Questor investment trust bargain: Smithson, the Fundsmith for smaller stocks, proved itself during the pandemic last year
The pandemic has provided Smithson, the global investment trust for smaller and medium-sized companies from the Fundsmith stable, with its first major test. And so far it has done exactly what it set out to do: it has delivered steady returns despite the sharp market sell-off in March.
Over the past 12 months Smithson’s share price has risen by 29pc, in line with its net asset value, and has outpaced the 13pc rise in the MSCI World Small Cap index.
The portfolio has proved relatively defensive: its largest “drawdown” or peak to trough decline last year was 17pc. Rivals BMO Global Smaller Companies and North Atlantic Smaller Companies recorded NAV drawdowns of 35pc and 24pc respectively, according to Winterflood, the broker.
In light of these promising numbers, Callum D’Ath of Brewin Dolphin, the wealth manager, has selected Smithson as his top investment trust pick for 2021.
He came up with last year’s best performer, Edinburgh Worldwide, which also invests in global smaller companies but has more of a “growth” focus than Smithson. Edinburgh Worldwide has gained 68pc since we tipped it in February 2020, so we have high hopes for Mr D’Ath’s latest trust idea.
“I think Smithson is brilliant,” he said. “It is one of those investment trusts that you can buy and lock away.”
Smithson’s resilience in 2020 is perhaps no surprise, given its focus on “quality” small and medium-sized companies around the world. The manager, Simon Barnard, invests in well-established businesses, typically leaders in their industries, that have the potential to generate cash and produce consistent returns.
The fund holds the likes of Domino’s Pizza and Equifax, the credit score agency. Mr Barnard aims to buy good companies at the right price and then “do nothing”, simply letting the investments compound in value over time.
It is the same philosophy that Fundsmith’s founder, Terry Smith, follows with his successful “open-ended” Fundsmith Equity fund, which invests in large companies around the world with similar characteristics.
While Mr D’Ath said he rated both funds, he suspected that Smithson had the potential to outperform its larger cousin over time because of its bias towards medium-sized firms.
“These are well-established businesses with a huge runway for future growth. It is a great area to invest in and I think Smithson is a fantastic way to do it,” he said. That doesn’t mean investors have to decide between the two funds: Mr D’Ath said there was a place for both in a diversified portfolio.
Although Smithson looks great on paper, it would be remiss of Questor not to highlight certain facts. First, it is a concentrated portfolio, comprising only 31 stocks, with an unashamed focus on capital growth rather than income (it has never paid a dividend).
Second, the eagle-eyed among our readers will be quick to highlight the trust’s persistent premium, which stands at 3.6pc. For some, this could be a sticking point.
However, Mr D’Ath said he was not too concerned by it; he said it was becoming difficult to find good trusts that weren’t trading at a premium. “Smithson is a popular trust and has pretty much traded at a premium since its launch in October 2018,” he added.
He said the board continued to issue shares in a bid to keep the premium in check: the trust raised £393m (net of costs) over the course of 2020, according to the Association of Investment Companies.
Finally, it is important to highlight the trust’s annual management charge of 0.9pc, which is higher than those of a number of its global equity peers. This might represent another stumbling block for some of our readers.
While costs remain an important consideration, Questor believes there is still much to be said for the trust’s potential to generate stable and growing returns over time.
And if 2020 is anything to go by, this “Steady Eddie” has more to give. This is one to buy whenever the shares take a stumble.
Questor says: buy on weakness
Share price at close: £16.96