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The Times - Smithson Investment Trust: Early signs suggest long-term success

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Never one to care much what the rest of the world thinks of him, Terry Smith has contentedly ploughed his own furrow since setting up his own investment management firm nine years ago. With a distinctive, selective, long-term investment style, Fundsmith made its name with the unlisted £18 billion Equity Fund, which was launched in 2010.

Turn the clock forward to October last year and Fundsmith launched the Smithson Investment Trust, one of two listed vehicles that it manages — something it did in part to cater to the weight of investor demand and in part to capitalise on the relative investment success of companies smaller than those the fund generally had invested in.

This trust, valued at just above £1.3 billion, is similarly distinctive and it should be swiftly apparent that it is not for everyone. First, it is concentrated, with only 29 holdings as of the end of September; second, it is unashamedly in the business of delivering capital appreciation for shareholders, rather than being a big dividend payer (there was no award at the half-year stage in mid-August, for example). Third, at 0.9 per cent, its annual management fee is high relative to a lot of other investment trusts. And, finally, it is avowedly not for those seeking a quick return. Buyers of this trust should expect to squirrel it away out of sight for at least three to five years, possibly longer.

Yet there are plenty of characteristics that make it worthy of a closer look, at the very least. The trust’s investment mantra is to buy companies that are already successful, more often than not leaders in their chosen field, but nevertheless capable of generating consistent returns over the longer term. It tends to prefer businesses whose standing is built on intangible assets, such as a brand name, or — crucially — something that cannot easily be imitated or supplanted.

Once acquired, Smithson aims to sit on its holdings, topping up its ownership in times of price weakness and selling out only as a last resort. It did so last month for the first time with CDK Global, a supplier of software and marketing to car and truck dealerships in the United States and Canada. It also occasionally adds holdings, as it did in July when it bought a stake in Fevertree, the upmarket tonic brand.

Although it describes its target companies as small and mid-sized, the range by market capitalisation of between £500 million and £15 billion is extremely wide and the average size, of about £7 billion, is probably high in the eyes of most British investors. That explains why FTSE 100 companies such as Rightmove, the property website, and Halma, a specialist in safety and hazard detection systems, feature prominently in the portfolio. The biggest holding is in Equifax, the US-listed credit data company whose market value weighs in at about £12.8 billion.

In many ways, Smithson’s chosen companies are not obvious and operate in sectors — online property search (Rightmove), data and analytics (Verisk), payroll and HR software (Paycom), even pizza delivery (Domino’s Pizza) — that are rapidly changing or are subject to disruption. To its credit, though, the trust is sticking with it and so far its returns back it up. Launched into the teeth of last October’s ferocious market sell-off, it has since comfortably beaten its reference index, the MSCI World SMID. The shares have gained a respectable 21 per cent and have always traded at a premium to the net asset value per share. The signs are good.


Carefully considered portfolio chosen by respected investment manager that has got off to a strong start