Smithson, the largest investment trust at launch, has delivered impressive returns for all those who subscribed to the IPO, writes Nick Sudbury.
Many new funds fail to live up to the hype, but that has certainly not been the case with Smithson (LON:SSON), which attracted a record £822m when it floated on the stock market in October 2018.
Smithson has a differentiated approach with the manager focusing on global small and mid-cap stocks with a market value of anything from £500m to £15bn. In common with the firm’s other funds, the aim is to buy good companies, don’t overpay and do nothing.
Comfortably beaten its global and global small-cap benchmarks
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The investment trust has just released a second set of interim accounts covering the six months to 30 June as part of an extended initial reporting period that runs from the launch to its year-end on 31 December 2019. During the first half of the year it generated an impressive NAV total return of 27.6% and since the IPO has comfortably beaten its global and global small-cap benchmarks.
Smithson has a concentrated 30-stock portfolio that has been put together on a bottom-up basis, although it is mainly focused on a few sectors that manager Simon Barnard believes will create the most shareholder value over the long-term. These include technology (44%), industrials (21%) and healthcare (17%), with the main country allocation being the 51% that is invested in the US.
The largest individual stock positions are the medical devices supplier Masimo, consumer credit ratings agency Equifax, travel technology company Sabre, risk assessment provider Verisk Analytics and online estate agent Rightmove.
It is a low turnover vehicle, which helps to keep the trading costs to a minimum, with no sales or new additions to the portfolio during the first half of the year. In July a position was opened in Fevertree Drinks after its share price fell 47% from its peak in 2018. The managers believe that the business is now attractively valued given its quality and growth prospects.
Haven’t overpaid for the superior growth prospects
On a look-through basis the portfolio has free cash-flow growth and return on capital employed of 16% and 39% respectively, which is well ahead of the benchmark ratios of 10% and 10% respectively. However, the free cash-flow yield of 3.7% is the same as the index and this suggests that they haven’t overpaid for the superior growth prospects.
Smithson has consistently traded at a premium to NAV since it was launched and the board has taken advantage of this to issue new shares to meet the demand. In total it has been able to raise an additional £300m that together with the strong asset growth has taken its market value above the £1.3bn mark.
The fund benefits from a high-profile management group led by the controversial Terry Smith, which has helped to make it popular with both retail investors and wealth managers. This, together with the strong performance, has enabled the shares to trade at a small premium to NAV.
Smithson was created to give investors exposure to secular growth opportunities within the global small and mid-cap arena. This area has delivered twice the return of global large caps over the last 20 years and is a part of the market that is followed by far fewer analysts, which suggests that there is an opportunity for the managers to take advantage of more market inefficiencies. Long-term investors may well see it as a core portfolio holding.