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The story behind Smithson’s soggy first half
A rare sub-par performance in the first half of 2021 for global small and mid cap investment trust Smithson (SSON) has been taken fairly calmly by investors.
Going forward its managers are confident they can navigate the inflation threat which has contributed to its holdings losing some of their sparkle.
Portfolio manager Simon Barnard notes rising prices would not cause significant issues for Smithson’s portfolio companies as they have low input costs and capital requirements, as well as pricing power which should enable them to pass on cost increases.
For the half to June, NAV (net asset value) per share grew by just 5.9% against a 12.4% return for the MSCI World Small and Mid-Cap Index.
For the first time since launch, the trust underperformed its benchmark over six months as its portfolio of higher-rated growth stocks failed to keep pace with more lowly-rated stocks in the index thanks to growing expectations of rising inflation, while previous winners such as US payroll software company Paycom and medical technology firm Masimo fell back due to lower demand for their products and services compared with last year.
Encouragingly however, since 30 June the NAV is up 5.9% versus a 0.7% rise for the index and broker Investec Securities expects ‘the power of compounding to generate superior returns over the long term’.
Smithson has performed well since its October 2018 IPO, generating impressive relative and absolute returns by sticking to its clear and simple philosophy; buy good companies, don’t overpay and then do nothing.
Its focus on buying high quality companies at reasonable valuations and then holding them for the long-term has supported a NAV total returns of 86.1% since launch, which compares to 41.9% for the MSCI World SMID index.
The popularity of manager Fundsmith and strong appetite for the strategy has meant the trust has consistently traded at a premium to NAV and continued to issue new shares to sate demand, swelling the size of the trust north of £3 billion.
Leading holdings include companies with competitive market positions, ranging from property listings site Rightmove (RMV) to cybersecurity firm Fortinet, a beneficiary of the expected ramp-up in cybersecurity spending following December’s Solarwinds hack.
Other companies in the book include water heaters business AO Smith, boosted by the improved construction outlook in the US and China, as well as lockdown beneficiaries Domino’s Pizza (DOM) and Domino’s Pizza Enterprises Two new holdings bought in the first half were Rollins, the US pest control business with strong margins and returns on capital, and fast-growing franchised chicken wing restaurant Wingstop.