Interactive Investor - How Smithson has fared since record-breaking IPO

Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I’m joined by Simon Barnard, manager of the Smithson Investment Trust Ord, Simon, thank you for coming into our studio today.

Simon Barnard, manager of Smithson Investment Trust: Hi Kyle, thanks for having me on.
Kyle Caldwell: So, Simon, I wanted to start off by asking you about performance. Smithson Investment Trust launched in October 2018. In your recent half-year results, performance figures to the end of June show that the net asset value, the NAV return, which reflects the performance of the underlying investments had outperformed the MSCI World Small and Mid-Cap index. But the share price total return underperformed that index. Why has that happened? Why is there a difference between the two?
Simon Barnard: Yes, our NAV has outperformed our reference index since inception but, as you point out, the share price has underperformed that. The reason is because the share price has fallen to a discount to the underlying net asset value of the fund, which opened in around 2022 and has persisted and is currently around 10%.
Now the issue is primarily one of people having a concern around the sector, particularly small and mid-cap, which is where we operate, and so that sentiment has led to that discount opening up. Now, it is something that we find very frustrating and certainly we and the board are trying to do a lot about it, but so far as it is for the broader sector, it is proving very stubborn.
Kyle Caldwell: Regarding the discount, what steps or measures are being taken by the board to try and rein the discount in?
Simon Barnard: Generally, they have employed a fairly aggressive buyback strategy. So, the board are using cash from the portfolio to buy back shares in the company and, actually, since 2022, which is when the discount opened up, they have bought back over a third of the company’s shares. So, that typically is higher than the average has been in the sector.
Kyle Caldwell: Smithson doesn’t use leverage. Leverage, or gearing as it’s known, is viewed as one of the key tools in the armoury of an investment trust. So, why do you not use leverage, and could you talk us through the benefits of Smithson being an investment trust as opposed to being an open-ended fund?
Simon Barnard: Well, the smaller and mid-cap universe that we invest in typically has relatively volatile share prices, and we’ve observed over time, where we’ve had years where the fund is up over 30% and one year where it was down over 20%, that typically the fund too can be quite volatile from year to year.
The board took the decision that they don’t want to augment that volatility through additional leverage. So, that has primarily been the reason. More recently there is also an issue of cost as interest rates have increased and so there would be a very real cost to the portfolio if we were to take on leverage.
While that is only one benefit of investment trusts, there are several others. Initially we launched as an investment trust because we intended to invest in smaller mid-cap companies where we had concerns that perhaps the liquidity wouldn’t be sufficient to be able to invest with an open-ended daily dealing fund.
Actually, as time has gone on over the last seven years, it hasn’t been as bad as we thought. So, liquidity has been fine.
I would say increasingly that isn’t the main reason why an investment trust is a good idea. Instead, it is really that we’re able to invest without uncontrolled movements of capital into and out of the fund.
Now the fund has been shrinking over the past couple of years because of the board’s buyback but that is entirely in the board’s control, so they could stop that if they were to observe that it was affecting the investment process, and in any case, they at all times do make sure that it is at a level which doesn’t affect the process.
Kyle Caldwell: You’ve spoken about the discount and how that reflects that smaller companies have been out of favour. So, sitting here today, could you reflect on the opportunity going forwards for investing in the part of the market you focus on, which is global, mid and small-cap companies?
Simon Barnard: This is a very exciting time for global small and mid-caps. Over the last seven years they have meaningfully under-performed large-cap companies such that the valuation today is at a discount to large caps that we haven’t seen almost since 2000.
Now, bear in mind that typically smaller mid-caps do tend to grow faster than large caps and so the sector over long periods of time has outperformed large caps, and so even the 20-year period up to Covid we saw small and mid-caps trading at a premium to large caps.
So, the fact that it is at a meaningful discount today is quite exciting and I think, anecdotally, we are finding a lot of opportunities in the space particularly in our segment of high-quality, fast-growing small and mid-cap companies and, frankly, at this point in time I would say we’ve got more ideas than capital.
Kyle Caldwell: As you’ve mentioned over the very long term, the data shows us that smaller companies tend to outperform larger companies. Do you think this is a trend that will endure or, because it’s so well known, the small-cap effect, could this potentially be arbitraged away?
Simon Barnard: No, I do think it is a trend that will endure. When you look at the fundamentals and the simple fact of the law of large numbers, it means that typically small and mid-sized companies can grow at a higher rate for longer than larger companies and so, over the very long term, you would expect them to outperform.
Whether that can be arbitraged away, everything happens in cycles and so we clearly have seen a cycle where small and mid-cap have underperformed large cap, that is primarily due most recently to the increase in interest rates, but there are other factors involved.
But I think that what we therefore should expect is given the low point in the cycle for small and mid-caps today, at some point that will revert.
Kyle Caldwell: In terms of valuations, could you pick out a sector or the types of companies within your portfolio that stand out for you on valuation grounds?
Simon Barnard: I think there are a few sectors that we’ve got particularly interested in in the recent past and it has really been borne out because of the cycle that we saw around Covid. So, for lots of different types of businesses, we saw quite extreme revenue growth coming out of Covid in 2021, 2022, and then we saw a hangover in 2023, 2024, as those sales either stabilised or declined.
What’s interesting at this point is that there are a few sectors, and I would list things such as biotechnology - we own a company called Medpace Holdings Inc 
MEDP 0.10%. That has exposure to that. In luxury goods, we own company called Moncler SpA MONC3.17% that has exposure to that, and some industrials. I would choose Spirax Group SPX 0.93% as an example. We are now approaching a level of trough earnings, but at the same time trough valuations because the market has become so enamoured with these companies.
One example is Medpace, which I’ve just mentioned. As you can imagine, biotechnology had one of those super cycles from Covid, off the back of Covid and then coming down since then, where a lot of biotech companies simply haven’t been able to sustain their funding over the last couple of years.
Now, MedPace is a US company, which is a CRO, that’s a contract research organisation. So, they help biotechnology companies research, do all the R&D they require for what they call assets - their molecules - and then take them through trials and bring them to commercialisation.
Now, it’s been in, like I said, a very weak environment for biotech funding, and MedPace’s revenues, which peaked above 30% growth per year at roughly the beginning of 2023, looked to have troughed at the end of 2024 at around 8% growth per annum. Last quarter they told us that that growth had re-accelerated again to about 14% and because of the low valuation that it was trading [at] and the low expectations that the market had, the share price of MedPace was up 55% on the day.
Kyle Caldwell: And finally, Simon, a question we ask all fund managers we interview, do you have skin in the game?
Simon Barnard: Yes, I do. In fact, it’s something that I always end my own personal presentations with when I’m discussing the fund because there’s this wonderful quote from Nassim Nicholas Taleb, who was an ex-portfolio manager turned author. He’s written four or five books, they’re fantastic, and I recommend all of them, but one of the quotes from those books is ‘don’t tell me what you think, tell me what you have in your portfolio’.
So, I always end my presentation with a snapshot of my personal investment portfolio within which 70% is accounted for by Smithson. And I always say if you’re worried that that’s just a few hundred pounds, I can assure you that my Smithson holding is worth a lot more than my house. So, it very much is the case that I have skin in the game.
Kyle Caldwell: Simon, thank you very much for your time today.
Simon Barnard: It’s been a pleasure. Thank you, Kyle.