<p>Smithson Investment Trust has made an impressive start on the London Stock Exchange with a return around triple that of its benchmark. But we shouldn&#8217;t get too carried away.<br />
<!--more--><br />
This week&#8217;s interim results followed a slightly briefer review <a href="https://www.itinvestor.co.uk/2019/03/a-smooth-start-for-smithson/">published in February</a>.</p>
<p>In short, everything still seems to be on track. But given Smithson only launched last October, it would be surprising if that were not the case!</p>
<h2>Returns: so far, so good</h2>
<p>Here&#8217;s the performance table:</p>
<table id="iti">
<tbody>
<tr>
<th></th>
<th style="text-align: right;">1 Jan 19 to<br />
30 Jun 19</th>
<th style="text-align: right;">19 Oct 18 to<br />
30 Jun 19</th>
</tr>
<tr>
<td>Net asset value per share<br />
(total return)</td>
<td style="text-align: right;">+27.6%</td>
<td style="text-align: right;">+20.3%</td>
</tr>
<tr>
<td>Share price<br />
(total return)</td>
<td style="text-align: right;">+23.4%</td>
<td style="text-align: right;">+23.4%</td>
</tr>
<tr>
<td>Small and Mid Cap Market<br />
Equities (total return)</td>
<td style="text-align: right;">+17.2%</td>
<td style="text-align: right;">+7.5%</td>
</tr>
</tbody>
</table>
<p>We can&#8217;t draw any conclusions from just nine months, although it is interesting that this period included a fairly savage downturn followed by a strong recovery.</p>
<p>Smithson&#8217;s net asset value outperformed by about 3% in the downturn (two and a bit months) and 10% in the upturn (six months).</p>
<p>I wouldn&#8217;t expect such strong outperformance of its benchmark to continue, though. Over the long term, I would regard beating it by 5% a year as extremely good.</p>
<p>The performance in July 2019 offered a little cold water. Smithson&#8217;s net asset value rose by 2.1% whereas the wider market increased by 4.3%.</p>
<p>Measured against other global small-cap trusts, Smithson has also performed well in net asset terms:</p>
<table id="iti">
<tbody>
<tr>
<th style="text-align: left;">Trust (ticker)</th>
<th style="text-align: right;">19 Oct 18 to<br />
12 Aug 19</th>
</tr>
<tr>
<td>Smithson (SSON)</td>
<td style="text-align: right;">+21%</td>
</tr>
<tr>
<td>Edinburgh Worldwide (EWI)</td>
<td style="text-align: right;">+17%</td>
</tr>
<tr>
<td>North Atlantic Smaller (NAS)</td>
<td style="text-align: right;">+13%</td>
</tr>
<tr>
<td>Herald (HRI)</td>
<td style="text-align: right;">+11%</td>
</tr>
<tr>
<td>BMO Global (BGSC)</td>
<td style="text-align: right;">+7%</td>
</tr>
<tr>
<td>Scotgems (SGEM)</td>
<td style="text-align: right;">+6%</td>
</tr>
</tbody>
</table>
<h2>Good news: the premium has narrowed</h2>
<p>One thing I am pleased to see is Smithson&#8217;s premium narrowing.</p>
<p>Its premium to net assets actually exceeded 10% for a little while last year, soon after it floated. But for most of 2019 it&#8217;s been around the 2-3% mark.</p>
<p>When a trust holds just listed shares, I generally consider a premium of 5% or more too rich for topping up. But I&#8217;d be happy to add to my holding at its current level, although a discount would of course be even better!</p>
<h2>Smithson&#8217;s now a much bigger beast</h2>
<p>Part of the reason for the fall in Smithson&#8217;s premium is that it has been issuing bucketloads of new shares.</p>
<p>82m shares were issued when the company floated. As of the date of these results, the total was 107m.</p>
<p>Smithson&#8217;s market cap is now over £1.3bn, which is incredible given that its initial fundraising target for its flotation was just £250m.</p>
<p>This does have implications of course. The new cash has to be put to work and you don&#8217;t want individual positions to get so large that it makes them harder to buy or sell.</p>
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<p>And you don&#8217;t want the trust&#8217;s size to mean that it can&#8217;t take meaningful positions in companies valued at the lower end of its £500m-£15bn target range.</p>
<p>Thankfully, we seem to be a little way off this point.</p>
<p>For example, the largest holding Smithson has in an individual company is 3.1% of Domino&#8217;s Pizza Enterprises, <span class="iq">the master Domino&#8217;s franchisee for Australia and several European markets (</span><span class="iq">Smithson also holds the UK-listed Domino&#8217;s but not the main US-listed version, even though the latter&#8217;s market value of $10bn is within its stated range).</span></p>
<p>However, a 3% position in a £500m company would come in at £15m, which would make it Smithson&#8217;s smallest position size. Its current smallest is £19m followed by £23m.</p>
<h2>The portfolio</h2>
<p>Here&#8217;s the portfolio as of 30 June 2019:</p>
<p><a href="https://www.itinvestor.co.uk/wp-content/uploads/2019/08/Smithson_portfolio_as_of_30_June_2019-1.png"><img class="alignnone wp-image-2721 size-large" src="https://www.itinvestor.co.uk/wp-content/uploads/2019/08/Smithson_portfolio_as_of_30_June_2019-1-600x400.png" alt="Smithson portfolio as of 30 June 2019" width="600" height="400" /></a></p>
<p>Smithson has certainly stuck to the &#8216;Do Nothing&#8217; part of the Fundsmith mantra so far.</p>
<p>It has not sold any positions to date and has largely used the cash generated from its share issues to keep its portfolio weightings broadly the same.</p>
<p>A range of 1.6% to 5.6% of assets for its position sizes looks reasonable. No position size is too small to matter or too large to be of concern.</p>
<p>A 30th company, Fever-Tree Drinks, was added in July. It&#8217;s not clear how much Smithson bought although it wasn&#8217;t one of its top 10 positions at the end of July.</p>
<p>Sector-wise, Information Technology (44%), Industrials (20%), and Healthcare (17%) still dominate the portfolio.</p>
<p>Geographically, it&#8217;s the US (51%) and the UK (19%), although the Fevertree purchase may have nudged the latter over 20%.</p>
<h2>Companies on double-secret probation</h2>
<p>As the half-year was such a strong one, only two of the holdings produced negative returns during the period: Ambu and Domino&#8217;s Pizza Enterprises.</p>
<p>There&#8217;s a frank discussion of the five primary detractors from overall performance (Chr Hansen, CDK, and Sabre were the other offenders).</p>
<p>They have all had issues in recent months, such as replacing their CEOs, class-action lawsuits, loss of major customers, and trying to sell a struggling division.</p>
<p>Nothing seems particularly terminal, but we could see one or more of these positions become the first sale if their troubles continue.</p>
<h2>A little less skin in the game?</h2>
<p>One thing I am starting to look at a little more closely is how many shares are held by a trust&#8217;s directors and fund manager (although the latter isn&#8217;t always reported).</p>
<p>Smithson&#8217;s three directors have 35,000 shares (£430,000) between them. That&#8217;s not a great deal for a £1.3bn trust and they don&#8217;t seem to have added anything since Smithson floated.</p>
<p>More encouragingly, <span class="iq">&#8220;as at 30 June 2019, Terry Smith and other founder partners and key employees of the Investment Manager &#8230; held 2.76% of the issued share capital&#8221;. That&#8217;s £36m.</span></p>
<p>According to the Prospectus, Terry Smith was going to buy 2.5m shares with other Fundsmith employees buying &#8220;approximately 0.5m&#8221;.</p>
<p>I make 2.76% of the current share capital 2.87m shares, so that&#8217;s a little bit lower than the Prospectus suggested.</p>
<p>I don&#8217;t think Smith would have sold, so perhaps the other Fundsmith employees have reduced their holdings or they didn&#8217;t actually end up buying as much as 0.5m when the trust floated.</p>
<p>It&#8217;s a number to keep an eye on in future financial reports.</p>
<h2>Costs</h2>
<p>The management charge remains at 0.9% of market value, raking in about £11m a year for Fundsmith.</p>
<p>It&#8217;s not outrageous, but it would be good to see some commitment to lowering the percentage as the fund grows larger.</p>
<p>BMO Global Smaller Companies, which is about three-quarters of the size of Smithson, charges 0.55%.</p>
<p>Bankers, a global fund of the same size, charges 0.45% up to £750m and 0.4% over that.</p>
<p>Terry Smith would argue that Smithson&#8217;s low portfolio turnover means that its overall charges are still competitive. And there&#8217;s some truth to that. And it&#8217;s good to see that the three directors only cost £84,000 in annual fees.</p>
<p>But it&#8217;s noticeable that rivals like Baillie Gifford and Lindsell Train seem happy to lower the percentage charged as their funds increase in size, whereas Fundsmith refuses to do so.</p>
<h2>Dividend</h2>
<p>When I reviewed Smithson&#8217;s last statement, I made a crude calculation that the yield might be 0.25%-0.35%.</p>
<p>It was more out of semi-intellectual curiosity, although it does now seem I may have been overly optimistic!</p>
<p>With a profit for the half-year of £445,000 (0.5p per share), an annual dividend of 1p per share (just under 0.1%) seems more likely.</p>
<p>Smithson isn&#8217;t paying an interim dividend (surprising no one I suspect) and said it &#8220;<span class="iq">should not be expected that the Company will pay a significant annual dividend, but the Board intends to declare such annual dividends as are necessary to maintain the Company&#8217;s UK investment trust status&#8221;.</span></p>
<p>I believe that means distributing at least 85% of any net profit each year.</p>
<h2>Looking ahead</h2>
<p>Smithson expects to report its first set of full results in February 2020. The AGM, which will presumably be shown on <a href="https://www.smithson.co.uk/tv">Fundsmith TV</a> in due course, is to be held on 30 March 2020.</p>
<p>I added to my relatively small IPO position in November and April and am thinking about topping up a little more over the next year or so.</p>
<p>While Smithson has got off to a great start, the recent performance of Fundsmith Emerging Equities serves as a useful reminder that even the mighty Terry Smith isn&#8217;t infallible.</p>
 
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Thanks for the great write up and nice to see someone remember the relatively high charges Fundsmith have on all of their current offerings. Terry Smith covers this by saying that they add only a very small amount to cover dealing costs etc whereas others have higher additional charges and thus higher fees overall. There's a good explanation of it in his 2018 annual letter iirc.
Thanks, Michael.
Good memory on the dealing cost commentary from TS. Looks like it was on page 10 of the 2018 short-form report.
https://www.fundsmith.co.uk/docs/default-source/documents---reports-accounts/2018-short-form-report-for-the-twelve-months-ended-31st-december-2018.pdf?sfvrsn=4