than Smithson with almost 100 different holdings.

If you prefer open-ended funds you might want to consider the £827 million Invesco Perpetual Global Smaller Companies fund, which draws on the expertise of the various regional teams across the firm. It is incredibly diversified with 389 holdings and has comfortably beaten the Global Sector average over the last ten years.


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