Shares Magazine - Great time to buy Fundsmith sister fund Smithson

It follows the same process as the popular Fundsmith Equity Fund but invests in different stocks

Fundsmith is one of the most popular asset managers on the market, and with good reason. Its mantra of investing in high quality companies at a decent price and not constantly trading in and out of stocks has produced good performance.

Fundsmith chief executive Terry Smith manages Fundsmith Equity Fund (B41YBW7) which has returned 540% since launch in November 2010 and is now one of the most popular funds among UK investors. Shares sees merit in owning both this product and its sister fund, Smithson Investment Trust (SSON).

Smithson follows the same investment ethos, albeit backing smaller companies. Its holdings have an average market value of £11.3 billion, versus Fundsmith Equity’s equivalent £103 billion, across a similarly concentrated portfolio of between 25 and 40 stocks. Investors can own both funds and not have to worry about any overlap.

While Terry Smith doesn’t run Smithson, manager Simon Barnard still follows the same investment process as his boss.

The first half of 2021 presented Barnard with a new sensation, namely Smithson underperforming its benchmark for the first time since its October 2018 launch on a six-month basis.

The trust’s portfolio of higher-rated growth stocks fell out of favour with markets earlier this year as investors looked for value as global inflation spiked. The investment trust returned 5.9% on net assets and 4.1% on a share price basis, well below the 12.4% gain from its MSCI World Small and Mid-Cap benchmark.

However, this spell of short-term weakness is already showing signs of reversing, with Smithson’s net assets up 7.2% through July and August, versus a 0.9% rise for the index.

Equally encouraging, Barnard believes that rising prices will not cause significant issues for Smithson’s portfolio companies. They typically have low input costs and capital requirements as well as pricing power. This should mean passing on cost increases to end users.

Investec expects the power of compounding to generate superior returns for Smithson over the long term, as it has in its near three-year lifespan.

In that limited timeframe Smithson has doubled the performance of its benchmark, with net assets and share price total return up 82.3% and 86.2% respectively, against 40.4% of its equity comparator.

In other words, £10,000 invested in Smithson over the near-three years would have turned into £18,620, compared to £14,040 from a relevant index tracker. Left in the bank, you’d be lucky to have made £150 in interest.

Smithson’s ongoing charges fluctuate but averaged 1% in 2020, including a 0.9% management fee, well worth paying given the outperformance potential.

DISCLAIMER: Author Steven Frazer and Editor Daniel Coatsworth have personal investments in Fundsmith Equity and Smithson.